Maryam Hedayati suffered catastrophic injuries when Auto Club’s insured, Maurice Vanwyk, ran a red light and struck her in a pedestrian crosswalk. The accident severed one of Hedayati’s legs at the scene, shattered the other, and left her in a coma with broken bones throughout her body. Forty-three years old and a recent medical school graduate at the time, Hedayati was struck while walking as she took a break from studying for her medical board examinations.
The insured driver immediately notified Auto Club of the accident and authorized the Club to disclose his policy limits ($25,000); he also informed Auto Club he had no other insurance or assets. Auto Club’s policy with its insured required him to relinquish to the Club his right to negotiate settlement of potential tort claims falling within the policy. When he inquired about a release, Auto Club inaccurately told its insured driver Hedayati was not willing to sign one.
Despite repeated requests during settlement negotiations from Hedayati’s attorney, Auto Club initially declined to disclose the insured’s policy limits; eventually it relented, but even then Auto Club declined to provide written proof of those limits, which the Club knew was common practice to facilitate a settlement. Auto Club then withheld from Hedayati’s counsel the insured’s written declaration which indicated he had no other insurance, which the Club had confirmed, and the insured’s statements that he had no assets.
Auto Club also, despite multiple requests from Hedayati’s lawyer, failed to provide a copy of its insured’s policy which Hedayati’s lawyer needed to verify its terms.
Auto Club ultimately failed to settle the matter within its $25,000 policy limits. Hedayati subsequently obtained a $26 million judgment against the insured driver, along with assignment of the insured’s claim against the Club for breach of the covenant of good faith and fair dealing implicit in its policy with him.
In following litigation filed by Hedayati for bad faith against Auto Club, Auto Club moved for summary judgment, which was granted by the trial court. The Court of Appeal reversed in the published case of Hedayati v Auto Club.
The trial court explained it “must be guided by how case law defines bad faith” and agreed with “the definition [of bad faith] as an unreasonable refusal to accept a settlement offer within policy limits.” The court, however, reiterated its conclusion that Auto Club “never refused any of plaintiff’s policy limits settlement demands.” According to the court, “All plaintiff has shown is that defendant failed to respond by plaintiff’s self-imposed, arbitrary deadline to a demand defendant received the day before Thanksgiving for not just $25,000, but also for a signed declaration from the insured attesting to certain facts.”
The Court of Appeal carefully reviewed the law of insurance bad faith, and pointed out several errors in the ruling by the trial court. Good faith and fair dealing requirements obligate insurers to make reasonable efforts to settle claims against their insureds. An insurer that unreasonably fails to accept a settlement demand that falls within the policy limits of its insured acts in bad faith. An insurer may also be liable if it breaches other duties owed to the insured, such as the duty to investigate or the duty to communicate, and that breach prevented the insurer from settling the claim within policy limits. A liability insurer has a duty to communicate to its insured any settlement offer that could affect the insured’s interests, particularly where action is required by the insured to secure the settlement.
There was therefore a triable issue of bad faith, and summary judgment was not justified.