At least one court, in a recent decision out of California’s second appellate district, has answered no to that question.  In Vidrio v. Hernandez, the court reversed an order imposing sanctions on an insurer for failing to negotiate in good faith at a settlement conference.  The court held that even if the insurer’s conduct had not been in good faith, there was no authority under California statute, the Rules of Court or any local rule for sanctioning the insurer.

The Vidrio case involved personal injury claims brought by two plaintiffs injured in a car accident.  Defendant’s insurer, Mercury Insurance Company, provided her with a defense.  Plaintiffs’ total claims were approximately $90,000.   A mediation was conducted in the case, and defendant served plaintiffs offers of $1,000, which they did not accept.  A mandatory settlement conference followed the mediation.  Both defendant’s attorney, hired by Mercury, and an adjuster from Mercury attended the settlement conference.  Plaintiffs made demands of $15,000 each.  Defendant contested liability as well as the nature and extent of Plaintiffs’ injuries and again repeated the offer of $1,000 for each plaintiff. 

Following the settlement conference the trial court held a proceeding on the record where it noted that the case appeared to be one of damages not liability and that the Rules of Court and local rules require good faith representation by both counsel and an authorized representative of the company, which was Mercury here.  The court further noted that, “[c]ounsel and the adjuster came to court today unprepared to discuss damages, unprepared to discuss costs of defense, unprepared to have an intelligent conversation about how they derive a thousand dollars in total to be paid to plaintiffs.”  The court issued an order to show cause why sanctions would not be imposed.  A hearing followed where the court ultimately ordered sanctions of $1,500 payable to the court and $357.50 payable to plaintiffs’ counsel against Mercury only.

In reversing the trial court’s order of sanctions, the appellate court examined a number of California statutes that authorize the imposition of sanctions, but found none that authorized an award of sanctions against a nonparty insurer for failure to participate in good faith in a mandatory settlement conference.  The court found the only statute cited by the trial court, California Code of Civil Procedure Section 177.5, to be inapplicable.  Section 177.5 authorizes sanctions for violations of court orders.  However, even if Mercury failed to participate in the settlement conference in good faith, that conduct did not violate a court order.  Further, under Section 177.5, sanctions may only be awarded against a person, defined as “a witness, a party, a party’s attorney, or both.”  A non-party insurer, such as Mercury, is not included within that definition.  Additionally, the sanction against Mercury had exceeded the monetary limit under the statute by $357.50.

The court looked to another statute, CCP Section 575.2, which authorizes the superior courts to provide for sanctions by local rules for failure to comply with any requirements of the local rules.  Los Angeles Superior Court has promulgated a local rule pursuant to this authority.  However, the court found this statute also to be inapplicable here as it does not provide authority to sanction a non-party insurer.  Further, the court could find nothing in the local rules requiring the participants to negotiate with each other.

The court noted that the only possible source of authority for these sanctions was Rule of Court 2.30, which specifically authorizes a court to impose sanctions against an insurer.  Mercury argued that this rule still did not support the court’s order of sanctions against them because the Rule was not grounded in statute and its conduct at the settlement did not violate any rule of court.  The court was not persuaded by Mercury’s first argument and found that the Judicial Counsel was well within their rule-making authority to promulgate Rule 2.3 and that the rule was not in conflict with any other statute. The court was persuaded, however, by Mercury’s second argument.  While the local rules do require attendance at settlement conferences by persons authorized to settle, and they require a defendant to present a good faith settlement offer, the court could find no local rule requiring Mercury to make a good faith effort to settle the case.  Therefore, the court reversed the order of sanctions against Mercury.