Woodland Hills personal injury attorney Barry P. Goldberg is regularly asked whether an insurer is committing “bad faith” by failing or refusing to settle a case. Most accident victims do not realize that the “at fault” party’s insurer really owes virtually no duty of care to the accident victim. Rather, the duty of care is owed to the insured that must be protected from an excess judgment by the “good faith” efforts of his insurance company. The failure on the part of the insured may create liability for the excess verdict (and more) if it is assigned to the accident victim.
This “bad faith” circumstance is played out regularly when an accident victim makes an unequivocal offer to settle a case within an insured’s policy limits in return for a release of all claims. When an insurer fails or refuses to settle for a policy limit, extra-contractual damages may be available. We have found that many insurers fail to pay to protect insureds and give pretextual reasons for not paying. Accident victims argue that the failure creates strict liability for the insurer. They reason that it does not matter why the insurer failed—only that it failed. Insurers argue that there must be something more than a mere failure. Rather, they reason there must be a demonstration of ill will or “bad faith.” The answer is probably somewhere in between the two depending on the particular facts.
“In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach.” (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312.) The standard of good faith and fairness examines the reasonableness of the insurer’s conduct, and mere errors by an insurer in discharging its obligations to its insured ” ‘does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer’s conduct must also have been unreasonable. [Citations.]’ ” (Brandt v. Superior Court (1985) 37 Cal.3d 813, 819; accord, Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1460 [“so long as insurers are not subject to a strict liability standard, there is still room for an honest, innocent mistake”]; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1280-1281 [“The law clearly states that erroneous denial of a claim does not alone support tort liability; instead, tort liability requires that the insurer be found to have withheld benefits unreasonably.”].)
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. (Merritt, supra, 34 Cal.App.3d at p. 877.) 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 (Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 992-993 (Coe)), (2) all of the third party claimants have joined in the demand (ibid.), (3) it provides for a complete release of all insureds (Strauss v. Farmers Ins. Exchange (1994) 26 Cal.App.4th 1017, 1021), and (4) the time provided for acceptance did not deprive the insurer of an adequate opportunity to investigate and evaluate its insured’s exposure. (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 798 (Critz) [One-week limitation attached to settlement offer does not preclude a finding of bad faith rejection where insurer’s investigation and evaluation of claim had been completed; claimant “had a right to attach a time limit to her offer, but the insurer was not bound by it. [Citation.] Had the company needed more time for investigation, for a good faith assessment of the claim’s value or for consultation with its policyholder, it might have chosen neither to accept nor reject her offer, but rather to suggest additional time.”], disapproved on other grounds in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433.)
A 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. (Critz, supra, 230 Cal.App.2d at p. 798.)
As can be seen from the established case law, questions of fact are often created. When an insurer sends a letter on the day a policy limit expires contending that more time is required (which we see all the time!), it becomes a question of fact whether additional time was really required or whether a reasonable insurer under the same or similar circumstances would have accepted the offer. Obviously, the extent of the injuries compared to the amount of the liability limits plays a major factor in this determination. With a California minimum policy of $15,000 and any serious injury, failure to pay policy limit disputes are becoming more and more common.
It is vitally important that if you suffered any significant injury, you will require an lawyer experienced in making flawless policy limit demands and who is willing to pursue the case for “bad faith” if the insurer refuses or fails to pay in a timely fashion.