Source: http://dutytodefend.com/duty-to-settle-2/
Timestamp: 2019-04-22 08:35:27+00:00

Document:
An insurer’s duty to settle is well recognized in California law. The duty to settle arises from the implied covenant of good faith and fair dealing, not from an express contractual promise to settle. An insurer that refuses to settle because it believes that it has no coverage does to at its own risk. Even a reasonable believe that an insurer has no coverage provides no defense to bad faith liability for a failure to settle. However, an insure that declines a settlement offer on the perceived merits of the claim is subject to the prudent insurer standard.
The insurer has an affirmative obligation to investigate the merits of a claim, evaluate whether the policyholder may be exposed to excess liability and advise the policyholder.
A typical liability insurance policy makes no express contractual promise to settle. Accordingly, insurers usually have only the discretionary right, but no express contractual obligation to settle.
California courts have identified several required prerequisites of a proper policy limit offer to settle.
“An insured’s claim for ‘wrongful refusal to settle’ cannot be based on his or her insurer’s failure to initiate settlement overtures with the injured third party, but instead requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. We conclude there is no substantial evidence [the underlying plaintiff] ever offered to settle her claims against [the policyholder] for an amount within [the policyholder]’s policy limits.
“An insurer who denies coverage does so at its own risk. [A]n insurer’s ‘good faith,’ though erroneous, belief in noncoverage affords no defense. Such factors as a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.” Thus, if an insurer refuses to settle because it prudently believed that the offer was not reasonable and because it denies coverage, the at-your-own-risk standard should by applied.
An insurer which rejects a reasonable policy limits offer on the ground of no coverage, does so “at its own risk.” If coverage is ultimately found to exist, it will be liable for the full amount of any ensuing judgment whether its decision to refuse to settle was objectively “reasonable” or not. Thus, as a rule, an insurer which fails to settle within policy limits because it denies coverage may prevail in a subsequent bad faith suit only be establishing that it does not in fact have any coverage.
An alternative to the “at its own risk” standard is the “prudent insurer” standard. If an insurer fails to settle on the ground that the offer is not reasonable, the insurer which fails to settle may defend a subsequent bad faith case hoping to convince a jury that it acted as a “prudent insurer” should have acted in refusing to settle. However, most reported opinions come very close to imposing an “absolute” obligation to accept a reasonable settlement offer.
In one reported opinion, the Court of Appeal rejected numerous mitigation arguments by an insurer that refused to settle, including the following: 1) Having refused to settle on the ground of no coverage, the insurer was not allowed to defend itself against its failure to settle on the ground that the settlement offer was not reasonable; 2) A judgment in excess of policy limits alone justifies a conclusion that the value of the claim is the amount of the judgment; 3) Even absent an excess judgment, an insurer may be liable for other consequential damages caused by its failure to settle.
Because there are two standards governing an insurer bad faith liability, it is important for both the plaintiff and defendant to elicit information from the insurer(s) why it may not settle.
 Ins. Code § 790.03(h)(5)(12)(13) (ellipses omitted) (http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ins&group=00001-01000&file=790-790.15).
 Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 425 (Graciano).
 Id. at 425-26 quoting Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433 (Crisci).
 Walbrook Ins. Co. Ltd. v. Liberty Mut. Ins. Co. (1992) 5 Cal.App.4th 1445, 1460.
 California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 57; see also, Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1003; Graciano, supra, 231 Cal.App.4th at 431.
 Graciano, supra, 231 Cal.App.4th at 425, fn.9 (citation and quotation marks omitted).
 Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-16 (Johansen) (citations and ellipses omitted).
 Howard vs. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 529 (Howard) (citations omitted).
 “In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer.” (Crisci, supra, 66 Cal.2d at 429.
 Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 689.
 Allen v. Allstate Ins. Co. (9th Cir. 1981) 656 F.2d 487, 489 (applying Calif. law).
 Howard, supra, 187 Cal.App.4th at 525-28 (citations, quotation marks and ellipses omitted).
 Kinder v. Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 901.
 Davy v. Public National Ins. Co. (1960) 181 Cal.App.2d 387, 396; see also, Ivy v. Pacific Automobile Ins. Co. (1958) 156 Cal. App.2d 652, 660.
 Martin v. Hartford Accident & Indem. Co. (1964) 228 Cal.App.2d 178, 183-4.
 Howard, supra, 187 Cal.App.4th at 527 (ellipses omitted); see also, Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2014) ¶¶ 12:391 to 12:391.2; Camelot by the Bay Condominium Owners’ Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 48; Larraburu Brothers, Inc. v. Royal Indemnity Co. (9th Cir. 1979) 604 F.2d 1208, 1214; J.B. Aguerre, Inc. v. American Guar. & Liab. Ins. Co. (1997) 59 Cal.App.4th 6, 13-14 (Aguerre); Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1478-1479; Barney v. Aetna Casualty & Surety Co. (1986) 185 Cal.App.3d 966, 978.
 Aguerre, supra, 59 Cal.App.4th at 15.

References: § 790
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