An insurance policy is a contract between a person and an insurance company in which the person (the insured) pays premiums to an insurer and in return the insurance company agrees to provide a defense for the insured and pay all damages up to the limits of the policy for covered losses. In every insurance contract, including insurance liability contracts, there is an implied-in-law covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. (Comunale v. Traders & General Insurance Co. (1958) 50 Cal. 2d 654, 658.) The relationship of insurer and insured is in essence a quasi-fiduciary one: the insurer has an absolute and nondelegable duty to conduct itself with the utmost good faith and fair dealing for the benefit of the insured and the insured promises to be cooperative and honest if a claim is made against him. (State Farm v. Superior Court (1989) 216 Cal. App. 3d 1222, 1225-26; Hughes v. Blue Cross of Northern Cal. (1980) 215 Cal. App. 3d 832, 848.)
Although the covenant of good faith and fair dealing exists in every contract, only in insurance liability contracts does a violation of this covenant give rise to an action in tort. (PPG Industries, Inc. v. Transamerica Ins. (1999) 42 Cal. 4th 713, 723; Foley v. Interactive Data Corp. (1988) 47 Cal. 3d 654; Johansen v. California State Auto Assn. Inter-Ins. Bureau (1975) 15 Cal. 3d 9, 14-16; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 818.) Tort liability is imposed not for a bad faith breach of contract but for the failure to meet the tort duties included within the implied covenant of good faith and fair dealing. (Murphy v. Allstate Ins. Co. (1976) 17 Cal. 3d 937, 941; Crisci v. Security Ins, Co. (1967) 66 Cal. 2d 425, 430.)
When an insured causes harm to or death of a third party, or damages or destroys property, the insured must relay the facts to the insurer to the best of his recollection. The insured must also promptly provide evidence he may have, such as photographs, video clips, receipts, names and contact information of witnesses and bystanders who may have seen the incident occur, as well as written reports. The witnesses must be told to be completely honest and forthcoming in assisting the attorney, insurance agents and investigators. The client should be advised not to talk with the insurance representative except with the presence of the attorney. (See generally Torkzadeh and Wilkinson, "Why clients should be completely honest with lawyers," (Sept. 15, 2021, Daily Journal.)
An insurance company acts in bad faith when (1) there is a substantial likelihood that the claimant will recover more than the policy limits; (2) the claimant makes a reasonable demand to settle the claim within policy limits; and (3) the insurer unreasonably refuses to accept it. In such a case, the insurance company is liable for all the damages, including the entire amount of the excess award. (Chateau Chamberay Homeowners Assn. v. Assurance Inter. Ins. Co. (2001) 90 Cal. App. 4th 335, 346.); Samson v. Transamerica Ins. Co. (1981) 30 Cal. 3d 220, 237; Murphy v. Allstate Ins. Co. (1976) 17 Cal. 3d 937, 941; Crisci v. Security Ins, Co. (1967) 66 Cal. 2d 425, 430; Comunale v. Traders & General Ins. Co. (1958) 50 Cal. 2d 654, 660.)
In deciding whether or not to settle a claim, the insurer must take into account the interests of the insured and give them at least as much, if not more than, consideration as it does to its own interests. (Comunale v. Traders & Gener. (1958) 50 Cal. 2d 654,659.) Where liability is clear and the damages are more than the policy limits, a good faith consideration of the insured's interests may require the insurer to settle the claim at policy limits. An unreasonable refusal to settle the claim at policy limits may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including all excess over the policy limits. (Hamilton v. Maryland Casualty Co, (2002) 27 Cal. 4th 718, 724-25; Samson v. Transamerica Ins. Co. (1981) 30 Cal. 3d 220, 137.)
The insurer has an implied duty to settle the case at policy limits to protect its insured from exposure to liability in excess of coverage as a result of the insurer's gamble - a gamble on which only the insured might lose. (Murphy v. Allstate Ins. Co. (1976) 17 Cal. 3d 937, 941; Shapero v. Allstate Ins. Co. (1971) 14 Cal. App. 3d 433.) The plaintiff must prove that the insurer knew or should have known at the time the demand was rejected that the potential judgment against its insured was likely to exceed policy limits based on the claimant's injuries or loss, and the insured's probable liability. But the mere fact that the insurer refuses to accept a reasonable demand within policy limits does not in and of itself constitute bad faith per se; the claimant must still prove that the refusal of the insurer to accept the policy limits demand was unreasonable in light of all the particular circumstances. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal. 4th 1269, 1280; Pinto v. Farmers Ins. Exchange (2021) 61 Cal. App. 5th 676, 687.)
A claim for bad faith based on the insurer's wrongful refusal to settle within policy limits requires proof the insurer unreasonably failed to accept an offer within policy limits. Simply refusing to accept a reasonable settlement offer for policy does not constitute bad faith per se. A facially reasonable demand might go unaccepted due to no fault of the insurer; for example, if some emergency prevents transmission of the insurer's acceptance. (Pinto, supra, 61 Cal. App. 5th 676, 688.) Mere errors by an insurer in discharging its obligations to the insured do not necessarily make the insurer liable in tort for bad faith. So long as insurers are not subject to a strict liability standard, there is still room for an honest, innocent mistake. (Pinto, supra, 61 Cal. App. 5th 676, 687-88; Graciano v. Mercury General Corp. (2014) 231 Cal. App. 4th 414, 425; Wilson v. 21st Century Ins. Co (2007) Tomaselli v. Transamerica Ins. Co. ((1994) 25 Cal. App. 4th 1269, 1280; Walbrook Ins. Co. v. Liberty Co. (1992) 5 Cal. App. 4th 1445, 1460. In evaluating whether an insurer acted in bad faith, the critical issue is the reasonableness of the insurer's conduct under the facts of the particular case. To prevail on a third-party claim, the plaintiff must establish that the failure to settle was unreasonable. (Wilson v. 21st Century In Co. (2007) 42 Cal. 4th 713, 723; Hamilton v. 21st Century Ins. Co. (2002) 27 Cal. 4th 718; Pinto, supra, 61 Cal. App. 5th 676, 687.). But failure of the insurance company to accept a reasonable settlement offer does not alone constitute bad faith. The crucial issue is the basis for the insurer's decision to reject an offer of settlement at policy limits.. (Hamilton v. 21st Century, supra, 27 Cal. 4th 718, 724-25; Comunale v. Traders & General Ins, Co. (1958) 50 Csl. 3d 653, 661.)
Where liability of its insured has become reasonably clear, California law requires the insurance company to investigate, process, and pay claims fully, promptly and faithfully, and to deal fairly with the claimant at all times. (Ins. Code 790.03(h); 10 Calif. Code of Regs. 2695.9.) "Bad faith' does not require a showing of dishonesty, fraud, or concealment. All that is required is that the plaintiff made a reasonable offer to the defendant and that the defendant unreasonably rejected it.
Where a fact is necessary to support a cause of action that is not included in a special verdict, judgment on that cause of action cannot stand. Thus, the failure of the plaintiff in a bad faith case to include in a special verdict that the insurance company acted unreasonably in any respect is fatal to the plaintiff's recovery. (Pinto v. Farmers Ins. Exchange (2021) 61 Cal. App. 5th 676, 688.)
Before the enactment of CCP 999 et seq., there were no limits on how much time plaintiffs had to give insurance companies to respond to a settlement offer. The third party was able to set a reasonable time for the defendant to accept or reject the demand. (Martin v. Hartford (1964) 228 Cal. App. 2d,178, 185.) Even a time limit for as few as seven days might not have been too short of a time depending on the facts of the case. (Critz v. Farmers Ins. Group (1964) 230 Cal. App. 2d 788, 798.) The general rule was that the time provided for acceptance of the settlement demand must give the insurer an adequate opportunity to investigate and evaluate the claim.
Some of the elements which must be proved for a successful insurer bad faith claim are:
●The insurance policy was in force at the time of the accident;
●The loss (injuries, deaths, or property damage) was covered by the policy;
●The claimant made a reasonable settlement demand within policy limits;
●The insurance company refused to accept the demand;
●The insurance company's refusal to accept the demand was unreasonable; and
●A monetary judgment was entered for the plaintiff and for a sum greater than policy limits.
The reasonableness of an insurer's claims-handling conduct is ordinarily a question of fact, but becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence. (Chateau Chamberay Homeowners Ass'n v. Associated Inter. Ins. Co. 335, 346 (2001).) The correctness of a special verdict is a matter of law and is subject to de novo review. (Zagami v. James A. Chrone, Inc. (2008) 160 Cal. App. 4th 1083, 1092.). Thus, a special verdict was facially insufficient to support a bad faith judgment because it had no finding that the insurer acted unreasonably in failing to accept the claimant's settlement offer. (Pinto, supra, 61 Cal. App. 5th 676; Behr v. Redmond (2011) 193 Cal. App. 4th 517, 531 ("If a fact necessary to support a cause of action is not included in a special verdict, judgment on that cause of action cannot stand.").)
The special verdict in Pinto asked only three questions; (1) Did the claimant make a reasonable offer within policy limits? (2) Did the insurance company fail to accept that offer?, and (3) Did the insured assign the judgment to the third party? Absent from the special verdict was the question whether the insurance company acted unreasonably in failing to accept the settlement offer. (Pinto, supra, 61 Cal. App. 5th 676, 690.)
The third party is entitled to set a reasonable time limit within which the insured must accept the offer. (Martin v. Hartford Accident & Indem. Co. (1964) 228 Cal. 2d 178, 195.) One of the major requirements for a successful time-limited demand is that the time provided for acceptance does not deprive the insurer of an adequate opportunity to investigate and evaluate the insurer's exposure. (Graciano v. Mercury General Corp. (2014) 231 Cal. App. 4th, 414, 425.) Whether the insurer refused the offer and whether it could have acted otherwise in light of the deadline. Mutual Auto. Ins. Co. (1977) 66 Cal. App. 3d 981, 994.) No set time limit - even seven days - may be too short depending on the facts of the case. (Critz v. Farmers Ins. Group (1965) 230 Cal. App. 2d 788, 798.)
In Pinto v. Farmers Ins. Exch. ((2021) 61 Cal. App. 5th 676.), the plaintiff was paralyzed while riding as a passenger in a pickup truck involved in a single vehicle accident. The plaintiff offered to settle his claim against the vehicle's owner in exchange for payment of the owner's insurance policy limit of $50,000. The insurer failed to accept the offer, which then lapsed. At the jury trial, both sides presented evidence concerning the reasonableness of the insurer's conduct in failing to accept the offer. However, the special verdict form asked nothing about the reasonableness of the insurer's conduct and in their verdict the jury made no finding that the insurer had acted unreasonably in any respect. Nevertheless, the jury found for the plaintiff and entered judgment against the insurer solely on the basis of the special verdict in any respect in the amount of $9,935,000.
On appeal, the appellate court reversed the judgment on the basis a bad faith claim requires proof that the insurer acted unreasonably in any respect. Since the jury made no finding that the insurer had acted unreasonably in any respect, the appellate court vacated the judgment and entered a contrary judgment for the insurer. The appellate court stated that the jury had made three findings of fact as to the insurer's conduct: (i) the injured party had made a reasonable settlement demand; (ii) the insurer failed to accept a reasonable settlement demand; and (iii) a monetary judgment had been entered against the insurer in the plaintiff's earlier lawsuit. However, the appellate court noted that the jury had made no finding that the insurer had acted unreasonably in any respect, therefore the plaintiff's action was defeated.
Pre-suit time-limited demands
On Jan. 1, 2023, Code of Civil Procedure (CCP) sections 999 - 999.5 took effect for all pre-suit and pre-arbitration time-limited demands made on or after that date. The stated purpose of these sections is to encourage prompt settlements of civil actions and claims for the benefit of claimants, policy holders, and insurers. (CCP sec. 999, subd. (a).) In fact, they were mainly designed to stop the plaintiffs' lawyer from demanding a policy limits settlement before the insurance companies had sufficient time to thoroughly investigate the cause of the accident and the extent of injuries suffered by the plaintiff. Insurers claimed that the plaintiffs' bar was using early settlement demands to set the insurers up for bad faith suits.
CCP sec. 999, subd. (b) sets forth two definitions:
(1) "Extracontractual damages" means any amount of damages that exceeds the total available limit of liability insurance for all of a liability insurer's liability insurance policies applicable to a claim for property damage, personal injury, bodily injury, or wrongful death. (CCP 999.2 subd. (b)(1).
(2) "Time-limited demand" means an offer prior to the filing of a complaint or demand for arbitration to settle any cause of action or a claim for personal injury, property damage, bodily injury, or wrongful death made by or on behalf of a claimant to a tortfeasor with a liability insurance policy for purposes of settling the claim against the tortfeasor within the insurer's limit of liability insurance, which by its terms must be accepted within a specific period of time. Note that the Act does not apply to claims for all types of injuries. The time-limited demand must be in writing, be labeled as a time-limited demand or reference section CCP 999 - 999.5., and include all material terms under CCP sec. 999.1:
The statute provides a number of steps that must be satisfied to qualify as a pre-suit time-demand which the plaintiff must substantially comply with for the demand to be considered a reasonable settlement offer. Following are the elements that the plaintiff must substantially comply with for a pre-suit time-demand to be valid. Note that the failure to substantially comply with all these procedures will result in the demand not being a reasonable offer.
(a) The demand must be in writing;
(b) The demand must be labeled as a "Time Limit Demand" or a CCP 999 Demand;
(c) The demand must give the insurer at least 30 days from the date of transmission of the demand if transmission is by email, facsimile, certified mail, or personal service, nor not fewer than 33 days if transmission of the demand is by mail;
(d) A clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens;
(e) A copy of the demand letter and supporting documents and evidence must also be sent to the insurer representative handling the claim, if known;
(f) An offer for a complete release from the claimant for the liability insurer's insured from all present and future liability for the occurrence;
(g) The date and location of the loss;
(h) The claim number, if known;
(i) A description of all known injuries sustained by the claimant;
(j) Reasonable proof of liability and damages, which may include photographs, police reports, medical records or bills, proof of lost income or diminished earning capacity sufficient to support the claim.
(k) How long the offer to settle will be open (which must be no less than 30 or 33 days).
The recipient of a time-limited demand may accept the demand by providing written acceptance of all material terms within the designated time. (CCP section 999.3, subd. (a).). If, for any reason, an insurer does not accept a time-limited demand, the insurer must notify the claimant, in writing, of its decision and the basis for its decision. This notification must be sent prior to the expiration of the time-limited demand to reject the offer, including any extension agreed to by the parties, and must be relevant in any lawsuit alleging extracontractual damages against the tortfeasor's liability insurer. (CCP 999.3, subd. (b)).
In any lawsuit filed by a claimant, or a claimant as an assignee of the tortfeasor or by the tortfeasor for the benefit of the claimant, a time-limited demand that does not substantially comply with the terms of this chapter shall not be considered to be a reasonable offer to settle the claims against the tortfeasor for an amount within the insurance policy limits for purposes of any lawsuit alleging extracontractual damages against the tortfeasor's liability insurer. (CCP 999.4, subd. (a).
This section does not apply to a claimant who is not represented by counsel. (CCP 999.4, subd. (b).). If there is any conflict between CCP section 998 and 999, section 998 applies. In the event a court determines that this chapter conflicts with the Civil Discovery Act, the Civil Discovery Act shall prevail. (CCP 999.4, subd. (c).)
Except as provided in this chapter, nothing shall alter existing law, including laws relating to claims, damages, and defenses, that may be asserted in litigation seeking extracontractual damages. (CCP 999.5, subd. (b) This chapter applies to time-limited demands transmitted on or after Jan. 1, 2023
The authors certify that AI was not used in any way in the research and writing of this article.