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.