California Civil Jury Instructions (CACI) (2017)

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

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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 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 for an amount within policy limits is reasonable if
[name of defendant] knew or should have known at the time the demand
was rejected that the potential judgment was likely to exceed the
amount of the demand based on [name of plaintiff in underlying case]’s
injuries or loss and [name of plaintiff]’s probable liability. However, the
demand may be unreasonable for reasons other than the amount
demanded.
New September 2003; Revised December 2007, June 2012, December 2012, June
2016
Directions for Use
This instruction is for use in an “excess judgment” case; that is one in which
judgment was against the insured for an amount over the policy limits, after the
insurer rejected a settlement demand within policy limits.
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.
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
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the defendant should have contributed the policy limits, then this instruction will
need to be modified.
This instruction should also 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.
Under this instruction, if the jury finds that the policy-limits demand was
reasonable, then the insurer is automatically liable for the entire excess judgment.
Language from the California Supreme Court supports this view of what might be
called insurer “strict liability” if the demand is reasonable. (See Johansen v.
California State Auto. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123
Cal.Rptr. 288, 538 P.2d 744] [“[W]henever it is likely that the judgment against the
insured will exceed 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,’ ”
italics added].)
However, there is language in numerous cases, including several from the
California Supreme Court, that would require the plaintiff to also prove that the
insurer’s rejection of the demand was “unreasonable.” (See, e.g., Hamilton v.
Maryland Cas. Co. (2002) 27 Cal.4th 718, 724–725 [117 Cal.Rptr.2d 318, 41 P.3d
128] [“An unreasonable refusal to settle may subject the insurer to liability for the
entire amount of the judgment rendered against the insured, including any portion
in excess of the policy limits,” italics added]; Graciano v. Mercury General Corp.
(2014) 231 Cal.App.4th 414, 425 [179 Cal.Rptr.3d 717] [claim for bad faith based
on an alleged wrongful refusal to settle also requires proof the insurer
unreasonably failed to accept an otherwise reasonable offer within the time
specified by the third party for acceptance, italics added].) Under this view, even if
the policy-limits demand was reasonable, the insurer may assert that it had a
legitimate reason for rejecting it. However, this option, if it exists, is not available
in a denial of coverage case. (Johansen, supra, 15 Cal.3d at pp. 15−16.)
None of these cases, however, neither those seemingly creating strict liability nor
those seemingly providing an opportunity for the insurer to assert that its rejection
was reasonable, actually discuss, analyze, and apply this standard to reach a result.
All are determined on other issues, leaving the pertinent language as arguably dicta.
For this reason, the committee has elected not to change the elements of the
instruction at this time. Hopefully, some day there will be a definitive resolution
from the courts. Until then, the need for an additional element requiring the
insurer’s rejection of the demand to have been unreasonable is a plausible, but
unsettled, requirement. For a thorough analysis of the issue, see the committee’s
report to the Judicial Council for its June 2016 meeting, found at https://jcc.legistar.
com/View.ashx?M=F&ID=4496094&GUID=53DBD55C-AF07-498F-B665-
D6BDD6DEFB28.
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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, supra, 15 Cal.3d at p.
16, internal citation omitted.)
• “[A]n insurer is required to act in good faith in dealing with its insured. Thus,
in deciding whether or not to settle a claim, the insurer must take into account
the interests of the insured, and when there is a great risk of recovery beyond
the policy limits, a good faith consideration of the insured’s interests may
require the insurer to settle the claim within the policy limits. An unreasonable
refusal to settle may subject the insurer to liability for the entire amount of the
judgment rendered against the insured, including any portion in excess of the
policy limits.” (Hamilton, supra, 27 Cal.4th at pp. 724−725.)
• “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
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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.)
• “An insured’s claim for bad faith based on an alleged wrongful refusal to settle
first requires proof the third party made a reasonable offer to settle the claims
against the insured for an amount within the policy limits. The offer satisfies
this first element if (1) its terms are clear enough to have created an enforceable
contract resolving all claims had it been accepted by the insurer, (2) all of the
third party claimants have joined in the demand, (3) it provides for a complete
release of all insureds, and (4) the time provided for acceptance did not deprive
the insurer of an adequate opportunity to investigate and evaluate its insured’s
exposure.” (Graciano, supra, 231 Cal.App.4th at p. 425, internal citations
omitted.)
• “A bad faith claim requires ‘something beyond breach of the contractual duty
itself, and that something more is ‘ “refusing, without proper cause, to
compensate its insured for a loss covered by the policy . . . .” [Citation.] Of
course, the converse of “without proper cause” is that declining to perform a
contractual duty under the policy with proper cause is not a breach of the
implied covenant.’ ” (Graciano, supra, 231 Cal.App.4th at p. 433, original
italics.)
• “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].)
• “The third party is entitled to set a reasonable time limit within which the
insurer must accept the settlement proposal . . . .” (Graciano, supra, 231
Cal.App.4th at p. 434.)
• “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
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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.)
• “ ‘An insurer who denies coverage does so at its own risk and although its
position may not have been entirely groundless, if the denial is found to be
wrongful it is liable for the full amount which will compensate the insured for
all the detriment caused by the insurer’s breach of the express and implied
obligations of the contract.’ Accordingly, contrary to the defendant’s suggestion,
an insurer’s ‘good faith,’ though erroneous, belief in noncoverage affords no
defense to liability flowing from the insurer’s refusal to accept a reasonable
settlement offer.” (Johansen, supra, 15 Cal.3d at pp. 15−16, original italics,
footnotes and internal citation omitted.)
• “[W]here the kind of claim asserted is not covered by the insurance contract
(and not simply the amount of the claim), an insurer has no obligation to pay
money in settlement of a noncovered claim, because ‘The insurer does not . . .
insure the entire range of an insured’s well-being, outside the scope of and
unrelated to the insurance policy, with respect to paying third party
claims. . . .’ ” (Dewitt v. Monterey Ins. Co. (2012) 204 Cal.App.4th 233, 244
[138 Cal.Rptr.3d 705], original italics.)
• “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, supra, 27 Cal.4th at p. 725, internal
citations omitted.)
• “[I]nsurers do have a ‘selfish’ interest (that is, one that is peculiar to
themselves) in imposing a blanket rule which effectively precludes disclosure of
policy limits, and that interest can adversely affect the possibility that an excess
claim against a policyholder might be settled within policy limits. Thus, a
palpable conflict of interest exists in at least one context where there is no
formal settlement offer. We therefore conclude that a formal settlement offer is
not an absolute prerequisite to a bad faith action in the wake of an excess
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verdict when the claimant makes a request for policy limits and the insurer
refuses to contact the policyholder about the request.” (Boicourt v. Amex
Assurance Co. (2000) 78 Cal.App.4th 1390, 1398–1399 [93 Cal.Rptr.3d 763].)
• “For bad faith liability to attach to an insurer’s failure to pursue settlement
discussions, in a case where the insured is exposed to a judgment beyond policy
limits, there must be, at a minimum, some evidence either that the injured party
has communicated to the insurer an interest in settlement, or some other
circumstance demonstrating the insurer knew that settlement within policy limits
could feasibly be negotiated. In the absence of such evidence, or evidence the
insurer by its conduct has actively foreclosed the possibility of settlement, there
is no “opportunity to settle” that an insurer may be taxed with ignoring.” (Reid
v. Mercury Ins. Co. (2013) 220 Cal.App.4th 262, 272 [162 Cal.Rptr.3d 894].)
• “(4) [12:245] Insurer culpability required? A number of cases suggest that
some degree of insurer ‘culpability’ is required before an insurer’s refusal
to settle a third party claim can be found to constitute ‘bad faith.’ [Howard
v. American Nat’l Fire Ins. Co. (2010) 187 CA4th 498, 529, 115 CR3d 42, 69
(quoting text)]
(a) [12:246] Good faith or mistake as excuse: ‘If the insurer has exercised
good faith in all of its dealings . . . and if the settlement which it has rejected
has been fully and fairly considered and has been based upon an honest belief
that the insurer could defeat the action or keep any possible judgment within
the limits of the policy, and its judgments are based on a fair review of the
evidence after reasonable diligence in ascertaining the facts, and upon sound
legal advice, a court should not subject the insurer to further liability if it
ultimately turns out that its judgment is a mistaken judgment.’ [See Brown v.
Guarantee Ins. Co. (1957) 155 CA2d 679, 684, 319 P2d 69, 72 (emphasis
added); Howard v. American Nat’l Fire Ins. Co., supra, 187 CA4th at 529, 115
CR3d at 69—‘an insurer may reasonably underestimate the value of a case, and
thus refuse settlement’ on this basis (acknowledging but not applying rule)]
‘In short, so long as insurers are not subject to a strict liability standard, there
is still room for an honest, innocent mistake.’ [Walbrook Ins. Co. Ltd. v. Liberty
Mut. Ins. Co. (1992) 5 CA4th 1445, 1460, 7 CR2d 513, 521]
1) [12:246.1] Comment: These cases are difficult to reconcile with the
‘only permissible consideration’ standard of a ‘reasonable settlement
demand’ set out in Johansen and CACI 2334 (see ¶ 12:235.1). A possible
explanation is that these cases address the ‘reasonableness’ of the insurer’s
refusal to settle based on a dispute as to the value of the case (or other
matters unrelated to coverage), whereas Johansen addressed
‘reasonableness’ in the context of a coverage dispute (see ¶ 12:235). [See
Howard v. American Nat’l Fire Ins. Co., supra, 187 CA4th at 529, 115 CR3d
at 69 (quoting text)]” (Croskey et al., California Practice Guide: Insurance
Litigation, Ch. 12B-B, Bad Faith Refusal To Settle, ¶¶ 12:245–12:246.1 (The
Rutter Group), bold in original.)
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Secondary Sources
2 Witkin, Summary of California Law (10th ed. 2005) Insurance, §§ 257–258
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-A, Implied
Covenant Liability—Introduction, ¶¶ 12:202–12:224 (The Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-B, Bad
Faith Refusal To Settle, ¶¶ 12:226–12:548 (The Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-C, Bad
Faith Liability Despite Settlement Of Third Party Claims, ¶¶ 12:575–12:581.12
(The Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-D, Refusal
To Defend Cases, ¶¶ 12:582–12:686, (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)
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