Revising California’s Jury Instructions on Bad Faith Failure to Settle: Should There Be a Second Reasonableness Inquiry?

October 27, 2016

Insurance LawMy last post examined the lack of clear guidance from the California courts on whether the reasonableness of the insurer’s conduct is a relevant consideration in a bad faith failure to settle case. This post argues that focusing exclusively on the reasonableness of the claimant’s settlement demand effectively makes bad faith failure to settle a strict liability tort in violation of California law. If the insurer can defend only by attacking the reasonableness of the settlement demand after an excess judgment has been entered against the insured, and the jury is allowed to draw an inference about the value of claim from the amount of the excess judgment, liability, if not strict, is virtually inevitable.

Reasonable Rejections of Reasonable Settlement Demands

To use an extreme example raised in the comments about the proposed revisions to CACI No. 2334, an insurer would be liable for failure to accept a reasonable settlement demand in a timely fashion if its adjuster is hit by a bus while in the process of mailing a letter accepting a settlement demand. If the only consideration is the reasonableness of the settlement demand, the insurer could not point to the extenuating circumstances of the bus accident in defending against liability an excess judgment following a reasonable settlement demand. The same reasoning would apply in other situations in which an insurer is unable to fulfill its intent to accept a demand due to unforeseen, extenuating circumstance, i.e., an earthquake shuts down the insured’s office and phone service, or, as in Graciano v. Mercury General Corporation, the insured or the claimant induces the insurer’s rejection of a settlement demand.

Inability to Satisfy Reasonable Settlement Conditions

An insurer’s inability to satisfy reasonable settlement conditions for reasons beyond its control also can provide a defense if the reasonableness of the insurer’s conduct is a relevant inquiry. The instruction now clarifies that a settlement demand other than the amount demanded can render the demand unreasonable. Consequently, unreasonable conditions to settlement, such as a short time limit or an unreasonable restriction on the manner in which the insurer can express acceptance, will render the demand unreasonable, obviating the need to consider the insurer’s reasonableness. But not all settlement conditions are unreasonable. For example, in most policy limits cases, the demand includes settlement conditions that are outside the control of the insurer; e.g., declarations from the insured that (i) he has no assets, (ii) he has no other insurance, and (iii) he was not acting in the course and scope of employment at the time of the accident. These conditions are reasonable, so requiring them does not make a demand unreasonable. However, what if, through no fault of the insurer, the insured refused to provide these declarations. Or what if the insurer could not even reach the insured to tell him about these requirements because the insured went on vacation and did not return until after the demand expired? These are examples of “proper cause” for not accepting the demand. But under CACI 2334 as currently written, the insurer would be liable simply because the reasonable demand was not accepted.

Sometimes insurers fail to comply with reasonable settlement conditions as the result of an innocent mistake. An insurer’s adjuster may make a typographical error in a mailing or e-mail address when trying to convey an acceptance or misinterpret a condition of a settlement demand. Such mistakes arguably are at most negligence, and the California courts have consistently refused to equate an insurer’s negligence with acting without proper cause or bad faith. But if liability turns solely on the reasonableness of the settlement demand, insurers will be liable for merely negligent conduct when they accidently fail to comply with reasonable settlement conditions.

Imposing liability on insurers in these circumstances is liability without fault, something the California courts have rejected. As the Court of Appeal explained in Walbrook Ins. Co. v. Liberty Mut. Ins. Co., 5 Cal.App.4th 1445, 1460 (1992), “so long as insurers are not subject to a strict liability standard, there is still room for an honest, innocent mistake.” Insurers must therefore have opportunity to offer a legitimate excuse for not accepting a reasonable settlement demand.

Titles by John DiMugno