California Civil Jury Instructions (CACI)

2334. Bad Faith (Third Party)—Refusal to Accept Reasonable Settlement Within Liability Policy Limits—Essential Factual Elements

[Name of plaintiff] claims that [he/she/it] was harmed by [name of defendant]’s breach of the obligation of good faith and fair dealing because [name of defendant] failed to accept a reasonable settlement demand in a lawsuit against [name of plaintiff]. To establish this claim, [name of plaintiff] must prove all of the following:

1. That [name of plaintiff in underlying case] brought a lawsuit against [name of plaintiff] for a claim that [[he/she/it] alleged] was covered by [name of defendant]’s insurance policy;

2. That [name of defendant] failed to accept a reasonable settlement demand for an amount within policy limits; and

3. That a monetary judgment was entered against [name of plaintiff] for a sum greater than the policy limits.

“Policy limits” means the highest amount available under the policy for the claim against [name of plaintiff].

A settlement demand is reasonable if [name of defendant] knew or should have known at the time the settlement demand was rejected that the potential judgment was likely to exceed the amount of the settlement demand based on [name of plaintiff in underlying case]’s injuries or loss and [name of plaintiff]’s probable liability.

New September 2003; Revised December 2007

Directions for Use

The instructions in this series assume that the plaintiff is the insured and the defendant is the insurer. The party designations may be changed if appropriate to the facts of the case.

This instruction is intended for use if the insurer assumed the duty to defend the insured, but failed to accept a reasonable settlement offer. For instructions regarding general breach of contract issues, refer to the Contracts series (CACI No. 300 et seq.).

If it is alleged that a demand was made in excess of limits and there is a claim that the defendant should have contributed the policy limits, then this instruction will need to be modified.

This instruction should be modified if the insurer did not accept the policy- limits demand because of potential remaining exposure to the insured, such as a contractual indemnity claim or exposure to other claimants.

Sources and Authority

  • “[T]he implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. [¶] The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer to settle the claim.” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659 [328 P.2d 198], citation omitted.)
  • “Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.” (Crisci v. Security Insurance Co. of New Haven, Connecticut (1967) 66 Cal.2d 425, 430 [58 Cal.Rptr. 13, 426 P.2d 173].)
  • “In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer.” (Crisci, supra, 66 Cal.2d at p. 429.)
  • “[I]n deciding whether or not to compromise the claim, the insurer must conduct itself as though it alone were liable for the entire amount of the judgment… [T]he only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.” (Johansen v. California State Auto. Asso. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123 Cal.Rptr. 288, 538 P.2d 744], internal citation omitted.)
  • “The size of the judgment recovered in the personal injury action when it exceeds the policy limits, although not conclusive, furnishes an inference that the value of the claim is the equivalent of the amount of the judgment and that acceptance of an offer within those limits was the most reasonable method of dealing with the claim.” (Crisci, supra, 66 Cal.2d at p. 431.)
  • “The covenant of good faith and fair dealing implied in every insurance policy obligates the insurer, among other things, to accept a reasonable offer to settle a lawsuit by a third party against the insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits. The insurer must evaluate the reasonableness of an offer to settle a lawsuit against the insured by considering the probable liability of the insured and the amount of that liability, without regard to any coverage defenses. An insurer that fails to accept a reasonable settlement offer within policy limits will be held liable in tort for the entire judgment against the insured, even if that amount exceeds the policy limits. An insurer’s duty to accept a reasonable settlement offer in these circumstances is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble—on which only the insured might lose.” (Rappaport-Scott v. Interinsurance Exch. of the Auto. Club (2007) 146 Cal.App.4th 831, 836 [53 Cal.Rptr.3d 245], internal citations omitted.)
  • “Determination of the reasonableness of a settlement offer for purposes of a reimbursement action is based on the information available to [the insurer] at the time of the proposed settlement.” (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 793 [244 Cal.Rptr. 655, 750 P.2d 297].)
  • “Whether [the insurer] ‘refused’ the ‘offer,’ and whether it could reasonably have acted otherwise in light of the 11-day deadline imposed by the offer’s terms, were questions for the jury.” (Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 994 [136 Cal.Rptr. 331].)
  • “A cause of action for bad faith refusal to settle arises only after a judgment has been rendered in excess of the policy limits… Until judgment is actually entered, the mere possibility or probability of an excess judgment does not render the refusal to settle actionable.” (Safeco Ins. Co. of Am. v. Superior Court (1999) 71 Cal.App.4th 782, 788 [84 Cal.Rptr.2d 43], internal citations omitted.)
  • “An insurer’s wrongful failure to settle may be actionable even without rendition of an excess judgment. An insured may recover for bad faith failure to settle, despite the lack of an excess judgment, where the insurer’s misconduct goes beyond a simple failure to settle within policy limits or the insured suffers consequential damages apart from an excess judgment.” (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 527 [115 Cal.Rptr.3d 42], internal citations omitted.)
  • “A good faith belief in noncoverage is not relevant to a determination of the reasonableness of a settlement offer.” (Samson v. Transamerica Insurance Co. (1981) 30 Cal.3d 220, 243 [178 Cal.Rptr. 343, 636 P.2d 32], internal citation omitted.)
  • “An insurer that breaches its duty of reasonable settlement is liable for all the insured’s damages proximately caused by the breach, regardless of policy limits. Where the underlying action has proceeded to trial and a judgment in excess of the policy limits has been entered against the insured, the insurer is ordinarily liable to its insured for the entire amount of that judgment, excluding any punitive damages awarded.” (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 725 [117 Cal.Rptr.2d 318, 41 P.3d 128], internal citations omitted.)

Secondary Sources

2 Witkin, Summary of California Law (10th ed. 2005) Insurance, §§ 257—258

Croskey et al., California Practice Guide: Insurance Litigation, ¶¶ 12:201—12:686 (The Rutter Group)

2 California Liability Insurance Practice: Claims and Litigation (Cont.Ed.Bar) Actions for Failure to Settle, §§ 26.1—26.35

2 California Insurance Law and Practice, Ch. 13, Claims Handling and the Duty of Good Faith, § 13.07[1]—[3] (Matthew Bender)

26 California Forms of Pleading and Practice, Ch. 308, Insurance, § 308.24 (Matthew Bender)

12 California Points and Authorities, Ch. 120, Insurance, §§ 120.195, 120.199, 120.205, 120.207 (Matthew Bender)