California Insurance Bad Faith Attorney - Michael Rehm
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A look at the Law:
What happens if an insurance company rejects an offer to settle the case, when the offer was within the policy limits of the insured? In short, it can bring about one of two things:
(1) A conclusion that the insurance company was reasonable in rejecting the offer;
(2) A conclusion that the insurance company was unreasonable, and in this situation, the insurance company is now subjected to a lawsuit for bad faith.
-- For example, if Person A is driving Vehicle A, and negligently runs a red light and crashes into Vehicle B, being driven By Person B, and Person B suffers injuries, it is fairly straightforward that Person A is liable for Person B's injuries. Person B retains an attorney, and the attorney finds out that Person A has insurance, with a policy limit of $100K. The Accident Attorney makes an offer to Person A's insurance to settle the claim for $100k. Person A's insurance company rejects the offer, the case goes to court, and Person B wins a judgment in court for $200k. At that point Person A would have a suit against their own insurance company for failing to settle the claim within their policy limits, which would have cost Person A nothing, as opposed to Person A's current predicament of owing an additional $100K to Person B.
This kind of scenario is not necessarily uncommon. This is also referred to as "opening up the policy." Once a settlement offer is made within the policy limits, assuming it is a reasonable offer, and the insurance company rejects the offer, the policy limit no longer applies, and the insurance company can be on the hook for the entire judgment, no matter how large the judgment is, and how low the policy limit originally was. This is because of legal concept called Bad Faith, and it is explained in the jury instructions dealing with Bad Faith litigation below:
CACI 2330.Implied Obligation of Good Faith and Fair Dealing Explained
"In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement.
To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests. To breach the implied obligation of good faith and fair dealing, an insurance company must unreasonably act or fail to act in a manner that deprives the insured of the benefits of the policy. To act unreasonably is not a mere failure to exercise reasonable care. It means that the insurer must act or fail to act without proper cause. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy."
“It is important to recognize the reason for the possibility of tort, and perhaps even punitive damages on top of regular tort damages, for an insurance company's unreasonable breach of an insurance contract. Insurance contracts are unique in that, if the insurance company breaches them, the policyholder suffers a loss (often a catastrophic loss) that cannot, by definition, be compensated by obtaining another contract. [Citations.] [¶] Thus, without the possibility of tort damages hanging over its head when it makes a claims decision, an insurance company may choose not to deal in good faith when a policyholder makes a claim. The insurance company could arbitrarily deny a claim, thus gambling with the policyholder's ‘benefits of the agreement.' [Citation.] If the insurance company gambled wrong, it would be no worse off than it would have been if it had honored the claim in the first place. In effect, if the law confined the exposure of the insurance company under such circumstances to only contract damages, it would be pardoned and still retain the fruits of its offense.” (Pulte 1353 Home Corp. v. American Safety Indemnity Co. (2017) 14 Cal.App.5th 1086, 1125 [223 Cal.Rptr.3d 47].)
“[T]o establish the insurer's ‘bad faith' liability, the insured must show that the insurer has (1) withheld benefits due under the policy, and (2) that such withholding was ‘unreasonable' or ‘without proper cause.' The actionable withholding of benefits may consist of the denial of benefits due; paying less than due; and/or unreasonably delaying payments due.” (Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1209 [87 Cal.Rptr.3d 556], internal citations omitted.)
“[I]f the insurer denies benefits unreasonably (i.e., without any reasonable basis for such denial), it may be exposed to the full array of tort remedies, including possible punitive damages.” (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1073 [56 Cal.Rptr.3d 312].)
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:
- 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;
- That [name of defendant] failed to accept a reasonable settlement demand for an amount within policy limits; and
- That a monetary judgment was entered against [name of plaintiff] or 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."
Further language from the jury instructions:
"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, some day 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. "
The jury instructions go on to discuss cases that provide guidance for the court:
"[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.)"
“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.)
"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.)"
Michael Rehm's analysis: The case above, Graciano, provides crucial information for every personal injury lawyer who is confronting an insurance company who is acting unreasonable. It is important to make sure the settlement offer complies with the elements of Graciano, or it could be argued later that the offer, even if accepted, was not a final settlement offer, and therefore the insurance company did not actually reject a final settlement offer, and no bad faith liability will ensue. It can be a benefit to clients if the insurance company acts unreasonable, especially in cases where liability is clear and damages are in excess of the policy limit, which is not uncommon. At that point, it can be a gift for the insurance company to reject the policy limits offer, it effectively "opens up" the policy, and the full value of the case can be pursued from there. A firm understanding of this aspect of the law can make a big difference in the amount of the recovery.
The final jury instruction on this issue is below:
2337.Factors to Consider in Evaluating Insurer's Conduct
In determining whether [name of defendant] acted unreasonably, that is, without proper cause, you may consider whether the defendant did any of the following:
[(a) Misrepresented to [name of plaintiff] relevant facts or insurance policy provisions relating to any coverage at issue.]
[(b) Failed to acknowledge and act reasonably promptly after receiving communications about [name of plaintiff]'s claim arising
under the insurance policy.]
[(c) Failed to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under its
insurance policies.]
[(d) Failed to accept or deny coverage of claims within a reasonable time after [name of plaintiff] completed and submitted
proof-of-loss requirements.]
[(e) Did not attempt in good faith to reach a prompt, fair, and equitable settlement of [name of plaintiff]'s claim after liability
had become reasonably clear.]
[(f) Required [name of plaintiff] to file a lawsuit to recover amounts due under the policy by offering substantially less than
the amount that [he/she/nonbinary pronoun/it] ultimately recovered in the lawsuit, even though [name of plaintiff] had made a claim
for an amount reasonably close to the amount ultimately recovered.]
[(g) Attempted to settle [name of plaintiff]'s claim for less than the amount to which a reasonable person would have believed [name
of plaintiff] was entitled by referring to written or printed advertising material accompanying or made part of the application.]
[(h) Attempted to settle the claim on the basis of an application that was altered without notice to, or knowledge or consent of,
[name of plaintiff], [his/her/nonbinary pronoun/its] representative, agent, or broker.]
[(i) Failed, after payment of a claim, to inform [name of plaintiff] at [his/her/nonbinary pronoun/its] request, of the coverage under
which payment was made.]
[(j) Informed [name of plaintiff] of its practice of appealing from arbitration awards in favor of insureds or claimants for the purpose of forcing them to accept settlements or compromises less than the amount awarded in arbitration.
[(k) Delayed the investigation or payment of the claim by requiring [name of plaintiff], [or [his/her/nonbinary pronoun]
physician], to submit a preliminary claim report, and then also required the submission of formal proof-of-loss forms, both of
which contained substantially the same information.]
[(l) Failed to settle a claim against [name of plaintiff] promptly once [his/her/nonbinary pronoun/its] liability had become apparent,
under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy
coverage.]
[(m) Failed to promptly provide a reasonable explanation of its reasons for denying the claim or offering a compromise
settlement, based on the provisions of the insurance policy in relation to the facts or applicable law.]
[(n) Directly advised [name of plaintiff] not to hire an attorney.]
[(o) Misled [name of plaintiff] as to the applicable statute of limitations, that is, the date by which an action against [name of
defendant] on the claim had to be filed.]
[(p) Delayed the payment or provision of hospital, medical, or surgical benefits for services provided with respect to acquired
immune deficiency syndrome (AIDS) or AIDS-related complex for more than 60 days after it had received [name of plaintiff]'s claim
for those benefits, doing so in order to investigate whether [name of plaintiff] had the condition before obtaining the insurance
coverage. However, the 60-day period does not include any time during which [name of defendant] was waiting for a response for
relevant medical information from a healthcare provider.]
The presence or absence of any of these factors alone is not enough to determine whether [name of defendant]'s conduct was or was not
unreasonable, that is, without proper cause. You must consider [name of defendant]'s conduct as a whole in making this determination.
New April 2008; Revised December 2015, May 2020
Directions for Use
Although there is no private cause of action under Insurance Code section 790.03(h) (see Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 304-305 [250 Cal.Rptr. 116, 758 P.2d 58]), this instruction may be given in an insurance bad-faith action to assist the jury in determining whether the insurer's conduct was unreasonable or without proper cause. (See Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1078 [56 Cal.Rptr.3d 312], internal citations omitted.)
Include only the factors that are relevant to the case.
Michael Rehm's Analysis : The list above did not come out of nowhere, the level of specifics just goes to show that these incidents have occurred before, and that insurance companies have a troubled history, to say the least. Bad Faith Litigation is why insurance companies are willing to settle, if not for this legal principle, they would have nothing to lose by rejecting every offer that comes their way, as discussed above:
"Thus, without the possibility of tort damages hanging over its head when it makes a claims decision, an insurance company may choose not to deal in good faith when a policyholder makes a claim. The insurance company could arbitrarily deny a claim, thus gambling with the policyholder's ‘benefits of the agreement.' [Citation.] If the insurance company gambled wrong, it would be no worse off than it would have been if it had honored the claim in the first place."
It is important to understand that you do have leverage in negotiations with the insurance company. if the insurance company miscalculates, and acts unreasonable in rejecting a settlement offer, they are potentially liable for significant damages down the road if the case does not go as they planned. This is sound public policy, and another factor in your corner as you fight for fairness against the insurance companies.
For more information on Attorney Michael Rehm's practice, or for a free consultation, call (800) 978-0754.