Insurance Bad Faith: the Past, Present and Unpredictable Future?

As published in the Riverside County Bar Association’s Riverside Lawyer, May 2017:

by Wylie A. Aitken & Megan G. Demshki

Over the last several decades California has been at the forefront of protecting consumers through insurance bad faith law. However, recent case law developments have generated confusion over when the insurer has a duty to proactively effectuate a settlement, or at least “seize” an opportunity to settle to protect their insured. The recent case of Reid v. Mercury Insurance Co. 220 Cal.App.4th 262, 278-9 (2013), raises interesting questions of when, if at all, a carrier must take affirmative action to protect an insured.

To understand the public policy of breach of the “implied covenant of good faith and fair dealing” (i.e. bad faith) it is helpful to give a historical perspective.

Until the 1950s, there was a clear distinction between the remedies for a breach of contractual duty and the remedies for the breach of duty found in tort law1

During this time, an insurer’s refusal to pay a claim was treated as a breach of contract.2 In this environment, insureds were left without adequate protections from insurance companies and without any extra contractual remedies and were often coerced into accepting lower amounts than were even provided for in the insurance policy.3

Sensing the clear inadequacy of contractual remedies, courts began to treat insurer’s unfair claims practices as a tort.4 The courts turned to the implied covenant of good faith and fair dealing that is present in all contracts.5 By breaking away from purely contractual liability, insureds and consumers had access to greater recovery.6 With this new playing field, insurers could no longer bully the insured without consequence.7

Today, insurance companies still owe a duty of good faith and fair dealing to the people they insure that cannot be contracted out of the relationship.8 When insurance companies fail to uphold that duty, they have committed insurance bad faith.9 Insurance bad faith law is state-specific and can apply to any type of insurance policy regardless of whether it is a first party or third party claim by the implied covenant of good faith and fair dealing contained by law in insurance contracts.10 A third-party bad faith claim generally arises when a third-party asserts a claim against the insured and the insured is exposed to damages exceeding the policy limits of the insurance policy due to the insurer’s failure to settle within the policy limits. A first-party bad faith claim generally arises when the insurer fails to pay an insured’s claim without a reasonable basis or fails to properly investigate the claim in a timely manner, causing a delay in payment. In one of the most pivotal insurance bad faith California Supreme Court cases, Comunale, the Court held:

“When there is a great risk of a recovery beyond the 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. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.”11

In 1972, California adopted the Unfair Claims Practices Act.12 Initially, the California Supreme Court held that a private right of action existed under the Unfair Claims Practices Act for both first and third party claims.13 Then the California Supreme Court reversed the decision for first and third party claims.14 After the California Supreme Court disavowed a private cause of action against under the Unfair Claims Practices Act, California voters passed Proposition 103 in the November 1988 election.15 This presently is Section 790.03(h) of the California Insurance Code.16 This section now lists sixteen unfair and deceptive acts or practices that can constitute bad faith.17

As insurance bad faith developed, it became clear that there was no private civil cause of action “against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).”18 Case law further clarified that violation of the section “may evidence the insurer’s breach of duty to its insured” under the implied covenant of good faith and fair dealing, making it evidentiary important though not an independent cause of action.19

In Crisci v. Security Ins. Co. of New Haven, Conn., the Court determined that liability based on the implied covenant of good faith and fair dealing “exists whenever the insurer refuses to settle in an appropriate case.”20 The Court articulated that when “determining whether to settle the insurer must give the interests of the insured at least as much consideration as it gives to its own interests.”21

In Johansen v. California State Auto. Assn. Inter-Ins. Bureau, the Court held that “[t]he implied covenant of good faith and fair dealing imposes a duty on the insurer to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits.”22 The Court went on to explain that “the 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.”23

Reid and Boicourt

In Boicourt v. Amex Assurance Co.(2000), a matter handled by our office at both the trial and appellate levels, the Court explained that the “the claimant’s request for the policy limits might have been a settlement opportunity which was arbitrarily foreclosed by the insurer for its own advantages to the insured’s detriment.”24 The opinion begins with the statement that, “[n]o less an authority on insurance law than John Alan Appleman declared 40 years ago that a liability insurer “’is playing with fire’” when it refuses to disclose policy limits.”25 The Court further said, “[w]e therefore conclude that a formal settlement offer is not an absolute prerequisite to a bad faith action in the wake of an excess verdict when the claimant makes a request for policy limits and the insurer refuses to contact the policyholder about the request.”26 This was an important and significant development.

In Reid v. Mercury Ins. Co. (2013), the Court took the position that “an insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured.”27

The Court also noted that in the absence of a settlement demand or some other manifestation that the injured party is interested in a settlement, there is no liability for bad faith failure to settle.28 The Court did not consider asking for the policy limits or the letter of representation citing to Insurance Code section 790.03 enough to constitute a settlement demand.29 The Court held that “nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear.”30

Reid has generated some confusion in the legal community regarding exactly what is enough to prove a manifestation of an interest in settlement and what triggers an insurer’s duty to initiate settlement. Practitioners are left to grapple with how Reid is consistent with the Boicourt decision, which explained:

“All we say now is that the claimant’s request for the policy limits might have been a settlement opportunity which was arbitrarily foreclosed by the insurer for its own advantages to the insured’s detriment.”31

The authors believe that to some extent Reid misses the point in that it puts too much emphasis on the actions or interest of the claimant/plaintiff and not enough on the duty of a carrier to protect the insured defendant. Since insurance is a promise of “protection” then why not have a duty to act affirmatively to “protect,” rather than take advantage of the whim of a claimant or their attorney? Reid also does not emphasize enough that the carrier did take some positive steps which could have been a firmer basis for its opinion.

There is some encouragement in the Court’s recognition that, “there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within the policy limits could feasibly be negotiated.”32

In our letters of representation, we include the following language: Furthermore, we hereby request that you contact your insured and seek permission to disclose to us the applicable limits of all liability insurance on behalf of your insured which apply to this incident. If such disclosure is not done in a proper manner, the ability to effectuate a policy limits settlement may be lost. See Boicourt v. Amex Assurance Company Co. (2000) 78 Cal.App.4th 1390, 93 Cal.Rptr.2d 763. It is our belief and policy that if such a disclosure is made it could well lead to, and often does result in, a resolution of the matter.

Insurance bad faith law has worked to balance the needs of insurance companies to advocate for their interests with adequate consumer protections for the insured. The historical progression of insurance bad faith as a tort has caused increased security for consumers, while also balancing the needs of the insurance company to run a business, a business which has fiduciary duties beyond a simple contract.

Not discussed in this article is the issue of punitive damages which has also evened the playing field for consumers and which can be saved for another day.

1 John K. DiMugno & Paul E.B. Glad, California Insurance Law Handbook 231 (2011).
2 Id.
3 Id. See 20th Century Ins. Co. v. Sup. Ct. (2001) 90 Cal.App.4th 1247, 1265-6 (explaining the significant policy considerations in protecting the insured through tort law).
4 Id.
5 Id. See Wilson v. 21st Century Ins. Co. (2007) 42 C4th 713, 720.
6 Id. See Crisci v. Security Ins. Co. of New Haven, Conn., (1967) 66 Cal. 2d 425, 432-3.
7 Id.
8 Justice H. Walter Croskey & Justice Marcus M. Kaufman, California Practice Guide Insurance Litigation 12A-1 (2013).
9 Croskey at 12A-1-3. See Waller v. Truck Ins. Exch., Inc.(1995) 11 C4th 1, 36; Gruenberg v. Aetna Ins. Co. (1973) 9 C3d 566, 573.
10 DiMugno at 231. In reality, they are all first party claims since a third-party claim exists only upon an assignment of the first party.
11 Comunale v. Traders & General Ins. Co. (1958). 50 Cal. 2d 654, 659 (emphasis added).
12 DiMugno at 544-9.
13 Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880 (1979).
14 See Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal.3d 287 (1988) (discussing third party claims); Zephyr Park v. Superior Court, 213 Cal.App.3d 833 (1989) (discussing first party claims).
15 DiMugno at 546.
16 California Insurance Code § 790.03 (2014).
17 Id. See also Ashley at §§ 2.08 and 2.15 (Since California Prop. 103, nineteen state legislatures have passed legislation specifically authorizing bad faith claims against insurers.)
18 Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988) (304)
19 Shade Foods v. Innovative Products Sales & Marketing, Ins., 78 Cal.App.4th 847 (2000) (916) See Jordan v. Allstate Insurance Company, 148 Cal.App.4th 1062 (2007); CACI 2330.
20 Crisci, 66 Cal.2d at 430.
21 Crisci, 66 Cal.2d at 429.
22 Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal.3d 9, 14-5 (1975).
23 Id. at 16.
24 Boicourt v. Amex Assurance Co., 78 Cal.App.4th 1390, 1398-9 (2000).
25 Id. at 1392
26 Id. at 1398-9.
27 Reid v. Mercury Ins. Co., 220 Cal.App.4th 262, 278-9 (2013).
28 Id.
29 Id.
30 Id. at 277.
31 Boicourt v. Amex Assurance Co., 78 Cal. App.4th 1390, 1399 (2000).
32 Reid at 272.