Insurance bad faith, and a $25k policy that turned into a $26 million Judgement. Hedayati v. Interinsurance Exchange of the Automobile Club

By Eric Ganci

Yes, you read those numbers correctly. What started as an insurance policy for $25,000…turned into a popped policy…and which then turned into a $26 million dollar Judgement. Which then also turned into a Bad Faith claim against the Automobile Club. All based on a personal injury legal claim the Insurance Company could have settled.

This case is Hedayati v. Interinsurance Exchange of the Automobile Club (2021 WL 3524034), filed 8/11/21 and later approved for publication. The facts hit you in the gut: Ms. Hedayati is 43 years-old, a recent medical school graduate, and is walking outside to take a break from studying for her medical board examinations. Defendant Driver hits Hedayati, who suffers a severed leg, shatters the other leg…goes into a coma. Automobile Club reviews the claim and notes in their file “Hedayati, ‘may be taken off life support and if so and [therefore] becomes [a] fatality.’” Sounds like Insurance should want to settle, right? Not so fast..

Driver’s policy is $25,000. There are particular dates and facts about the case. But overall, Plaintiff makes a demand for Defendant to settle on its policy limit on a short timeline, and also requires Defendant to disclose the “declarations page” certifying the true policy limit. Automobile Club fails to comply with Plaintiff’s demand, which removes the policy lid.

The case stems out of the Trial Court granting a motion for summary judgement in favor of Automobile Club. But the Court of Appeal reverses that error in this decision.

With this, Hedayati leaves us with important legal principles about an Insurance Company’s duty of Good Faith:

1. “Good faith and fair dealing requirements obligate insurers to make reasonable efforts to settle claims against their insureds.” And “[i]t is well established that this duty requires the insurer to accept a settlement demand within policy limits when there is a substantial likelihood the claimant will obtain a judgment exceeding the insured’s policy limits.”
2. “An insurer that unreasonably fails to accept a settlement demand that falls within the policy limits of its insured acts in bad faith. Such an insurer is liable for any damages caused by its breach of the duty to settle, including the full amount of any judgment against the insured that exceeds the policy limits.”
3. Insurance Companies also owe a duty to investigate and communicate offers to the Insured Driver: “An insurer may also be liable if it breaches other duties owed to the insured, such as the duty to investigate or the duty to communicate, and that breach prevented the insurer from settling the claim within policy limits.”

Hedayati also restates an important legal standard as it relates to Motions for Summary Judgement:

“If the defendant does not address an issue in a motion for summary judgment that has been raised in the plaintiff’s complaint, it fails to meet its initial burden to show the plaintiff’s action has no merit; the motion therefore fails to shift the burden to the plaintiff to oppose summary judgment.” “Where ‘the motion ha[s] not addressed all theories in the complaint…summary judgment should not have been entered.’”