CACI No. 2334. Bad Faith (Third Party) - Refusal to Accept Reasonable Settlement Demand Within Liability Policy Limits - Essential Factual Elements

Judicial Council of California Civil Jury Instructions (2022 edition)

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2334.Bad Faith (Third Party) - Refusal to Accept Reasonable
Settlement Demand Within Liability Policy Limits - Essential
Factual Elements
[Name of plaintiff] claims that [name of defendant] breached the obligation
of good faith and fair dealing because [name of defendant] failed to accept
a reasonable settlement demand for a claim against [name of plaintiff]. To
establish this claim, [name of plaintiff] must prove all of the following:
1. That [name of plaintiff] was insured under a policy of liability
insurance issued by [name of defendant];
2. That [name of plaintiff in underlying case] made a claim against
[name of plaintiff] that was covered by [name of defendant]’s
insurance policy;
3. That [name of defendant] failed to accept a reasonable settlement
demand for an amount within policy limits;
4. That [name of defendant]’s failure to accept the settlement demand
was the result of unreasonable conduct by [name of defendant];
and
5. That a monetary judgment was entered against [name of plaintiff]
for a sum greater than the policy limits.
“Policy limits” means the highest amount of insurance coverage 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 a potential judgment against [name of plaintiff] was
likely to exceed the amount of the demand based on [name of plaintiff in
underlying case]’s injuries or losses and [name of plaintiff]’s probable
liability. However, the demand may be unreasonable for reasons other
than the amount demanded.
An insurance company’s unreasonable conduct may be shown by action
or by the failure to act. An insurance company’s conduct is unreasonable
when, for example, it does not give at least as much consideration to the
interests of the insured as it gives to its own interests.
New September 2003; Revised December 2007, June 2012, December 2012, June
2016, November 2021
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
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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 example, if the plaintiff is the insured’s assignee, modify the
instruction as needed to reflect the underlying facts and relationship between the
parties.
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 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.
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. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123 Cal.Rptr. 288,
538 P.2d 744], internal citation omitted.)
“[A]n insurer is required to act in good faith in dealing with its insured. Thus, in
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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 v. Maryland Cas. Co. (2002) 27 Cal.4th 718, 724-725 [117
Cal.Rptr.2d 318, 41 P.3d 128].)
“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 insurers 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 insurers 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 v. Mercury General Corp. (2014) 231 Cal.App.4th 414,
425 [179 Cal.Rptr.3d 717], internal citations omitted.)
“An insurers duty to accept a reasonable settlement offer is not absolute. “[I]n
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
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rendered against the insured, including any portion in excess of the policy
limits.” [¶] Therefore, failing to accept a reasonable settlement offer does not
necessarily constitute bad faith. ‘[T]he crucial issue is . . . the basis for the
insurers decision to reject an offer of settlement.’ (Pinto v. Farmers Ins.
Exchange (2021) 61 Cal.App.5th 676, 688 [276 Cal.Rptr.3d 13], original italics,
internal citations omitted.)
“A claim for bad faith based on the wrongful refusal to settle thus requires proof
the insurer unreasonably failed to accept an offer. [¶] Simply failing to settle
does not meet this standard.” (Pinto, supra, 61 Cal.App.5th at p. 688, internal
citation omitted.)
“To be liable for bad faith, an insurer must not only cause the insured’s
damages, it must act or fail to act without proper cause, for example by placing
its own interests above those of its insured.” (Pinto, supra, 61 Cal.App.5th at p.
692.)
“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 offers 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 insurers 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 insurers 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
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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 insurers breach of the express and implied
obligations of the contract.’ Accordingly, contrary to the defendant’s suggestion,
an insurers ‘good faith,’ though erroneous, belief in noncoverage affords no
defense to liability flowing from the insurers 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 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 insurers 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
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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].)
“[F]ailing to accept a reasonable settlement offer does not necessarily constitute
bad faith. ‘[T]he crucial issue is . . . the basis for the insurers decision to reject
an offer of settlement.’ ‘[M]ere errors by an insurer in discharging its obligations
to its insured ‘does not necessarily make the insurer liable in tort for violating
the covenant of good faith and fair dealing; to be liable in tort, the insurers
conduct must also have been unreasonable.’ (Pinto, supra, 61 Cal.App.5th
at p. 688, original italics, internal citations omitted.)
“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 Cal.App.4th 1445, 1460 [7 Cal.Rptr.2d 513, 521].)
Secondary Sources
2 Witkin, Summary of California Law (11th ed. 2017) Insurance, §§ 366-368
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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