Bad Faith Set-Up Fails

 Plaintiffs’ and their Counsel’s Bad Faith Defeats Suit Against Insurer

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No Good Deed Goes Unpunished –  Plaintiffs Abused the Tort of Bad Faith

Julio Palma and Miriam Cortez (the Plaintiffs) appealed an order granting summary judgment in a bad faith insurance case against Mercury Insurance Company (Mercury). Mercury insured Frank McKenzie, who killed Plaintiffs’ son in a car crash. Plaintiffs obtained a $3 million judgment in a wrongful death action against McKenzie. McKenzie then assigned Plaintiffs his rights against Mercury, and Plaintiffs brought the present action against Mercury on the basis that it failed to accept their reasonable offer to settle their wrongful death claims. The trial court granted Mercury’s motion for summary judgment after determining Plaintiffs never offered to settle their claims.

In Julio Palma et al. v. Mercury Insurance Company, B309063, California Court of Appeals, Second District, Third Division (August 23, 2022) the Court of Appeals refused to buy plaintiffs’ claims of bad faith.


In September 2012, Frank McKenzie was driving a vehicle that struck and killed Oscar Palma, who was riding a moped. At the time, McKenzie was insured under a Mercury insurance policy with bodily injury liability limits of $15,000 and property damage limits of $10,000.

On October 15, 2012, attorney Paul Zuckerman sent Mercury a settlement letter that identified “Oscar Palma (deceased) Estate of Oscar Palma” as “Our Clients” and states: “Oscar Palma (deceased) Estate of Oscar Palma, demands that Mercury Insurance tender full policy limits to Oscar Palma (deceased) Estate of Oscar Palma to resolve their claim.

The letter stated the offer was to remain open for 14 days, until October 29, 2012.

Mercury retained attorney Jeffrey Lim and instructed him to accept the offer. On October 19, 2012, Lim faxed the Carpenter firm a letter stating Mercury “is tendering to the estate and all heirs of Oscar Palma Mr. McKenzie’s $15,000 policy limits. [¶] In order to confirm that all heirs are included in the release for the policy limits, please have the heirs complete and sign the attached affidavit of heirs.” The Carpenter firm did not respond to the letter.

On October 24, 2012, Lim told Mercury that McKenzie agreed to a settlement. The same day, Lim wrote a letter to the Carpenter firm accepting the “offer to resolve the death claim of Oscar Palma.” Lim enclosed a check for $15,000 and represented that, aside from the Mercury policy, there were no other policies in existence for the loss. Lim, however, inadvertently failed to attach McKenzie’s declaration to the letter.

Lim included with the letter his office’s standard Release of Claims form, which required the release of all “bodily injury and personal injuries and property damage claims, and wrongful death claims ….” Lim told the Carpenter firm if “you have any changes to my release, please let me know prior to October 29, 2012.” The Carpenter firm did not respond to Lim’s letter or request any changes to the release.

Between March and July 2013, Mercury sent the Carpenter firm six letters “reiterat[ing]” its offer of the $15,000 bodily injury policy limits. Lim responded by sending the Carpenter firm a copy of McKenzie’s declaration. He represented that the “declaration had been received, but was inadvertently left out of my October 24, 2012, letter to the Carpenter firm. Mercury sent the Carpenter firm a separate response stating its position that it “timely offered its $15,000 bodily injury policy limits to your clients to settle their claims against Mr. McKenzie.

Plaintiffs’ Wrongful Death Action Against McKenzie

On August 28, 2013, the Carpenter firm filed a lawsuit against McKenzie on behalf of Plaintiffs, Ana Guzman-Palma, and the “Estate of Oscar F. Palma, a deceased individual.” The complaint asserted causes of action for negligence, “survival action,” and wrongful death. Following a jury trial, the court entered judgment against McKenzie and in favor of Plaintiffs for $3 million on their wrongful death claims.  Mercury paid Plaintiffs its $15,000 bodily injury policy limits.

Plaintiffs’ Bad Faith Action Against Mercury

McKenzie assigned his rights against Mercury to Plaintiffs in exchange for a covenant not to execute the judgment against his personal assets.

Mercury’s Motion For Summary Judgment

Mercury moved for summary judgment and submitted evidence establishing the facts summarized above.

The trial court granted Mercury’s motion for summary judgment after determining the Carpenter firm’s letter offered only to settle a survival action on behalf of the estate.


Plaintiffs contended the trial court erred in granting Mercury’s motion for summary judgment because there are disputed issues of fact concerning whether Mercury unreasonably failed to accept their settlement offer.

Bad Faith Refusal To Settle

California courts have derived an implied duty on the part of the insurer to accept reasonable settlement demands on such claims within the policy limits.

An insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. The plaintiff must also prove the insurer failed or refused to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. In evaluating whether an insurer acted in bad faith, the critical issue is the reasonableness of the insurer’s conduct under the facts of the particular case. To hold an insurer liable for bad faith in failing to settle a third party claim, the evidence must establish that the failure to settle was unreasonable.

Plaintiffs Did Not Offer To Settle Their Wrongful Death Claims

The Carpenter firm’s October 15, 2012 letter cannot reasonably be interpreted as an offer to settle Plaintiffs’ wrongful death claims. A wrongful death claim is a statutory cause of action that allows a decedent’s heirs to recover compensation for the economic loss and deprivation of consortium they personally suffered as a result of the decedent’s death. Wrongful death claims belong to the heirs, not the decedent or the decedent’s estate. The Carpenter firm’s letter, however, does not mention Plaintiffs or Palma’s heirs, let alone identify them as the offerors. It is clear that the Carpenter firm’s letter offered to settle the estate’s survival claim, and not Plaintiffs’ wrongful death claims.

Because Mercury’s undisputed evidence shows Plaintiffs did not offer to settle their wrongful death claims, they cannot state a cause of action for bad faith refusal to settle those claims.

Mercury Did Not Act In Bad Faith

Even if the Carpenter firm’s letter had offered to settle Plaintiffs’ claims, Mercury would be entitled to summary judgment because no reasonable trier of fact could conclude it acted in bad faith. The undisputed evidence shows Mercury directed Lim to accept the Carpenter firm’s settlement offer under the terms set out in its October 15, 2012 letter. The only reasonable conclusion from this evidence is that Mercury would have settled the claims under Plaintiffs’ terms, but for Lim’s negligence in failing to deliver McKenzie’s declaration. Mere negligence, however, is insufficient to support a claim for bad faith failure to settle.

There was no evidence showing Mercury refused to remove the property damage language from the release or otherwise required it as a condition of settlement. To the contrary, the undisputed evidence shows Mercury separately attempted to resolve any property damage claims in November 2012, before the Carpenter firm informed it that there was no settlement related to the bodily injury policy limits.

Mercury made substantial efforts to accept the Carpenter firm’s offer. Among other things, it informed McKenzie of the offer, obtained his consent to accept it, tendered its full bodily injury policy limits, made substantial efforts to obtain and deliver the requested information and documents, and expressed a willingness to modify the Release of Claims form

Plaintiffs pursued a legal action against McKenzie, knowing it would hurt his credit and subject him and his family to extremely distressing and embarrassing post-judgment collection proceedings. If anyone acted in bad faith, it was Plaintiffs and the Carpenter firm.


The Court of Appeal established an attempt to wrongfully take advantage of the tort of bad faith by the plaintiffs acting in bad faith to an insurer who reasonably attempted to resolve a dispute against its insured by immediately accepting the offer of settlement. The insurer’s good faith acceptance was ignored by the plaintiffs’ counsel who refused to accept the policy limits. Rather, counsel brought silly arguments like expecting payment of $10,000 property damage limit for a moped worth about $1,000.00. This was an incompetent attempt at a bad-faith set up where the court concluded that the Plaintiffs acted in bad faith, not the insurer.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at and and receive videos limited to subscribers of Excellence in Claims Handling at to Excellence in Claims Handling at

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About Barry Zalma

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