CACI 2336 Bad Faith (Third Party)—Unreasonable Failure to Defend—Essential Factual Elements

California Civil Jury Instructions CACI

2336 Bad Faith (Third Party)—Unreasonable Failure to Defend—Essential Factual Elements

[Name of plaintiff] claims [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 defend [name of plaintiff] in a lawsuit that was brought against [him/her/nonbinary pronoun/it]. To establish this claim, [name of plaintiff] must prove all of the following:

1.That [name of plaintiff] was insured under an insurance policy with [name of defendant];

2.That a lawsuit was brought against [name of plaintiff];

3.That [name of plaintiff] gave [name of defendant] timely notice that [he/she/nonbinary pronoun/it] had been sued;

4.That [name of defendant], unreasonably, that is, without proper cause, failed to defend [name of plaintiff] against the lawsuit;

5.That [name of plaintiff] was harmed; and

6.That [name of defendant]’s conduct was a substantial factor in causing [name of plaintiff]’s harm.

New October 2004; Revised December 2007, December 2014, December 2015

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Directions for Use

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

The court will decide the issue of whether the claim was potentially covered by the policy. (See California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 52 [221 Cal.Rptr. 171].) If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute establishes a possibility of coverage and thus a duty to defend. (North Counties Engineering, Inc. v. State Farm General Ins. Co. (2014) 224 Cal.App.4th 902, 922 [169 Cal.Rptr.3d 726].) Therefore, the jury does not resolve factual disputes that determine coverage.

For instructions regarding general breach of contract issues, refer to the Contracts series (CACI No. 300 et seq.).

Sources and Authority

“A breach of the duty to defend in itself constitutes only a breach of contract, but it may also violate the covenant of good faith and fair dealing where it involves unreasonable conduct or an action taken without proper cause. On the other hand, ‘[i]f the insurer’s refusal to defend is reasonable, no liability will result.’ ” (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. 78 Cal.App.4th 847, 881 [93 Cal.Rptr.2d 364], internal citations omitted.)

“To prevail in an action seeking declaratory relief on the question of the duty to defend, ‘the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.’ The duty to defend exists if the insurer ‘becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.’ ” (Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009) 47 Cal.4th 302, 308 [97 Cal.Rptr.3d 298, 211 P.3d 1083], original italics, internal citation omitted.)

“ ‘[A]n insurer has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement. … This duty … is separate from and broader than the insurer’s duty to indemnify. …’ ‘ “[F]or an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. … Hence, the duty ‘may exist even where coverage is in doubt and ultimately does not develop.’ …” …’ ” (State Farm Fire & Casualty Co. v. Superior Court (2008) 164 Cal.App.4th 317, 323 [78 Cal.Rptr.3d 828], internal citations omitted.)

“If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.” (GGIS Ins. Services, Inc. v. Superior Court (2008) 168 Cal.App.4th 1493, 1506 [86 Cal.Rptr.3d 515].)

“ ‘The proper focus is on the facts alleged in the complaint, rather than the alleged theories for recovery. … “The ultimate question is whether the facts alleged ‘fairly apprise’ the insurer that the suit is upon a covered claim.” ’ ” (Albert v. Truck Ins. Exchange (2018) 23 Cal. App. 5th 367, 378 [232 Cal.Rptr.3d 774].)

“The duty to defend was not a question of fact for the jury; the trial court was compelled to determine as a matter of law that [indemnitee]’s claim was embraced by the indemnity agreement.” (Centex Homes v. R-Help Construction Co., Inc. (2019) 32 Cal.App.5th 1230, 1236 [244 Cal.Rptr.3d 574].)

“A duty to defend can be extinguished only prospectively and not retrospectively.” (Navigators Specialty Ins. Co. v. Moorefield Construction, Inc. (2016) 6 Cal.App.5th 1258, 1284 [212 Cal.Rptr.3d 231].)

“[F]acts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy. [Citation.] This is so because current pleading rules liberally allow amendment; the third party plaintiff cannot be the arbiter of coverage.” (Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc. (2016) 6 Cal.App.5th 100, 106 [210 Cal.Rptr.3d 634].)

“An insurer does not have a continuing duty to investigate the potential for coverage if it has made an informed decision on coverage at the time of tender. However, where the information available at the time of tender shows no coverage, but information available later shows otherwise, a duty to defend may then arise.” (American States Ins. Co. v. Progressive Casualty Ins. Co. (2009) 180 Cal.App.4th 18, 26 [102 Cal.Rptr.3d 591], internal citations omitted.)

“The duty does not depend on the labels given to the causes of action in the underlying claims against the insured; ‘instead it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy.’ ” (Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969, 976 [144 Cal.Rptr.3d 12], original italics, disapproved on other grounds in Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 295 [172 Cal.Rptr.3d 653, 326 P.3d 253].)

“The obligation of the insurer to defend is of vital importance to the insured. ‘In purchasing his insurance the insured would reasonably expect that he would stand a better chance of vindication if supported by the resources and expertise of his insurer than if compelled to handle and finance the presentation of his case. He would, moreover, expect to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own.’ ‘The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.’ ” (Amato v. Mercury Casualty Co. (Amato II) (1997) 53 Cal.App.4th 825, 831–832 [61 Cal.Rptr.2d 909], internal citations omitted.)

“An anomalous situation would be created if, on the one hand, an insured can sue for the tort of breach of the implied covenant if the insurer accepts the defense and later refuses a reasonable settlement offer, but, on the other hand, an insured is denied tort recovery if the insurer simply refuses to defend. … This dichotomy could have the effect of encouraging an insurer to stonewall the insured at the outset by simply refusing to defend.” (Campbell v. Superior Court (1996) 44 Cal.App.4th 1308, 1319–1320 [52 Cal.Rptr.2d 385].)

“[T]he mere existence of a legal dispute does not create a potential for coverage: ‘However, we have made clear that where the third party suit never presented any potential for policy coverage, the duty to defend does not arise in the first instance, and the insurer may properly deny a defense. Moreover, the law governing the insurer’s duty to defend need not be settled at the time the insurer makes its decision.’ ” (Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172, 209 [97 Cal.Rptr.3d 568], original italics.)

“The trial court erroneously thought that because the case law was ‘unsettled’ when the insurer first turned down the claim, that unsettledness created a potential for a covered claim. … [I]f an insurance company’s denial of coverage is reasonable, as shown by substantial case law in favor of its position, there can be no bad faith even though the insurance company’s position is later rejected by our state Supreme Court.” (Griffin Dewatering Corp., supra, 176 Cal.App.4th at p. 179, original italics.)

“Unresolved factual disputes impacting insurance coverage do not absolve the insurer of its duty to defend. ‘If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.’ ” (Howard v. American National Fire Insurance Company (2010) 187 Cal.App.4th 498, 520 [115 Cal.Rptr.3d 42].)

“ ‘If the insurer is obliged to take up the defense of its insured, it must do so as soon as possible, both to protect the interests of the insured, and to limit its own exposure to loss. … [T]he duty to defend must be assessed at the outset of the case.’ It follows that a belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty.” (Shade Foods, Inc., supra, 78 Cal.App.4th at p. 881, internal citations omitted.)

“When a complaint states multiple claims, some of which are potentially covered by the insurance policy and some of which are not, it is a mixed action. In these cases, ‘the insurer has a duty to defend as to the claims that are at least potentially covered, having been paid premiums by the insured therefor, but does not have a duty to defend as to those that are not, not having been paid therefor.’ However, in a ‘ “mixed” action, the insurer has a duty to defend the action in its entirety.’ Thereafter, the insurance company is entitled to seek reimbursement for the cost of defending the claims that are not potentially covered by the policy.” (Gonzalez v. Fire Ins. Exchange (2015) 234 Cal.App.4th 1220, 1231 [184 Cal.Rptr.3d 394], internal citations omitted.)

“No tender of defense is required if the insurer has already denied coverage of the claim. In such cases, notice of suit and tender of the defense are excused because other insurer has already expressed its unwillingness to undertake the defense.” (Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12D-G, Insurer’s Reliance on Advice of Counsel ¶ 7:614 (The Rutter Group).)

Secondary Sources

2 Witkin, Summary of California Law (11th ed. 2017) Insurance, §§ 427, 428
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-D, Third Party Cases—Refusal To Defend Cases, ¶¶ 12:598–12:650.5 (The Rutter Group)
2 California Liability Insurance Practice: Claims and Litigation (Cont.Ed.Bar) Actions for Failure to Defend, §§ 25.1–26.38
2 California Insurance Law and Practice, Ch. 13, Claims Handling and the Duty of Good Faith, § 13.08 (Matthew Bender)
6 Levy et al., California Torts, Ch. 82, Claims and Disputes Under Insurance Policies, §§ 82.10–82.16 (Matthew Bender)
26 California Forms of Pleading and Practice, Ch. 308, Insurance, § 308.24 (Matthew Bender)