In the absence of actual coverage, a liability insurer cannot be liable to an insured for failing to accept a third-party claimant’s reasonable settlement offer within the policy limits. ( DeWitt v. Monterey Insurance Company (2012) 204 Cal.App.4th 233)
Facts
Lisa Cappelletti owned an apartment complex. She allegedly employed Donald DeWitt to live at the complex as “onsite property manager.” DeWitt held a party at the apartment complex, during which DeWitt served alcohol to a minor. Following the party, the minor became involved in an auto accident in which Erica Howard was severely injured.
At the time of the accident, Cappelletti, the owner of the apartment complex, was the named insured on a $1 million general liability policy issued by Monterey Insurance Company. The Monterey policy also included as “insureds” any of Cappelletti’s “employees” and “real estate managers” while acting as such.
Following the accident, Howard filed a personal injury action against various parties including Cappelletti and DeWitt. Cappelletti and DeWitt in turn tendered the defense of the lawsuit to Cappelletti’s insurer, Monterey. Monterey agreed to defend Cappelletti, but after investigating concluded that DeWitt was not in fact an “insured” and thus declined to defend DeWitt. Howard subsequently obtained a default judgment of $4.7 million against DeWitt.
Thereafter, Howard offered to settle her claims against Cappelletti and DeWitt for Monterey’s policy limit of $1 million. Monterey declined. However, Monterey later paid $50,000 in settlement of Cappelletti’s alleged liability to Howard. Also, after Monterey unsuccessfully tried to set aside the default judgment against DeWitt, Monterey eventually paid $3.5 million in full satisfaction of the default judgment against DeWitt.
DeWitt then sued Monterey for bad faith. In the bad faith suit, DeWitt alleged that Monterey had unreasonably failed to defend and indemnify DeWitt against Howard’s claims despite knowing that DeWitt potentially or actually qualified as an “insured” under the Monterey policy.
The trial court ruled that Monterey had in fact breached a contractual duty to defend DeWitt against Howard’s lawsuit, because during the pendency of Howard’s lawsuit available information suggested the “possibility” that DeWitt qualified as an “insured” under the Monterey policy. The trial court then conducted a jury trial on the issue of whether Monterey had acted in “bad faith” (i.e., unreasonably) toward DeWitt. At the conclusion of the evidence, the trial court refused DeWitt’s request to instruct the jury concerning an insurer’s duty to accept reasonable settlement offers. The jury subsequently returned a special verdict finding that Monterey did not act in bad faith in failing to defend DeWitt against Howard’s lawsuit. The trial court entered judgment in favor of Monterey and Dewitt appealed.
Holding
The Court of Appeal affirmed the judgment in favor of Monterey. The appellate court rejected DeWitt’s argument that the trial court should have instructed the jury regarding an insurer’s duty to accept a reasonable settlement offer. The appellate court reasoned that a liability insurer “has a duty to accept a reasonable settlement offer only with respect to a covered claim.” Here, Monterey never assumed DeWitt’s defense in the underlying action (and thus DeWitt could not show that Monterey had “waived” its right to contest that DeWitt was an “insured”). Moreover, DeWitt never established as a matter of law that DeWitt was actually (as opposed to only potentially) an “insured.” Last, DeWitt never asked the jury in the bad faith case to decide whether DeWitt actually was an “insured.”
In short, DeWitt neither conclusively established, nor ever asked the jury to decide, that DeWitt actually was an “insured” (i.e., actually was “covered”) under the Monterey policy. Thus, DeWitt was not entitled to a jury instruction regarding an insurer’s duty to accept a reasonable settlement offer. That instruction only applies when the third-party’s claim against the insured is actually covered under the policy.
Comment
An insurer’s reasonable belief that the policy does not provide coverage is not a defense to a claim for bad faith failure to settle. However, in an action based on the insurer’s failure to settle, the insured must still prove that the third-party’s claim against the insured was in fact covered by the policy. Here, DeWitt never established as a matter of law, and never asked the jury to decide, that DeWitt actually was an “employee” of or “real estate manager” for Cappelletti, such that DeWitt would qualify as an “insured” who was “covered” under the Monterey policy.