Implied Covenant of Good Faith and Fair Dealing Enables Judgment Creditor To Pursue Claim for Interest

06.26.2014

California law recognizes an implied covenant that requires the insurer to accept a reasonable settlement offer when it is likely that the judgment will exceed the available policy limit.  Similarly, the implied covenant of good faith and fair dealing requires an insurer to refrain from unreasonably withholding payments of benefits due under the policy.  While these implied duties generally run in favor of the insured as the contracting party, courts have recognized certain exceptions particularly with regard to third party beneficiaries of insurance contracts.  In Villa v. Allstate Insurance Company, 2014 WL 2154481 (E.D. Cal. May 22, 2014), the court confirmed that a judgment creditor is recognized as such a beneficiary of the insurance contract between the insurer and its insured.

Following the murder of her son, Alexander, Plaintiff Mary Lou Villa filed a wrongful death lawsuit.  In addition to suing Alexander’s father, the man responsible for his death, the Plaintiff named Janet Sartain as a defendant on grounds that Ms. Sartain failed to warn Alexander of his father’s alleged violent propensities.  Ms. Sartain was insured by Allstate under a policy of homeowners insurance that included liability coverage of $100,000 per occurrence.  Pursuant to that policy, Allstate defended Ms. Sartain in the Plaintiff’s wrongful death action.

According to the Complaint, the Plaintiff made two separate offers to settle her claims against Ms. Sartain within the applicable $100,000 policy limit.  Allstate, however, declined to settle and thus, the Plaintiff proceeded to trial.  Ultimately, the Plaintiff obtained a judgment against Ms. Sartain in the amount of $408,304, plus costs and interest.

Subsequently, Ms. Sartain filed a request for a new trial and a notice of appeal, neither of which were granted.  Allstate then issued a check to the Plaintiff for $100,000, but did not pay the remainder of the $408,304 judgment entered against Ms. Sartain.  Further, Allstate tendered no payment for the interest awarded to the Plaintiff. 

The Plaintiff then filed a complaint in state court alleging causes of action against Allstate for violations of California Insurance Code § 11580 (which permits a party who has obtained a judgment against an insured tortfeasor to maintain a direct action against the insurer providing liability insurance) and for breach of the implied covenant of good faith and fair dealing.  Allstate removed the case to the United States District Court for the Eastern District of California and filed a motion to dismiss, or in the alternative, motion for summary judgment.

In analyzing the Plaintiff’s claim under California Insurance Code § 11580, the court found that a judgment creditor is a third party beneficiary of the insurance contract between the insurer and the insured.  Importantly, the Plaintiff’s prayer for relief properly requested not only the liability policy limit, but also costs and interests.  Allstate did not dispute the Plaintiff’s claim that it owes interest due to its failure to accept the Plaintiff’s statutory offer to compromise. Thus, the court could not rule out the Plaintiff’s entitlement, as a judgment creditor of Allstate’s insured, to additional benefits under the policy beyond the $100,000 that Allstate had paid. 

Turning next to the Plaintiff’s claim of breach of the implied covenant of good faith and fair dealing, the court again reiterated that a judgment creditor such as the Plaintiff is recognized under the law as a beneficiary of the insurance contract between the insurer and its insured.  It follows that the duty not to withhold, in bad faith, payment of adjudicated claims runs in favor of a judgment creditor who has obtained a judgment against the insured.  A bad faith refusal to pay a judgment creditor the entire amount of the judgment, once it becomes final, implicates the duty of good faith and fair dealing.  The court held that the Plaintiff, as the judgment creditor of Allstate’s insured, Ms. Sartain, may have a viable claim for breach of the implied covenant against Allstate if Allstate did, in fact, withhold benefits due under the policy (including costs and interest).  However, the court did recognize that the third party beneficiary doctrine does have its limits.  Specifically, the court held that the Plaintiff cannot maintain a claim for breach of the implied covenant to the extent that claim is premised on a failure to settle within the available policy limits, as the duty to settle is intended to benefit the insured, not the injured claimant.

Villa v. Allstate Insurance Company highlights the fact that insurers owe a duty of good faith and fair dealing not only to their insureds, but to certain third party beneficiaries as well.  These implied covenants can be a powerful tool for judgment creditors to combat insurers who withhold any amount of adjudicated damages payable under the policy. 

Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or jwisegarver@hf-law.com.