CALIFORNIA: U.S. COURT AFFIRMS "SHAM DEFENDANT" RULING.

A California woman cannot get her bad-faith lawsuit against an insurance company back into state court by adding as a defendant an insurance agent who is a resident of the state, the Ninth U.S. Circuit Court of Appeals ruled Aug. 18.

"It is well established that, unless an agent or employee acts as a dual agent (a circumstance not present in this case), she cannot be held individually liable as a defendants unless she acts for her own personal advantage," Judge David Thompson wrote for the three-member panel in Mercado v. Allstate Insurance (02-55997).

Plaintiff Emma Mercado was walking across a street when she was struck by a car driven by Brenda Brannon and insured by Allstate. She sued Brannon for negligence, and Allstate offered to settle for the $15,000 limits of its policy if Mercado added Los Angeles County and Mercado's attorney as payees.

Mercado refused. Instead, she reached an agreement with Brannon under which the latter stipulated to a judgment for $150,000 as long as Mercado agreed not to go after any of her own assets. In turn, Brannon assigned Mercado all claims against Allstate for bad faith.

Mercado filed a lawsuit in state court against Allstate and the agent who handled her claim, Silvia Luevano, alleging breach of the covenant of good faith and fair dealing.

Illinois-based Allstate removed the case to federal court on grounds of diversity jurisdiction applying to residents of different states, and U.S. District Judge Audrey Collins rejected Mercado's motion to remand it to state court - saying Luevano was a sham defendant added simply to defeat diversity jurisdiction.

The Ninth Circuit affirmed the ruling.

It also affirmed Judge Collins's ruling that a 2002 California Supreme Court decision in Hamilton v. Maryland Casualty Co. applies to both tort and contract claims for bad faith.

"The Hamilton court explained that a bad faith refusal to settle may give rise to either a breach of contract or a tort claim," Thompson wrote.

Further, the appellate panel said an insurer cannot be sued for alleged bad faith in refusing to settle a case until an excess judgment is rendered after a trial, leaving the policyholder to pay the difference.

"The reasoning behind the rule is basic fairness: an insurer that tenders a defense does no harm to its insured by declining to settle and taking its chances with a trial," Thompson wrote.

"If the trial results in a judgment within the policy limits, the insured is not harmed," he wrote.

"It is only after a litigated excess judgment is obtained that an insurer's refusal to settle becomes actionable."

And the panel said Allstate was justified in insisting on adding Mercado's attorney and the county as payees on its check. The attorney already had a lien on the proceeds and the county could be expected to get one because it had already presented Mercado a bill for medical expenses, Thompson noted.