Protections Against Defended Policyholder Manufacturing Bad Faith Case Via Stipulated Judgment Confirmed By California Court

The California Court of Appeal for the Fourth District, Division Two, in 21st Century Ins. Co. v. Superior Court (Tapia), ___ Cal.App.4th ___  (No. E062244, September 10, 2015), recently confirmed some of the important protections for defending insurers against stipulated judgments that were established in the Hamilton and Safeco decisions and limited the application of other decisions that have been relied on by claimants and policyholders seeking to get around the Hamilton rule against bad faith actions premised on such stipulated judgments.

In 21st Century, the Court of Appeal enforced the Hamilton rule established by the California Supreme Court and granted a petition for writ to reverse the denial of summary judgment to the insurer as to a bad faith claim premised on a $4.15 million stipulated judgment between the injured passenger claimants and driver policyholder, with a covenant not to execute against policyholder assets.  The stipulated judgment was entered while the insurer defended the policyholder under only one of the three policies the insurer issued, and followed the insurer’s refusal to pay more than the $100,000 limits of the one applicable policy.  Although the insurer later offered to (and eventually did pay) the additional $50,000 limits of the other two policies, the claimant withdrew its offer to settle for the lower amount and sought to transform the refusal to settle for the total $150,000 limits into a multi-million bad faith lottery ticket.

The court summarized the Hamilton rule as barring a stipulated judgment reached between a claimant and policyholder directly, while the policyholder was being defended, from having any weight in a later bad faith action, because no damages from a refusal to settle can be shown by a defended policyholder until judgment after adversarial trial actually exceeds available limits.  Under Hamilton, and the Safeco case on which it relied, the defended policyholder whose insurer refuses a settlement may strike a deal to assign the policyholder’s contract and bad faith rights after judgment in exchange for a covenant not to execute, but they cannot skip past the actual trial by directly settling for what they think the case is worth.

The policyholder in this case tried to get around Hamilton rule by arguing that the insurer had breached its duty to defend by offering an inadequate and ineffective defense.  But, the court noted that both Hamilton and Safeco rejected such arguments.  The court observed that such stipulated judgments only arise when some party believes its insurer has acted in bad faith, and so “hyperbolic and accusatory” recitations of wrongdoing do not avoid the rule of Hamilton.

The policyholder also relied on the post-Hamilton intermediate appellate decision in Risely (permitting action against defending insurer on stipulated judgment as to non-defending policies) and the pre-Hamilton decision of the California Supreme Court in Wint (permitting action against non-defending insurer on direct settlement despite policyholder being defended by settling insurer).  The Court of Appeal rejected that argument, finding Risely and Wint distinguishable as being limited to the circumstance where the defending policy had significantly lower limits than the non-defending policy (one-seventh and one-tenth in those cases, respectively), so the protection offered by the defending policy was considered significantly less effective.  The court concluded that, “even if [the insurer] had a duty to defend under all [three] policies, its partial breach of that duty cannot have affected the defense offered.”

The 21st Century decision confirms that the limitations against defended policyholders stipulating to judgments to create bad faith cases are alive and well under California law.


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