If the insurer notifies the insured it intends to settle a claim, but will then seek reimbursement if the claim is not covered, can the insured avoid having to reimburse the insurer?  The California Court of Appeal answered no in Am. Modern Home Ins. Co. v. Fahmian, 2011 Cal. App. LEXIS 420 (Cal. Ct. App. April 8, 2011).

   Fahmian was the owner of Provident Housing, Inc., a company that built homes.  Fahmian had a homeowner's policy with American Modern which specifically excluded coverage for any liability arising out of Fahmian's business. 

   Fahmian and Provident were sued by plaintiff for insuries suffered from being shot in the eye by a nail gun.  Fahmian tendered the suit to American Modern, which accepted under a reservation of rights. 

   The plaintiff's lawyer presented a settlement demand to American Modern for policy limits – $300,000.  On July 1, 2005, American Modern informed Fahmian in writing that it intended to accept the demand unless Fahmian either agreed to undertake his own defense or waive any potential claims based on the failure to settle the plaintiff's action within the policy limits.  The letter further advised that plaintiff's demand would expire on July 8, 2005, and that Fahmian had to respond to American Modern by 4:00 p.m. on July 6, 2005.  Although he received the letter, Fahmian never bothered to read it.

   When American Modern did not hear from Fahmian by July 8, 2005, it accepted the policy limits settlement demand.

   Thereafter, American Modern sued Fahmian, seeking a declaration that the underlying action was excluded under the policy, and for reimbursement of the money it paid to settle that action.  A jury found that American Modern was not entitled to reimbursement because it had not provided Fahmian "sufficient time" to make a reasoned reply to the offer to assume his own defense if the disagreed with the decision to settle.  The trial court entered a minute order stating that because American Modern did not give Fahmian a reasonable amount of time to decide, Fahmian was not liable to the insurer. The trial court did not make any declaration of rights as requested in the complaint.

   The appellate court reviewed the requirements in Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489 (2001) for seeking reimbursement for noncovered claims included in a reasonable settlement payment.  First, the insurer had to make a timely and express reservation of rights.  Second, an express notification to the insureds of the insurer's intent to accept a proposed settlement offer was required.  Third, the insurer had to make an express offer to the insureds to assume their own defense when the insurer and insured disagreed whether to accept the proposed settlement. 

   Absent from the list was a requirement of sufficient time for the insured to consider the notice of intent to settle and offer to the insured the ability to assume its own defense.  Accordingly, the appellate court reversed and directed the trial court to enter judgment in favor of American Modern declaring that the underlying suit was not covered by the policy and that American Modern was entitled to reimbursement from Fahmian of the $300,000 paid to settle.

   Thanks to Damon Key blogging colleague, Robert Thomas (www.inversecondemnation.com), for sending the case may way.