Draft Settlement Agreements with Care or You May Give Up More than You Bargained For

The first sentence in an appellate opinion can strike fear in the heart of any advocate. I should know. Nearly twenty years ago the California Court of Appeal began its opinion on a losing appeal of mine with this sentence: “This case presents a real doozy of a puzzle in mechanic’s lien law.” In a more recent case involving an attempt to undo a settlement agreement by way of subrogation and reverse an award of expert witness fees, the California Court of Appeal began its opinion even more dramatically: “What the heck?!? At one point, the trial court commented, ‘This is one of the most screwed up cases I’ve ever seen.’ We heartily agree.” Click here to read the opinion.

Why highlight such a “screwed up” case in a blog dedicated to helping people resolve construction disputes? Well, we can learn a lot from the opinion-someone else’s pain can be our gain, so to speak. First, the case reminds us that settlement agreements are contracts with consequences. And second, rejecting statutory settlement offers also has consequences.

Facts About the Case

A man was injured when he stepped on a nail in a restaurant that was being refurbished. As a result of the accident, the man’s leg was amputated, and he sued the restaurant and property owner, alleging that they “negligently managed, controlled and supervised the demolition being done on the premises, and failed to take reasonable precautionary measures to protect him from a risk of harm, which caused his injuries.

Essex Insurance Company provided a defense to the purported property owner who was not its named insured, but did not discover its mistake until after judgment was entered following a jury verdict in the plaintiff’s favor. Litigation ensued over Essex’s obligation to pay the judgment. Essex eventually entered into a global settlement with the plaintiff that had the effect of resolving three lawsuits, including the personal injury action and a bad faith action plaintiff brought against Essex, in exchange for a lump sum payment. The settlement agreement did not allocate the payment among the three lawsuits or resolve issues regarding the identity of Essex’s insured.

Essex then sought indemnity from plaintiff’s physician who had treated him after the accident with the nail, on a theory of equitable subrogation for his proportionate liability for the amount Essex paid in settlement. The doctor filed a motion for summary judgment, which the trial court granted on the basis that Essex had waived any claim for equitable subrogation. In a post-judgment order, the trial court also awarded the doctor the cost of his expert witness fees. On appeal, Essex challenged both the judgment and the order. The Court of Appeal ” agreed with the trial court that Essex must lie in the bed it made,” and affirmed.

Settlement Contract

The settlement agreement between Essex, the property owner, and the plaintiff included a lump sum payment of $700,000 which resolved three pending cases, including a bad faith action against Essex. The settlement agreement did not allocate payment amounts among the three pending cases; there was no statement about how much was being paid to compensate plaintiff for his personal injury. Accordingly, the trial court found Essex had impliedly waived its subrogation rights when it failed to enter into separate settlement agreements or otherwise apportion the amount paid among the three lawsuits. The Court of Appeal agreed:

Essex’s contention, however, shows why an implied waiver is applicable here — without resort to extrinsic evidence that is most likely inadmissible, it is impossible to prove how much was paid to settle each claim. Moreover, Essex ignores the other issues it failed to address in the settlement agreement apart from apportionment of the damages between the three lawsuits that shows it did not step into its insured’s shoes in paying the settlement, such as the failure to identify its insured or to apportion damages between economic and non-economic damages.

On appeal, Essex contended the trial court should have considered the inference that the settlement payment was compensation for the personal injury claim of the plaintiff and even suggested that evidence outside the body of the settlement contract could be offered to show the intent of the parties. The Court disagreed, stating that such extrinsic evident would most likely be inadmissible and that in any event, Essex waived its right to equitable subrogation by its actions.

Expert Witness Fees

The doctor made a statutory offer of settlement to Essex in compliance with California Code of Civil Procedure section 998. (Click here for a previous post on statutory offers: Settlement Negotiations: Don’t Get Smacked by the Statutory Stick.) The good doctor’s offer to Essex was this: dismiss your claims for a waiver of costs. Essex did not accept and after the trial court ruled in favor of the doctor, he asked for an award of costs that included payment of his expert witness fees of $28,000. Essex opposed the award on the grounds that the statutory offer for a waiver of costs was not given in good faith. In denying Essex’s challenge to the order to pay expert fees, the Court of Appeal noted:

An offer to compromise may be “realistically reasonable” and justify cost shifting even though the party receiving the offer is unlikely to accept it as a consequence of the party’s skewed valuation of the case. Here, Essex recovered nothing from Dr. Heck. Dr. Heck’s offer is presumed reasonable and it is Essex‟s burden to show otherwise.

As a result, Essex was ordered to pay the doctor’s expert witness fees. Thus, not only did Essex lose the right to shift the burden of its settlement payment to the doctor through equitable subrogation, the doctor was able to shift the costs of litigation onto Essex through the statutory offer procedures of Code of Civil Procedure section 998.

Lessons to be Learned

  1. Settlement Agreements are contracts. They will be interpreted and enforced according to the standard rules of contract interpretation and the laws of evidence. Therefore, settlement agreements must be written with the utmost care. In particular, one should be concerned about the scope of the release to be sure that the intent of the parties is accurately reflected.
  2. Statutory offers must be considered in the light of the laws of the local jurisdiction where the case is pending. It is not wise to react emotionally to a statutory offer of settlement. One should seek to evaluate such offers based upon objective criteria rather than the party’s skewed valuation of the case, as noted in the Essex case. Remember, the party challenging the statutory offer generally has the burden of proving it is unenforceable.

So now you know about the “What the heck?!?” case. I hope it will help you when you are attempting to resolve your next case, even if it presents a “doozy of a puzzle.”