Rappaport-Scott v. Interinsurance Exchange of the Automobile Club
(2007) 146 Cal.App.4th 831

Insurer Has No Implied Covenant Obligation To Accept An Offer To Settle An Underinsured Motorist Claim

Interinsurance Exchange of the Automobile Club (Interinsurance) issued an automobile insurance policy to Laura Rappaport-Scott (Rappaport-Scott) including coverage for bodily injury caused by uninsured and underinsured motorists. The coverage limit was $100,000 per person.

Rappaport-Scott, while driving her automobile in January 1997, was rear-ended by another vehicle that had been struck by a vehicle driven by an underinsured motorist. Rappaport-Scott sued the underinsured motorist for her injuries and settled the action for $25,000, the policy limit available.

Rappaport-Scott then submitted a claim to Interinsurance for benefits under her underinsured motorist coverage. She claimed the total value of her injuries and losses caused by the underinsured motorist was $346,732.34. She requested an arbitration award of $75,000, calculated by deducting the $25,000 the underinsured motorist paid from the $100,000 coverage limit. She also made what she characterized as a settlement demand to Interinsurance for payment in that amount. Interinsurance offered her only $7,000 on the claim.

At the arbitration hearing in August 2003, the parties stipulated the policy provided coverage for the claim, that Rappaport-Scott had received some benefits under her medical expenses coverage and $25,000 from the underinsured motorist, and that she was free of fault. The parties disputed only the amount payable on the claim. The arbitrator found Rappaport-Scott had suffered damages of $15,000 for medical expenses, $3,000 for loss of earnings, and $45,000 for pain, suffering, and future medical care, for a total of $63,000. The arbitrator reduced the total amount by $25,000 for the settlement with the underinsured motorist and $10,000 for medical expenses benefits previously paid, and awarded a net amount of $28,000. The parties corrected the $10,000 figure to reflect the actual prior payment of benefits of only $5,000, and agreed that Rappaport-Scott was entitled to $33,000 under the award.

Rappaport-Scott later filed a complaint alleging Interinsurance breached the implied covenant of good faith and fair dealing by failing to negotiate with her in good faith. Rappaport-Scott alleged Interinsurance failed to present a reasonable counter-offer to her settlement demand of $75,000. Interinsurance filed a demurrer to Rappaport-Scott's complaint which was sustained by the trial court. Rappaport-Scott appealed.

The Court of Appeal affirmed. The Court held an insurer's tort liability for failure to accept a reasonable settlement offer can only arise with respect to third party, or liability, coverage. An insurer's obligations under the implied covenant of good faith and fair dealing with respect to first party coverage only includes a duty not to unreasonably withhold benefits due under the policy. The Court of Appeal found the vast difference between the $346,732.24 in losses claimed by Rappaport-Scott and the $63,000 in actual losses as determined by the arbitrator, demonstrated, as a matter of law, that Interinsurance did not unreasonably withhold policy benefits.

This opinion is not final. It may be withdrawn from publication, modified on rehearing or the California Supreme Court may grant review. Should any of these events take place, the opinion would be unavailable for use as authority in other cases.

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