California Civil Jury Instructions (CACI)

2335. Bad Faith—Advice of Counsel

[Name of defendant] did not breach the obligation of good faith and fair dealing if it reasonably relied on the advice of its lawyer. [Name of defendant]’s reliance was reasonable if:

1. [Name of defendant] acted in reliance on the opinion and advice of its lawyer;

2. The lawyer’s advice was based on full disclosure by [name of defendant] of all relevant facts that it knew, or could have discovered with reasonable effort;

3. [Name of defendant] reasonably believed the advice of the lawyer was correct; [and]

4. In relying on its lawyer’s advice, [name of defendant] gave at least as much consideration to [name of plaintiff]’s interest as it gave its own interest; [and]

[5. [Name of defendant] was willing to reconsider and act accordingly when it determined that the lawyer’s advice was incorrect.]

New September 2003

Directions for Use

The instructions in this series assume 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.

The “advice of counsel defense” is not a true affirmative defense, but rather negates an essential element of the insured’s cause of action for bad faith. (See State Farm Mutual Automobile Insurance Co. v. Superior Court (1991) 228 Cal.App.3d 721, 725—726 [279 Cal.Rptr. 116].)

Advice of counsel is irrelevant, however, when an insurer denies coverage and for that reason refuses a reasonable settlement offer. (See, e.g., Johansen v. California State Auto. Asso. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123 Cal.Rptr. 288, 538 P.2d 744] [“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”].)

Sources and Authority

  • “An insurer may defend itself against allegations of bad faith and malice in claims handling with evidence the insurer relied on the advice of competent counsel. The defense of advice of counsel is offered to show the insurer had ‘proper cause’ for its actions even if the advice it received is ultimately unsound or erroneous.” (State Farm Mutual Automobile Insurance Co., supra, 228 Cal.App.3d at p. 725, internal citations omitted.)
  • “If the insurer has exercised good faith in all of its dealings under its policy, 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…” (State Farm Mutual Automobile Insurance Co., supra, 228 Cal.App.3d at p. 725, internal citation omitted.)
  • “[I]t is a complete defense to a claim of extreme and outrageous conduct when the evidence shows (1) the defendant acted on the opinion and advice of counsel; (2) counsel’s advice was based on full disclosure of all the facts by defendant or the advice was initiated by counsel based on counsel’s familiarity with the case; and (3) the defendant’s reliance on the advice of counsel was in good faith.” (Melorich Builders, Inc. v. Superior Court (1984) 160 Cal.App.3d 931, 936—937 [207 Cal.Rptr. 47] [intentional infliction of emotional distress action].)
  • “Good faith reliance on counsel’s advice simply negates allegations of bad faith and malice as it tends to show the insurer had proper cause for its actions. Because advice of counsel is directed to an essential element of a plaintiff’s cause of action, it does not constitute new matter and need not be specifically alleged.” (State Farm Mutual Automobile Insurance Co., supra, 228 Cal.App.3d at. pp. 725—726.)
  • “An insurer’s receipt of and reliance on [the written opinion of its legal counsel] is a relevant circumstance to be considered on the issue of its alleged bad faith.” (Mock v. Mich. Millers Mut. Ins. Co. (1992) 4 Cal.App.4th 306, 326, fn. 20 [5 Cal.Rptr.2d 594].)
  • “Exemplary damages are not recoverable against a defendant who acts in good faith and under the advice of counsel.” (Fox v. Aced (1957) 49 Cal.2d 381, 385 [317 P.2d 608].)
  • “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.)

Secondary Sources

Croskey et al., California Practice Guide: Insurance Litigation (The Rutter Group) ΒΆΒΆ 12:1248—12:1260

2 California Liability Insurance Practice: Claims & Litigation (Cont.Ed.Bar) General Principles of Contract and Bad Faith Actions, §§ 24.52—24.55

2 California Uninsured Motorist Law, Ch. 21, Defending an Uninsured Motorist Claim, §§ 21.20, 21.31 (Matthew Bender)

6 Levy et al., California Torts, Ch. 82, Claims and Disputes Under Insurance Policies, § 82.55 (Matthew Bender)