City Sues Insurance Firm Over Refusal to Pay Claim

The City of Laguna Beach filed a $6.5-million lawsuit Monday against an insurance company and its underwriter for refusing to pay at least $600,000 in a landslide case that was settled last fall after a jury had rendered a verdict against the city.

Laguna Beach claims that Mead Reinsurance Corp. and underwriter Patricia Fleishman Inc. acted in bad faith and breached two written contracts in failing to pay the money to two couples whose homes were damaged or destroyed in the Feb. 17, 1980, slide.

Last fall, the city agreed to give C.L. and Marilyn M. McArthur $653,000 for the destruction of their home and to give David and Elizabeth Mallegg $47,000 for damage to their home.

Claiming that a city-built street weakened the hillside and caused the slide to occur during a storm, the couples won more than $820,000 in a March, 1984, jury verdict. The city filed an appeal but later dropped it as part of the settlement.

The city’s suit against Mead and Fleishman details a series of letters between the two sides. Mead claimed last October that the city had not provided any explanation for a claim of policy coverage, but the city contended that all the information had been provided in an April, 1984, letter.

Under one insurance contract, Mead and Fleishman were to pay claims in excess of $100,000 but less than $500,000. Another contract called for payment of amounts between $500,000 and $1 million.

Mead had been the carrier for the Orange County Cities Risk Management Authority, which consists of Laguna Beach and 11 other municipalities that banded together in an insurance pool. The company notified the authority last October that it would no longer provide insurance.

An authority manager blamed the pullout on legal doctrines that require cities to pay entire judgments when they are found to be only slightly liable.

The authority eventually obtained insurance from another carrier at premiums that are 300% to 450% higher.