In an interesting opinion in an intriguing case, California's Fourth District Court of Appeal summarized the law and applied it to its summary of the facts in American Modern Home Insurance Co. v. Fahmian, Super. Ct. No. 05CC12158, 2011 WL 1334959 (Cal. Ct. App. Apr. 8, 2011). The result was an award to American Home of "reimbursement from Fahmian of (i) the $300,000 paid to settle the [underlying] action, and (ii) the fees and expenses that the trial court determines are reimbursable under the terms of the policy, and that were incurred by American Modern in connection with the defense of the [underlying] action, as well as prejudgment interest," among other relief. Id. at *10.
The Court concisely summarized the applicable, settled law at the beginning of its opinion. "Under binding California Supreme Court authority, an insurance company may obtain reimbursement from its insured for a policy limits settlement, when it is determined the underlying claim was not covered by the policy," the Court held, "if the insurance company":
(1) made a timely and express reservation of rights [the Court pointed out separately that "it is a timely and express reservation of rights letter that is determinative." Id. at *1.],
(2) provided express notification to the insured of the insurer's intent to accept the proposed settlement offer ["We hasten to add that our holding is premised on the insurer's timely provision of a settlement advisement letter to the insured, after receiving the plaintiff's settlement demand." Id. at *8.], and
(3) made an express offer that the insured could assume its own defense.
"In this case," the appellate court held, "American Modern did all of the foregoing." Id. at *1. However, in reaching this holding, the appellate court had to reverse a contrary judgment entered by the trial court against American Modern's recovery, based upon a jury verdict.
The jury in this case was provided a special verdict form with 13 interrogatories. The jury determined as facts, among other things, that in this case:
• American Modern affirmatively made a timely and express reservation of rights.
• American Modern gave its policyholder whom it was defending in the underlying case, Mr. Sohail Fahmian, reasonably sufficient information to make a reasoned decision, in its settlement advisement letter that it, American Modern, had received a settlement demand for policy limits and that it was about to pay the demand and that Mr. Fahmian could choose between one of several options in that regard.
• Under all the circumstances, American Modern did not provide "sufficient time" for Mr. Fahmian "to make a reasoned reply."
Id. at *3.
The jury's answers to other interrogatories on the special verdict also established that Mr. Fahmian never had any coverage for the underlying action under the American Modern liability insurance policy. See id.
However, the trial court entered judgment denying any reimbursement to American Modern in this case for the indemnity payment and defense expenses it incurred on Mr. Fahmian's behalf. In the eyes of the trial judge in this case, the jury's finding that American Modern did not provide "sufficient time" for Mr. Fahmian "to make a reasoned reply" to American Modern's settlement advisement letter barred any chance of reimbursement to American Modern. As the trial judge said, when giving that notice “the insurer must give the insured a reasonable amount of time to select an option.” Id. at *5. Since the jury found that American Modern did not do so, the trial court held that "Fahmian is not liable to American Modern Home." Id.
This is the time sequence relevant to American Modern giving Mr. Fahmian time to select an option in response to the underlying plaintiff's settlement demand:
1. "Montoya's [the underlying plaintiff's] attorney presented a settlement demand to American Modern for the policy limits -- $300,000."
2. July 1, 2005: American Modern sends a letter by Federal Express to Mr. Fahmian, which is delivered on July 2, 2005, advising Mr. Fahmian that American Modern had received a policy limits demand which would expire "by its terms on July 8, 2005". American Modern further wrote that it intended to pay the policy limits demand "unless Fahmian either agreed to undertake his own defense in the Montoya action, or waive any potential claims based on the failure to settle the Montoya action within the policy limits."
3. July 5, 2005: Mr. Fahmian telephones American Modern's lawyer and requests a copy of the July 1 letter and its attachments [unspecified by the Court in this case] to be sent to him by e-mail attachment so that he can send them to a lawyer. "The requested documents were transmitted electronically the same day." During the telephone conversation, American Modern's lawyer tells Mr. Fahmian that he could call "until the morning of July 8 with his decision."
4. "American Modern did not receive any communication from Fahmian or any attorney purporting to represent him after July 5. Because American Modern did not hear from Fahmian by July 8, 2005, it accepted the policy limits settlement demand in the Montoya action."
Id. at *2.
It will be recalled that the appellate court "hastened to add" that its holding was based "on the insurer's timely provision of a settlement advisement letter to the insured, after receiving the plaintiff's settlement demand." Id. at *8. It is all the more worthy of note, then, that the only date not highlighted by the appellate court in the above summary is the date that American Modern received the underlying plaintiff's settlement demand. Clearly, that was a thing already decided.
The California appellate court was resolute that its legal holding in this case would be applied to future cases and that, in all future cases, the legal standard would be whether the insurer seeking reimbursement from its insured provided a settlement advisement letter to its insured in a "timely" fashion "after receiving the plaintiff's settlement demand." There will not be a comparison in any future case with the date that American Modern received a policy limits demand in this case, because the Court, quite deliberately it appears, did not say what date that was.
Further, and in connection with "timely" providing information to insureds from whom or which liability insurance companies seek reimbursement, the appellate court explicitly wrote that it was concerned with only one "fact" in this case. It had already happened long before American Modern received a policy limits demand and before American Modern sent its settlement advisement letter to Mr. Fahmian. As the jury found in this case as a fact, which the trial court itself acknowledged, American Modern made a timely and express reservation of rights including its claimed right of reimbursement in the event of non-coverage.
In sum, in the eyes of the California appellate court in this interesting case, American Modern complied with the list of legal requirements with which its opinion, and this post, began. "In this case, American Modern did all of the foregoing. We decline to add any additional requirements." Id. at *1.
About the Author: Dennis Wall is the principal in Dennis J. Wall, Attorney at Law, A Professional Association in Winter Springs and Orlando, Florida, and is a member of DRI. He also is the Author of LITIGATION AND PREVENTION OF INSURER BAD FAITH (Shepard's/McGraw-Hill Second Edition; West Publishing Company 2010 Supplement and Third Edition 2011 in process). Reimbursement causes of action by insurers from insureds are discussed in §3:4 of the Second Edition and 2010 Supplement, and in the Third Edition in §3:6, "Informing the Insured: Insurer Assertion of Rights to Reimbursement From the Insured of Clearly Noncovered Indemnity and Defense Expense."