For decades, California courts have mandated that an insurer is obligated to accept a “reasonable” settlement demand within policy limits on behalf of its insured. If it fails to do so, it is liable for the entire judgment, including amounts in excess of the policy limits. Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 659. Subsequent cases have addressed whether an insurer can escape excess liability if its decision-making process, as opposed to the settlement itself, was “reasonable”. California law is clear that even an honest mistake as to whether the claim is covered does not absolve an insurer from excess liability. Johansen v. Calif. State Auto Association Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-16. However, courts have also considered whether an insured must show the insurer acted “unreasonably” in assessing the value of the claim. In Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425, 431, the California Supreme Court held that the very fact of an excess judgment created an inference that the insurer was liable for the excess judgment. Other cases, however, looked at whether the insurance company properly investigated all facts relating to liability and damages. See, e.g., Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 707. Continue Reading Insured May Bear the Consequences of Insurer’s Negligence
On July 29, 2014, I spoke on a panel about recent developments in California bad faith law and related trends. My co-presenter was Robert K. Scott of The Law Offices of Robert K. Scott, and we gave the presentation at ACI’s 28th National Advanced Forum on Bad Faith Claims & Litigation in San Francisco. The title of the presentation was “The Positions of the Policyholder’s Bar: How insurers can avoid bad faith claims and tailoring your litigation strategies to the latest wave of first-party and third-party claims.” Some of the highlights included:
- the recent trend of bad faith claims handling conduct by insurers in responding to defense cost submissions by independent counsel under Section 2860, including the hiring of outside auditors to justify reduced insurer payments on defense bills;
- the state of the “genuine dispute” doctrine in bad faith claims arising out an insurer’s breach of the duty to defend (i.e., Mt. Hawley v. Lopez, 215 Cal. App. 4th 1385 (2013)); and
- 2013 case law on whether insurers have an affirmative duty to proactively seek settlement in excess-of-limits exposure cases (i.e., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) and Travelers Indem. Of Conn. v. Arch Specialty Ins. Co., 2013 WL 6198966 (E.D. Cal. Nov. 26, 2013)). See John Green’s article about Reid posted on this blog.
These are evolving areas of law that are likely to produce further disputes between insurers and insureds. Early insurance coverage advice can help avoid these disputes, or at least position the insured for a more favorable outcome if litigation becomes necessary. I’ll be writing in more detail about these on this blog over the next couple months.
Published in the ABTL Report, Vol. 22, No. 3, Winter 2013.
Insurers and insureds have long disagreed whether an insurer’s duty to settle is limited to the duty to accept a reasonable settlement offer made by a plaintiff, or whether the insurer has a duty to affirmatively seek a settlement within limits. This issue was recently addressed in Reid v Mercury Insurance Co., 220 Cal.App.4th 262 (2013). In Reid, the insurer recognized shortly after the accident that the exposure exceeded the $100,000 policy limits, but decided it needed a witness interview and the claimant’s medical records before making a policy limits offer. It requested this information, but didn’t tell the claimant it was considering a policy limits offer. While the claimant later testified he would have accepted $100,000 to settle at that time, his counsel did not make a policy limits demand. A few months later, after getting the medical information, the insurer offered policy limits, which the claimant promptly rejected. The matter went to trial and judgment was entered for $5.9 million, forcing the insured into bankruptcy.
Two seminal New York cases have brought that state, along with potentially many more, into line with California’s position on the recovery of consequential damages.
The effects of Bi-Economy Market v. Harleysville, 886 N. E. 2d 127 (N.Y. 2008) and Panasia Estates v. Hudson Insurance Company, 886 N. E. 2d 134 (N.Y. 2008) are beginning to take shape in New York and beyond. The court in both cases allowed for the recovery of consequential damages for the insurers’ breach of their respective contracts even without bad faith conduct, holding that consequential damages beyond policy proceeds were foreseeable as a matter of law. Courts in many states have taken notice, and at least nine states have followed suit. California courts, however, have long recognized such recovery – the infamous Hadley v. Baxendale rule states that if the damages are within the reasonable expectation of the parties at the time of contracting they are recoverable.
When the liability of its insured is clear, must an insurer proactively attempt to settle a claim within policy limits in order to avoid bad faith liability? Or is it sufficient to wait until a reasonable settlement offer is made? A court of appeals panel in the Ninth Circuit recently weighed in on the issue, holding that when liability is clear, an insurer has a duty to attempt to reach a settlement, even absent a demand from the claimant.
Sometimes an insurer declines coverage in either a first- or third-party context, and later, a court determines that this declination was in error and that coverage existed. Not infrequently in such circumstances, the policyholder asserts that the insurer did not conduct a thorough investigation prior to the declination and thus breached the implied covenant of good faith and fair dealing.
When an insurer fails to conduct an investigation that would have uncovered facts supporting the possibility of coverage, the insurer may be imputed with knowledge of those facts. Safeco Ins. of America v. Parks, 170 Cal. App. 4th 992 (2009). Interesting questions are presented where, during discovery in the ensuing bad faith litigation, the insurer discovers new facts that tend to support the denial of coverage. In such event, can an insurer rely on these new facts in arguing that its denial was reasonable and in good faith? The law is not entirely clear, and insurers and insureds – not surprisingly – may reach different conclusions.
Click here for the complete article previously published in The Recorder.
The California Supreme Court recently issued a decision in Century-National Ins. Co. v. Jesus Garcia, No. S179252, holding that California Insurance Code section 533, which bars coverage for intentional conduct, does not apply to coverage for innocent co-insureds. The Court examined this issue in the context of a fire insurance policy. The insureds, Jesus and Theodora Garcia, suffered substantial property damage to their home when their adult son – who was also an insured under the policy – set fire to his bedroom. Century-National denied coverage for the Garcias’ claim citing the policy’s exclusion for claims based on the intentional acts or criminal conduct of “any insured.” The trial court agreed and granted Century-National’s demurrer on the grounds that 1) the Century-National policy defined the term “any insured,” to include relatives of the insured who lived at the insured property; 2) courts generally interpret policy exclusions for intentional or criminal acts to exclude coverage for innocent co-insureds; and 3) Insurance Code section 533 expressly sets forth California’s public policy of denying coverage for willful wrongs. Continue Reading Section 533 Does Not Bar Coverage for Innocent Co-Insureds
On November 23, 2010, the California Supreme Court declined review of the First Appellate District’s decision in Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498 (2010). As I noted in a prior blog post. Howard provides powerful, additional support for policyholders demanding that their liability insurer fund a settlement.
In Howard, the Court of Appeal considered whether an insurer can be held liable for bad faith breach of its duty to settle if it rejects a settlement offer that is within the total available limits of all the insurers’ policies, but which exceeds the limits of its own individual policy. In the first clear statement of California law on this issue, the First Appellate District concluded that in a “multiple insurer case, the law cannot excuse one insurer for refusing to tender its policy limits simply because other insurers likewise acted in bad faith. If this were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.” The Court of Appeal went on to find that an excess judgment is not necessarily required in order to support a finding of bad faith failure to settle, particularly where the insured also sustains consequential damages arising out of the insurer’s conduct.
California policyholders and their counsel frequently face the situation presented in Howard: a loss giving rise to a potential for coverage under multiple policies. Before the Howard decision, each insurer would often take the position that it had no duty to settle unless the plaintiff’s settlement demand was within the limits of its own individual policy. The First Appellate District clearly rejected this premise, holding that each such insurer faces bad faith exposure if it rejects a reasonable settlement demand that is within the combined indemnity limits of all triggered policies. Now, the California Supreme Court has both denied review and denied the defendant insurer’s depublication request. Thus, Howard remains a citable authority on which policyholders can rely to demonstrate that their insurer has a present duty to fund settlement.
A recent California Court of Appeal case, Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498 (2010), addresses a question that all insurance litigators will find of particular interest: whether an insurer can breach its duty to settle by rejecting a settlement offer that is within the total available limits of all the insurers’ policies, but which exceeds the limits of its own individual policy. In the first clear statement of California law on this issue, the First Appellate District ruled that the answer is “yes.”
In the underlying case, plaintiff James Howard filed suit against the Roman Catholic Bishop of Stockton, alleging negligent hiring and supervision of a priest who sexually abused him throughout his childhood. Although several of the Bishop’s insurers agreed to defend, American National Fire Insurance Company did not. Howard’s lowest pre-trial settlement demand was $1.85 million. American’s limits were $500,000, and the total combined indemnity limits of all the insurance policies implicated by Howard’s claim was $4.3 million. American refused to make any meaningful contribution, and the case did not settle.
At trial, James Howard obtained a judgment against the Bishop of $2.5 million in (insurable) compensatory damages and $3 million in (uninsurable) punitive damages. The Bishop struggled to satisfy the judgment. The Bishop ultimately entered into several settlements with his insurers and Howard, eventually assigning all rights against American to Howard.
The Court of Appeal affirmed a finding that American breached its duty to settle and acted in bad faith. The Court concluded that American could not avoid bad faith liability merely because its $500,000 limit, on its own, would have been insufficient to fund Howard’s lowest settlement demand. In a “multiple insurer case,” the Court found, “the law cannot excuse one insurer for refusing to tender its policy limits simply because other insurers likewise acted in bad faith. If this were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.”
The court went on to find that an excess judgment is not necessarily required in order to support a finding of bad faith failure to settle, particularly where the insured also sustains consequential damages arising out of the insurer’s conduct. Here, “the Bishop was exposed to dire financial circumstances as a direct result of American’s failure to defend, indemnify, or settle James Howard’s claim.” The Court of Appeal therefore concluded that, on the facts of this case, American acted in bad faith.
On its face, the Howard case has little in common with most business insurance disputes. However, policyholders and their counsel frequently face the situation in which a loss gives rise to a potential for coverage under multiple policies. For example, a continuous or progressive loss may trigger multiple CGL policies. A plaintiff will rarely make a settlement demand that is within the limits of a single policy year. In such circumstances, insurers will often taken the position that they are under no duty to settle. As there is no pending settlement demand within its own policy limits, the insurer reasons, the insured would not be able to demonstrate the requisite causation and damages necessary to prevail on a claim for breach of the implied covenant of good faith and fair dealing. The new Howard decision clearly rejects this premise, holding that each such insurer faces bad faith exposure if it rejects a reasonable settlement demand that is within the combined indemnity limits of all triggered policies.
Nor is the Howard case strictly limited to progressive losses that trigger multiple, successive primary policies. Rather, the Court of Appeal speaks broadly of “multiple insurer” cases, which could also be interpreted to apply to a tower of primary and excess policies in place during a single policy period. Thus, policyholders facing a settlement demand that exceeds the limits of the primary policy, but is within the limits of the combined primary and excess layers, can also rely on Howard.
Howard provides powerful, additional support for policyholders who seek to demonstrate that their liability insurer has a present duty to fund settlement. For this reason (and because the Howard court upheld a judgment of over $4 million in compensatory damages, punitive damages, costs and interest), American is already challenging the decision. It has petitioned for rehearing, and a petition for review is likely if the attempt to secure a rehearing fails. The Howard case is definitely one to watch.
In Zhang v. The Superior Court of San Bernardino County, E047207 (Super.Ct No. CIVVS707287), the Court of Appeal addressed the issue of whether an insured could bring a claim against an insurer under the Unfair Competition Law (“UCL”), based on an insurer’s violations of California’s Unfair Insurance Practices Act (“UIPA”). Reversing the trial court, the Court of Appeal held that existing precedent did not bar such a claim.
In Moradi-Shalal v. Fireman’s Fund Ins. Co., 46 Cal.3d 287 (1998), the California Supreme Court held that there is no private cause of action under Section 790.03 of the California Insurance Code, also known as the UIPA, against an insurer who commit an unfair practice listed in that provision. Subsequent case law interpreted Moradi-Shalal to also prohibit claims brought under the UCL based on UIPA violations. The Court in Zhang, however, found Moradi-Shalal distinguishable.
In Zhang, a policyholder brought suit against her insurer alleging misconduct in the handling of her claim for a fire loss. The complaint alleged breach of contract, breach of the covenant of good faith, and a UCL claim incorporating all of the allegations, and adding allegations of misleading advertising based on the insurer’s representation that it would “timely pay proper coverage.” The insurer demurred to the last claim based on Moradi-Shalal. The trial court sustained the insurer’s demurrer, relying on both Moradi-Shalal and another case, Textron Financial. In Textron Financial an individual had brought a claim against an insurer under the UCL for false and misleading documents, and misrepresenting the terms of the policy. Because the misconduct alleged in Textron was only proscribed by the UIPA, it could not be the basis of a UCL claim.
Although existing precedent appeared seemingly dispositive in Zhang, upon writ of mandate, the Court of Appeal reversed the demurrer and distinguished Textron and Moradi-Shalal. The court noted that while Moradi-Shalal stands for the broad proposition that insurers cannot be held liable solely for violations of the UIPA, and Textron extended this holding to UCL claims predicated on violations the UIPA, neither case holds that insurers who violate the UIPA can never be held liable in tort to an injured party. The Zhang court went on to hold that insurers can be liable based on conduct proscribed by the UIPA, as long as it is conduct otherwise prohibited under the law. The conduct alleged by Zhang, false advertising and fraud, was not only improper under the UIPA, but also under tort law. Thus, plaintiff could properly pursue a UCL claim.
The opinion opens a new door for insureds to pursue private rights of action against insurers in spite of the Moradi-Shalal decision. It will be interesting to see if the Zhang decision will pique the interest of the Supreme Court and inspire them to provide further clarification of this issue.