COURT OF APPEAL SAYS INSURED MAY SUE FOR BAD FAITH EVEN AFTER SETTLING WITH INSURER.

In Village Northridge Homeowners Assn. v. State Farm Fire & Cas. Co. (Dec. 17, 2007, B188718) __ Cal.App.4th __, the Court of Appeal held that an insured who settles a coverage claim and releases its insurer may keep the settlement proceeds and then sue the insurer for misrepresenting the policy limits in order to recoup the difference between the settlement amount and the amount the insurer and insured would have agreed upon to settle the claim had there been no misrepresentation.

An insured homeowners association settled disputed earthquake claims with its insurer for $1.5 million. In exchange, the insured released all claims against the insurer. Two years later, the insured sued the insurer for breach of the insurance contract and insurance bad faith. The insurer successfully moved for summary judgment on the ground the insured's release barred the lawsuit. The Court of Appeal reversed and, on remand, the insurer successfully moved for judgment on the ground the insured could not sue on the policy without first rescinding the settlement agreement and restoring to the insurer the $1.5 million the insurer had paid to settle.

The Court of Appeal reversed once again, holding that the insured had the option of affirming the settlement agreement and recovering damages for the insurer's fraudulent misrepresentation of policy benefits, measured by the difference between the $1.5 million already paid by the insurer in settlement of the earthquake claim and the amount the insurer and insured would have settled for had there been no misrepresentation of policy benefits.

For more information about the case, contact Tom Watson at (818) 995-0800, or htwatson@horvitzlevy.com.

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