Chen vs. Interinsurance Exchange of the Automobile Club
filed June 19,2008, Second District, Div. Eight
Cite as 2008 SOS 3660

Insurer’s Settlement Offer Held Invalid, Judgment Reversed

This is an appeal by Po-Jen Chen, et. al. from the decision of the Superior Court of Los Angeles awarding costs to respondent Interinsurance under the Code of Civil Procedure section 998.

The facts are undisputed. Po-Jen Chen and Fang-Mei Lin own 2 houses: one in San Gabriel and one in San Marino. Both houses are insured by Interinsurance. In May 2003, their San Gabriel home suffered extensive water damage due to breakage of the water line in an upstairs bathroom; while their San Marino home suffered damage from high winds. As a result, appellants filed claims with respondent under both insurance policies.

Alleging bad faith and breach of insurance policies, appellants, on May 2004, sued respondent, alleging that the latter mishandled their claims by:

1. Authorizing shoddy repair work;


2. Making low ball offers;


3. Failing to pay certain benefits such as an adequate temporary housing stipend; and


4. Refusing to properly remediate mold contamination

In August 2005, the San Gabriel home suffered water damage, this time in the kitchen. The appellants filed another claim against respondent but it is not part of this suit.

Respondent made a statutory offer amounting to $251,000.00 to appellants in September 2005 on the condition that plaintiffs execute a dismissal with prejudice of the action and a general release of “all claims” in lieu of an entry of judgment against respondent. Appellants refused the statutory offer.

In 2006, the jury found respondent fully paid all of appellants’ covered losses under the insurance polices for both damages. Yet, the jury also held that respondent unreasonably handled appellants’ claims; awarding appellants $8,500 in economic damages and $141,500 in non-economic damages. The total award of damages was $150,000.

Since respondent’s initial statutory offer of $251,000 was more than the total award of damages, respondent, relying on section 998, moved to recover the costs of its expert witnesses, its post-offer litigation cost and trial costs. Plaintiffs opposed. Also, respondent prayed that plaintiffs’ claim to recover the costs they incurred after they had rejected the offer be denied by the court.

On the contrary, plaintiffs contended that the initial settlement offer was invalid under section 998 because:

1. Respondent had not allocated the settlement proceeds between appellants; and


2. Respondent had conditioned the offer on both appellants’ accepting it.

The trial court ruled in favor of the respondent, awarding respondents $310,000 in post-offer costs. However, it awarded almost $9,800 in pre-offer costs to appellants. Adding the $150,000 the jury awarded to appellants, the costs to be awarded respondent totaled $150, 949. 79. Hence, this appeal by the plaintiffs.

The primary issue in the case at bar is: Whether or not respondent’s 998 settlement offer was valid.

The Court interpreted against respondent any ambiguity in its offer. Plaintiffs alleged in their lawsuit that respondent mishandled their claims for water damage to one property and for wind damage to another property. The kitchen flooding was not part of this suit.

However, respondent offered appellants $251,000 in settlement; demanding for a “general release of all claims.” It is of appellants’ view that the phrase “all claims” was ambiguous because of its pending kitchen flooding claim. The Court shares the same view.

Acceptance by the plaintiffs of respondent’s offer by signing in the release claims would bar the former from recovering in the kitchen flooding lawsuit. According to Section 1542 of the Civil Code, a general release does not affect unknown claims. Thus, by implication, a general release covers all claims known to the party.

Unlike in the case of Goodstein vs. Bank of San Pedro, the case at bar contained language that might suggest that the offer covers not just the claims involved, but also the claim outside of the current suit. Hence, the court ruled that appellants’ assertion of ambiguity in the scope of respondent’s settlement offer is well-taken.

Wherefore, the Court orders the trial court to vacate its cost award in favor of the respondent and to recalculate plaintiffs’ cost award, disregarding respondent’s 998 offer to settle.