NU Online News Service, Sept. 1, 3:12 p.m. EDT
The Supreme Court of California has ruled that a homeowners association cannot sue State Farm over a claim related to the Northridge earthquake while it keeps a previous settlement with the insurer.
The unanimous decision means the Village Northridge Homeowners Association will need to give back its previous settlement with State Farm and rescind a release it signed with the insurer in order to sue it for allegedly underpaying and misrepresenting policy limits, according to court documents.
"To allow Village Northridge to settle with State Farm and sign a release, keep the money, and then sue its insurer for alleged fraud without rescinding the release…would violate the terms of the bargain and frustrate its purpose," the state Supreme Court decision reads. "It would also likely inhibit insurance companies' practice of using a release as a settlement device."
Village Northridge filed a claim with State Farm following the Northridge earthquake in 1994. The insurer first gave the homeowners association more than $2 million, added nearly $7,500 after re-inspections, and then late in 1999 settled with Village Northridge for an additional $1.5 million. As part of the settlement, the association agreed to release State Farm from all known and unknown claims related to the Northridge quake.
About two years later, according to H. Thomas Watson, partner with the Horvitz & Levy appellate law firm in Los Angeles, the state legislature extended the statute of limitations on Northridge claims, prompting Village Northridge to go after State Farm again for breach of contract and bad faith, Mr. Watson said.
A trial court said Village Northridge could not keep its previous settlement and sue. But the state Court of Appeals reversed the decision, stating that rules requiring that a plaintiff give back a settlement and rescind a previous release do not apply to insurance contracts, court records show.
Now the appellate ruling has been reversed by the state Supreme Court, which said it relied on case law and state statutes to come to its conclusion that "a release of a disputed claim, like the one here, does not permit a party to elect the remedy of a suit for damages when the release itself bars that option."
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