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Carrier's Duty to Preserve Order of Criminal Restitution

Many practitioners are unaware that they are not required to give up their right to court-ordered restitution from the criminal proceedings in order to receive the insurance proceeds from the policy covering the criminal defendant.

Crackhead Craig was returning home after attending a wild party down in Imperial Beach where he had consumed several beers, had multiple shots of Tequila, and smoked crack earlier that evening. Crackhead left the party and began driving home on his new Harley Davidson motorcycle. Crackhead decided that he would drive down to the Pacific Beach area and do some wheelies down Mission Boulevard to show off. While performing an extra-long wheelie, Crackhead lost control of his motorcycle and drove it through the front window area of Taco Surfer causing extensive property damages.

Taco Surfer was forced to shut down its operations for a period of several weeks while repairs were performed. Crackhead was arrested at the scene and charged with numerous criminal violations of the Vehicle Code. Crackhead ultimately pled guilty and the court imposed a jail sentence of six months and issued orders of restitution requiring him to pay restitution to Taco Surfer of $200,000.

Taco Surfer hired attorney Seickem Bulldog to represent it in its civil claim for damages against Crackhead Craig. Crackhead Craig was insured by Allsnake Insurance Company.

Attorney Bulldog found out that Crackhead Craig had a minimum limits insurance policy of $15,000 per person and $30,000 per occurrence for bodily injuries and $5,000 for property damages.

Allsnake received various documents supporting the claim of Taco Surfer from Attorney Bulldog. Two weeks after receiving the documentation supporting the claim, Allsnake’s adjuster, Shawn McScrewem, offered up its policy limits of $5,000. Attorney Bulldog requested Crackhead Craig to complete a statement of assets to assist his client in determining whether to accept Allsnake’s offer in satisfaction of its claims. Ultimately, a statement of assets was provided and Attorney Bulldog informed Allsnake that Taco Surfer accepted the policy limits offer and returned signed releases on a form provided by Allsnake. However, Attorney Bulldog had added an explanatory sentence to Allsnake’s recitation of the $5,000 payment stating, “This does not include court-ordered restitution.” Attorney Bulldog also inserted as a condition of the settlement that payment be made within five days of delivery of the executed releases. Allsnake requested additional time to analyze the additional language inserted into the release. Allsnake consulted with Crackhead’s criminal defense attorney who didn’t object to the language. Allsnake also requested Attorney Bulldog to clarify whether the proposed language was intended to only ensure the release did not waive Taco Surfer’s right to restitution or was it also to preclude any offsets against the restitution award by the amount that Allsnake was paying in insurance proceeds.

Attorney Bulldog sent a letter to Adjuster McScrewem confirming that his clients want 100% restitution on top of the $5,000 policy limits being offered. He indicated that Taco Surfer was firm on that and would not consider anything less.

Allsnake continued to request additional time. Ultimately, Attorney Bulldog set a deadline, which passed without Allsnake agreeing to the additional language or paying its policy limits of $5,000. Following the passage of the deadline, Attorney Bulldog sent a letter to Allsnake informing it that there was no settlement in the case and his client now intended to file suit and to pursue to a judgment fair and reasonable compensation for all of its damages and losses.

The matter proceeded to trial and judgment was entered in favor of Taco Surfer and against Crackhead Craig for the sum of $1.3 million. Crackhead Craig gave an assignment of his rights under his insurance policy to Taco Surfer, which intended to pursue its claims against Allsnake. Attorney Bulldog contacts you to handle the bad faith litigation against Allsnake since Bulldog knew that he would be testifying as a witness in the bad faith litigation. Do you take the bad faith case?

The Implied Covenant of Good Faith and Fair Dealing

California law implies a covenant of good faith and fair dealing in every policy of liability insurance. The implied covenant imposes an obligation upon insurance companies, amongst other things, to make reasonable efforts to settle a third party’s lawsuit against its insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third-party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach. (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312.) The implied covenant imposes a number of obligations upon insurance companies, which includes the obligation to accept a reasonable offer of settlement. (Id.) The duty to settle is implied under California law into an insurance policy to protect the insured to exposure to liability in excess of his or her insurance coverage as a result of the insurer’s gamble – on which only the insured might lose. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941.) Consequently, “the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits.” (Ibid.; see also, Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 792, fn. 12.)

The reasonableness of a settlement offer is to be evaluated by considering whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.” (Isaacson, 44 Cal.3d at 792, fn. 12.) Whenever an insurance company refuses to accept a reasonable settlement offer within the policy limits, such refusal is a violation of its duty to consider in good faith the interest of its insured in the settlement and is, therefore, liable for the entire judgment against the insured even if it exceeds the policy limits. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 661; Accord, Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 989.)

You rightly suspect that Allsnake refused to complete the settlement by trying to misconstrue the language added by Attorney Bulldog, especially after Attorney Bulldog had clarified the intent of his language. Ordinarily, a victim of a crime is entitled to restitution for economic losses incurred as a result of a commission of a crime from the defendant convicted of that crime. (Penal Code § 1202.4.) In addition to compensating the victim, an order of restitution imposed upon a criminal defendant is intended to rehabilitate a defendant and to deter crime. (People v. Vasquez (2010) 190 Cal. App.4th 1126, 1133.)

“An order of restitution pursuant to [Penal Code] section 1202.4 does not preclude the crime victim from pursuing a separate civil action based on the same facts from which the criminal conviction arose.” (Vasquez, supra, 190 Cal.App.4th at p. 1132) A restitution order reimburses the crime victim for only economic losses; noneconomic losses, such as pain and suffering, are recoverable in a civil action. (Ibid.) “Because of the separate interests at stake and different purposes served by a restitution order and a civil action for damages by the crime victim, as well as the different categories of damages recoverable in the two proceedings, the settlement of a civil action and release of the defendant by the crime victim does not discharge the defendant’s responsibility to satisfy the restitution order: ‘Even when a victim obtains a settlement from a company that insured the defendant for civil liability, the court in a criminal action may order the defendant to pay victim restitution. This is so because the victim “might rationally choose to accept an insurance settlement for substantially less than his or her losses rather than risk the uncertain ... possibility that the defendant will pay the entire restitution amount” [citation], and the “victim’s willingness to accept the [insurance settlement] in full satisfaction for all civil liability, ... does not reflect the willingness of the People to accept that sum in satisfaction of the defendant’s rehabilitative and deterrent debt to society.” ’ (Id. at p. 1133, fn.omitted.)” (Barickman v. Mercury Cas. Co., 2016 WL 4274674, at *5.)

Although payments received by a crime victim from the victim’s own insurance company, or from an independent third party such as Medicare, for economic losses suffered as the result of defendant’s criminal conduct cannot reduce the amount of restitution that the criminal defendant owes, the criminal defendant is entitled to an offset to the extent any payments are made from his or her own insurance for items of loss that are included in the restitution order. (Vasquez, supra, 190 Cal.App.4th at *1133-1134.)

“ ‘The defendant’s own insurance company is different than other sources of victim reimbursement, in that (1) the defendant procured the insurance, and unlike the other third party sources, its payments to the victim are not fortuitous but precisely what the defendant bargained for; (2) the defendant paid premiums to maintain the policy in force; (3) the defendant has a contractual right to have the payments made by his insurance company to the victim, on his behalf; and (4) the defendant’s insurance company has no right of indemnity or subrogation against the defendant. In sum, the relationship between the defendant and its insurer is that payments by the insurer to the victim are ‘directly from the defendant.’ ” (Vasquez, at p. 1134, 119 Cal.Rptr.3d 29; accord Bernal, at pp. 167–168, 123 Cal. Rptr.2d 622.) (Barickman v. Mercury Cas. Co., 2016 WL 4274674, at *5.)

While Allsnake may have offered in good faith initially by offering its policy limits of $5,000 in exchange for a general release of claims, it is doubtful that Allsnake did all that was within its power to effectuate a settlement once the offer had been accepted, but was slightly modified to clarify that the victim was not releasing the restitution ordered in the criminal proceedings. Consequently, it is very likely that a jury may view Allsnake’s conduct as being unreasonable and in bad faith and find that Allsnake is liable for the entire judgment. In light of this, you decide to take the case. At trial, the jury agrees that Allsnake acted in bad faith and finds in your favor and Allsnake is held liable for the entire judgment of $1.3 million.

Conclusion

The factual circumstances of this article were taken from the recent case of Barickman v. Mercury Cas. Co., 2016 WL 4274674. In that case, the insurance carrier was ultimately held liable for a $3 million excess judgment when it delayed accepting the change in the release containing the same language as proposed by Attorney Bulldog. Many practitioners are unaware that they are not required to give up their right to court-ordered restitution from the criminal proceedings in order to receive the insurance proceeds from the policy covering the criminal defendant. However, practitioners should be careful that they review the release and clarify that the release does not release any claims of restitution ordered in the criminal proceedings, but should allow the criminal defendant the right to offset the restitution order for the payments being made by his or her insurance carrier. An insurance company’s refusal to accept that language could result in a claim of bad faith being brought against it.


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2016). Carrier's duty to preserve order of criminal restitution. Trial Bar News, 39(9), 13-14, 28-29.

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