Bad Faith Liability for Failure to Settle Requires a Finding that the Insurer Acted Unreasonably

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In a unanimous opinion which will impact the plaintiff bar’s strategies for “setting up” liability insurers for “failure to settle” bad faith claims, a California appeals court held in Pinto v. Farmers Ins. Exchange (No. B295742, filed 3/8/21) that a bad faith failure to settle claim requires a finding that the insurer acted unreasonably in some respect. Because the jury verdicts proposed by the plaintiff did not require the jury to make such a finding, the $10 million judgment against the insurer was reversed and judgment is to be entered in its favor.

Pinto was a passenger injured in a solo vehicle accident leaving him paralyzed. The named insured/vehicle owner was also a passenger, with the vehicle being driven by a permissive user. There was evidence of intoxication and, fearing criminal prosecution, the permissive user disputed that she was the driver, refusing to cooperate.

Pinto’s counsel made a demand for the policy’s $50,000 per person limit that was severely time-limited, and conditioned on declaration(s) from “the insured” providing a release, a declaration that the insured had not been acting within the course and scope of employment and a copy of any applicable insurance policy. The demand gave the adjuster only eight business days to respond and she hired a private investigator who located the driver, but the driver did not provide a declaration.

Prior to the deadline, Farmers had a letter of acceptance, a release for both insureds and a check for $50,000 hand-delivered to Pinto’s counsel. This was followed by faxing a declaration from the vehicle owner, but Farmers was never able to obtain a declaration from the driver, who still faced criminal prosecution.

After the deadline, Pinto’s counsel rejected the tender, stating that Farmers had not conducted an adequate investigation or provided Pinto with “basic and critical” information in the form of a declaration from the driver. A lawsuit against both insureds followed, which was ultimately settled by way of an assignment and covenant not to execute and a stipulation to $10 million in damages.

In the subsequent lawsuit for a bad faith failure to settle, Farmers repeatedly argued, over Pinto’s repeated objections, that to establish bad faith, Pinto had to prove Farmers acted unreasonably in failing to accept his demand. The California Judicial Council jury instruction for bad faith refusal to accept a settlement offer within limits, CACI 2334, calls for proof:

” 1.  That [a claimant] brought a lawsuit against [the insured] for a claim that was covered by [the insurer]’s insurance policy;
2.  That [the insurer] failed to accept a reasonable settlement demand for an amount within policy limits; and
3.  That a monetary judgment was entered against [name of plaintiff] for a sum greater than the policy limits.”

‘Policy limits’ means the highest amount available under the policy for the claim against [the insured].

A settlement demand for an amount within policy limits is reasonable if [the insurer] 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 [the claimant]’s injuries or loss and [the insured]’s probable liability. However, the demand may be unreasonable for reasons other than the amount demanded.”

Relying on CACI 2334, the special verdict form proposed by Pinto contained no question relating to the reasonableness of Farmers’ conduct, and the trial court declined Farmers’ request for a modified verdict form including reasonableness. Consequently, the jury only made three findings as to Farmers’ conduct toward the owner: (1) Pinto made a reasonable settlement demand; (2) Farmers “fail[ed] to accept a reasonable settlement demand”; and (3) a monetary judgment had been entered against the owner in Pinto’s earlier lawsuit. The jury made those same findings as to Farmers’ conduct toward the driver, plus three more directed to a cooperation defense: (4) the driver failed to cooperate with Farmers; (5) Farmers “use[d] reasonable efforts to obtain [the driver’s] cooperation”; and (6) the driver’s] lack of cooperation prejudiced Farmers. The jury made no finding that Farmers acted unreasonably in any respect.

Following the verdicts, Farmers argued that the jury’s finding that the driver failed to cooperate established that Farmers did not act unreasonably, and was thus entitled to judgment on Pinto’s bad faith claim. The court rejected the argument and entered judgment for Pinto in the amount of the stipulated judgment less the policy limits.

On appeal, Farmers contended the judgment had to be vacated because the jury did not find, and no evidence established, that it acted unreasonably in failing to settle Pinto’s claim against the owner. Pinto countered that failure to accept a reasonable settlement offer is itself unreasonable per se. Thus, the issue boiled down to whether, in the context of a third party insurance claim, failing to accept a reasonable settlement offer constitutes bad faith per se. The appeals court concluded that it does not.

Reviewing extensive case law on bad faith failure to settle, the Pinto court held that bad faith liability requires an actual finding that the insurer acted unreasonably. (Citing PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310 and Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713.) The Pinto court said that an insurer’s failure to accept a reasonable offer may subject the insurer to liability, but it is not unreasonable per se. (Citing Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 and Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718.) Insurers are not subject to a strict liability standard and the crucial issue is the basis for the insurer’s decision to reject an offer of settlement. (Citing Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1460.) But mere errors do not necessarily make the insurer liable in tort; the insurer’s conduct must also have been unreasonable. (Citing Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 425.) The Pinto court stated that “a claim for bad faith based on the wrongful refusal to settle thus requires proof the insurer unreasonably failed to accept an offer.” (Citing Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788.)

Having reached that conclusion, the Pinto court found that Pinto’s special verdict was facially insufficient to support a bad faith judgment because it included no finding that Farmers acted unreasonably in failing to accept Pinto’s settlement offer. The court said that CACI 2334 presents two issues: Whether the plaintiff was harmed and whether the insurer’s failure to settle caused the harm. But no element addresses whether the insurer’s failure to settle was unreasonable.

The Pinto court noted that CACI 2337 (factors to consider in evaluating insurer’s conduct) lists 16 examples of potentially unreasonable conduct, including failure for improper reasons to settle a claim, but no element from that instruction was reflected in the verdict form. The court rejected Pinto’s argument that in Comunale, supra, the Supreme Court held in a third-party duty to settle case that a carrier’s failure to accept a reasonable offer to settle within policy limits constitutes a breach of the covenant of good faith and fair dealing as a matter of law: “Comunale simply held that an insurer may not put its own interests before the insured’s when ‘the most reasonable manner of disposing of the claim is a settlement.’ [] The [Comunale] Court did not discuss rejecting settlement for reasons outside of coverage disputes, and did not hold that failure to settle is unreasonable whenever the offer itself is reasonable.”

The Pinto court stated: “Although CACI No. 2334 describes three elements necessary for bad faith liability, it lacks a crucial element: Bad faith. To be liable for bad faith, an insurer must not only cause the insured’s damages, it must act or fail to act without proper cause, for example by placing its own interests above those of its insured.” As a result, the court held that the jury’s verdict was defective.

The Pinto court then held that the proper remedy was the entry of judgment for Farmers. The court said that “The plaintiff ‘bear[s] the responsibility for a special verdict submitted to the jury on [his] own case’ and must therefore ensure that a special verdict allows the jury to ‘resolve all of the ultimate facts’ so that ‘nothing shall remain to the court but to draw from them conclusions of law.’” (Citing Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949.) The Pinto court rejected Pinto’s argument that Farmers had invited the error:

“Pinto argues it was Farmers that insisted that the special verdict mirror CACI No. 2334, and is therefore responsible for the error. The record is flatly to the contrary. Farmers proposed that a special verdict question mirroring CACI No. 2334 be modified to ask whether Farmers’ failure to accept Pinto’s settlement offer was ‘the result of unreasonable conduct by Farmers,’ which Farmers at all times argued was essential to Pinto’s bad faith failure-to-settle theory. This would have been the correct question, but Pinto successfully objected to it.

We conclude the defective verdict was accomplished at Pinto’s behest. Not only did he fail to propose an appropriate verdict, he also vigorously opposed Farmers’ attempts to clarify the erroneous verdict. The proper remedy is to vacate the judgment and enter a new judgment for Farmers.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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