Sohail Fahmian ("Insured") was sued for injuries suffered by a worker at his residence. The Insured tendered the lawsuit to his homeowners insurance carrier, American Modern Home Insurance Company ("American Modern"). American Modern accepted the defense of the personal injury lawsuit, subject to a reservation of rights.
The injured worker made a $300,000 policy limits demand to the Insured and to American Modern. American Modern informed the Insured, in writing, that it intended to accept the policy limits demand unless the Insured either took over his own defense, or waived any future bad faith claim based on American Modern's failure to settle the action within limits. American Modern provided the Insured with a deadline which was three days before the injured worker's policy limits demand was set to expire. On the deadline set by American Modern, the Insured asked American Modern's coverage counsel to send the settlement letter to him via email so he could forward the letter to counsel. Although its coverage counsel sent the letter to the Insured via email, American Modern received no response. American Modern then accepted the injured worker's policy limits demand.
American Modern subsequently sued the Insured, seeking a declaration that the personal injury action was excluded under the policy, and for reimbursement of what it paid to settle the action. The case proceeded to trial. The jury determined that American Modern made a timely reservation of rights, that American Modern expressly notified the Insured of its intent to accept the settlement offer, and that American Modern advised the Insured that he could assume his own defense if he disagreed with the proposed settlement. Even though the action was not covered under the policy, the trial court also found that American Modern was not entitled to reimbursement because it had not provided the Insured "sufficient time" to make a reasoned reply to the settlement demand. American Modern appealed.
The court of appeal reversed and ordered the trial court to enter judgment in favor of American Modern. The court found that, under Blue Ridge Insurance Company v. Jacobsen, (2001) 25 Cal. 4th 489, an insurance company may obtain reimbursement from its insured for settlement of uncovered claims if the insurer: (1) made a timely and express reservation of rights; (2) provided express notification to the insured of the insurer's intent to accept the proposed settlement offer; and (3) advised the insured of his or her right to assume the defense.
The court of appeal explained that the determinative issue was the insurer's timely reservation of rights. Blue Ridge merely requires that the insurer notify the insured of its intent to settle and of the insured's right to assume his or her own defense. The requirement of "sufficient time" for the insured to consider a settlement offer is not a requirement under Blue Ridge.
Finally, the court of appeal observed that the time frame at issue in the Blue Ridge case was similar to the deadlines at issue in this case. In Blue Ridge, the insurer gave the insured six days to respond to the letter, two days before the offer expired. Here, American Modern gave the Insured five days to respond to the letter, two days before the offer expired.
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