A claim against an insurer for bad faith failure to accept a reasonable settlement demand requires a finding that the insurer acted “unreasonably” in some respect. (Pinto v. Farmers Ins. Exch. (2021) 61 Cal.App.5th 676)
Facts
Farmers Insurance Exchange issued an automobile policy listing Alaxandrea Martin as the named insured and her car as the insured vehicle. The policy had bodily injury liability limits of $50,000 each person / $100,000 each occurrence.
Martin and three of her friends – Dana Orcutt, Alexander Pinto and Anthony Williams – traveled in Martin’s car to a party which took place in Lake Havasu, Arizona. On the way back from the party, Martin allowed Orcutt, who was intoxicated, to drive the car. Orcutt lost control of the car, causing the car to roll over and seriously injure its occupants. One of the occupants, Pinto, was rendered a quadriplegic.
About a week after the accident, Martin’s mother reported the accident to Farmers. Farmers opened a claim file and began investigating.
About two months after the accident, Pinto through his attorney sent Farmers a letter in which Pinto offered to settle his claims against Martin (vehicle owner / named insured) and Orcutt (permissive user / additional insured) for the applicable $50,000 policy limits. Pinto’s settlement offer also required that Martin and Orcutt provide a proposed release; declarations that they were not within the course and scope of employment at the time of the accident and had no other insurance policies; and copies of any applicable insurance policies. The settlement offer was open for 15 days. Farmers promptly forwarded the offer to Martin and Orcutt, and Farmers hired a private investigator to locate Orcutt. Farmers repeatedly asked Pinto’s attorney to extend the deadline for acceptance of the settlement offer, but Pinto’s attorney never responded.
Three days before the settlement offer was set to expire, the private investigator located Orcutt, who stated that at the time of the accident she was not in the course and scope of her employment and did not have any other insurance. However, Orcutt never responded to Farmers’ repeated requests that she provide a signed declaration to that effect.
Prior to the expiration of the settlement offer’s deadline, Farmers delivered to Pinto’s attorney a letter stating that Farmers was accepting the settlement offer; a settlement check for $50,000; a release in favor of Martin and Orcutt; a copy of the policy Farmers had issued to Martin; and a signed declaration from Martin. However, Farmers was never able to obtain a signed declaration from Orcutt.
Pinto asserted that because Farmers failed to provide a signed declaration from Orcutt, Farmers failed to meet all the conditions of Pinto’s policy limit demand. Pinto thus sued Martin and Orcutt for negligence. That lawsuit eventually settled, with an agreement that: (1) Martin and Orcutt would assign all their rights against Farmers to Pinto; (2) the settlement would be treated as the equivalent of a $10,000,000 judgment; and (3) the insurers (another insurer had been found for Orcutt) would pay Pinto their combined policy limits of $65,000.
Pinto, as assignee of Martin and Orcutt, then sued Farmers alleging that Farmers had acted in bad faith toward Martin and Orcutt by failing to accept Pinto’s settlement demand. At trial of the bad faith case, much of the evidence concerned Farmers’ claims handling before and after Pinto’s settlement offer. Farmers repeatedly argued, over Pinto’s repeated objections, that to establish bad faith, Pinto had to prove Farmers acted “unreasonably” in failing to accept Pinto’s demand. The trial court declined to so instruct the jury, and the special verdict form contained no question relating to the reasonableness of Farmers’ conduct. The jury ultimately found in relevant part that Pinto had made a reasonable settlement demand, and that Farmers had “failed to accept a reasonable settlement demand.” The jury made no finding that Farmers acted “unreasonably” in any respect. Based on the jury’s special verdict, the trial court entered judgment for Pinto of $9,935,000. Farmers appealed.
Holding
The California Court of Appeal reversed. The appellate court reasoned that in order to hold an insurer liable for bad faith failure to settle a third party claim, there must be a finding that the insurer’s failure to settle was “unreasonable.” Unreasonable conduct means that the insurer acted or failed to act without proper cause, e.g., by placing the insurer’s own interests above the insured’s interests. Thus, an insurer’s mere failure to accept a reasonable settlement offer is not, by itself, unreasonable. The crucial issue in each case is the basis for the insurer’s failure to accept the settlement offer.
Because the special verdict form in this case did not include any finding that Farmers acted unreasonably in failing to accept Pinto’s settlement offer, the verdict form was facially insufficient to support a bad faith judgment against Farmers. Further, because Pinto, not Farmers, had insisted on the defective special verdict form, Pinto was bound by the erroneous special verdict. Under such circumstances, the appellate court directed the trial court to vacate the judgment in favor of Pinto and enter a new judgment in favor of Farmers.
Comment
This is an important case because it appears to resolve the dispute over whether an insurer’s liability for failing to accept a reasonable settlement offer within policy limits requires only that the insurer “fail” to accept a reasonable settlement offer (as contended by insureds and their assignees), or instead requires that the insurer “unreasonably fail” to accept a reasonable settlement offer (as contended by insurers). The Pinto court made it clear that to hold an insurer liable for bad faith failure to settle a third party claim, there must be a finding that the insurer’s failure to settle was in fact “unreasonable.” Here, at Pinto’s behest, the trial court submitted to the jury a special verdict form that omitted any finding that Farmers acted unreasonably in failing to accept Pinto’s settlement offer. Thus, as a matter of law, the jury’s verdict was insufficient to support the judgment. In other words, Pinto had failed to obtain a finding on an essential element of his case against Farmers.
Notwithstanding the above, it still appears to be the rule that if an insurer erroneously believes that it does not provide coverage for the loss, and on that basis rejects a reasonable settlement demand within policy limits, the insurer will be deemed to have acted “unreasonably.” In other words, it is unreasonable for an insurer to reject a reasonable settlement demand within limits based on the insurer’s good faith but mistaken belief that the policy does not provide coverage for the loss. In that situation, the insurer basically “acts at its own peril.” (See, e.g., Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9.)