CACI 2334 Bad Faith (Third Party)—Refusal to Accept Reasonable Settlement Within Liability Policy Limits—Essential Factual Elements
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/nonbinary pronoun/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 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, someday 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.
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 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 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 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.)