Release rule gives way to set-off-with-contribution absent finding settling tortfeasor's policy-limit-payment was a good-faith settlement

September 12, 2012
By Dowling Aaron Incorporated on September 12, 2012 6:00 AM |

policy-limit-payment.jpgIn Leung v. Verdugo Hills Hospital (filed August 23, 2012) 2012 DJDAR 11705, the California Supreme Court tackled what it saw as an inequitable result to personal-injury plaintiffs and repudiated the common law release rule.

Plaintiff minor suffered irreversible brain injury shortly after birth. Through his guardian mother, he settled his claim for damages with his pediatrician for that defendant's malpractice insurance policy limit of $1 million. The trial court refused to grant these parties' request for an order that the settlement was in good faith. Nonetheless, plaintiff stood by the settlement and proceeded to trial against the remaining defendant, the hospital. A jury found both defendants negligent, assessing approximately $15.504 million in damages. The jury apportioned fault as 55% as to the pediatrician, 40% as to the hospital, and 5% as to the minor's parents. The defendants' portion of fault left them liable for approximately $14.729 million.

The Court of Appeal felt duty-bound to follow the common law release rule which would relieve the nonsettling hospital from any liability for plaintiffs economic damages (the above total damages less the $250,000 MICRA-limited non-economic damages) because plaintiff's settlement with, and release of liability against, the joint torfeasor pediatrician also released the non-settling hospital. This is where the Supreme Court stepped in to unanimously repudiate the common law release rule.

The state high court determined that basic tort principles support the court's adoption of the "setoff-with-contribution" rule. The court's opinion states that this does not change the respective positions of the parties and is fully consistent with both comparative fault and joint and several liability.

Doing the math, even after settling for his policy limit, the defendant physician faces contribution for an additional amount to the hospital in excess of $7 million (assuming the hospital pays the $13+ million over and above the setoff for the $1 million settlement), even though the physician has no insurance to cover that liability. It is thus clear that, after Leung, the pressure on a defendant, who wants out of a case by way of settlement, to pay out of pocket beyond the policy limits is enormous, if that is what will be necessary to get a court to order the settlement is in good faith. Under a "good-faith settlement," there would be a setoff without contribution." (Code of Civil Procedure section 877, Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 499.)

The Leung opinion leaves a wide range of implications and questions. In the typical case involving insurance coverage and appointed insurance defense counsel, there are two clients, the insurance company and the insured individual or entity. Where there is a strong possibility of a judgment in excess of the insurance policy limits, it is common practice for the insured party to make a written demand to the insurance company that it settle the case within the policy limits. There is substantial case authority that the insurance company's failure to settle within policy limits may open the policy to an unlimited judgment. In the context of the Leung decision, one wonders how and whether failure to obtain a finding of good faith for a settlement within policy limits affects the issue of opening up the policy.

Where there is the potential for a judgment in excess of the policy limits, might there now be additional pressure on the insurance companies for appointment of cumis counsel? Following the traditional rule, such counsel might only be required if there is a preceding strong reservation of rights from the insurance company. Either way, it seems that the insured client will need additional counsel on the issue of the excess judgment outside the normal insurance defense.

Following Leung, all settlement agreements should be conditioned upon a finding of good faith by the court, at least where equitable indemnity claims exist from other parties. To proceed without such a finding would arguably be malpractice by the insurance defense counsel, at least to the extent that counsel does not make appropriate written disclosures to the insured client regarding the possible outcomes when proceeding with a settlement that is not submitted to the court for good faith or where the court finds the settlement is not in good faith.

Finally, Leung gives good reason for professionals to take a renewed look at their malpractice coverage limit.

By: David J. Weiland, Nickolas J. Dibiaso and Steven M. Vartabedian

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