California Law Imposes On Insurance Companies A Duty To Settle Anytime There Is A Risk Of A Verdict In Excess Of Policy Limits

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When a person is sued, they may have liability insurance that covers them by providing a defense and policy funds to settle the lawsuit. Often there may be an opportunity to settle the case but the insurance company unreasonably refuses to do so. This can lead to a verdict against the insured above the policy limits, or other damages from a delayed settlement.  An insurance company’s unreasonable refusal to settle, which damages the policyholder, can give rise to a bad faith case, including the amount of the judgment above policy limits.

Liability insurance usually “imposes two separate obligations on the insurer,” to defend the insured and indemnify the insured against covered claims.  (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 519.)  The duty to defend is well known to be broader than the duty to indemnify. It encompasses any claim which “potentially seeks damages within the coverage of the policy.”  (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 275.)

The duty to defend provides context for the duty to settle. This is because an insurer’s duty to settle exists before judgment and factual findings on claims, which are necessary to ultimately determine insurance coverage. Thus, an insurer must discharge its duty to settle often without the benefit of facts necessary to know whether or not there is actual coverage.

Under California law, an insurance company has a duty “to make reasonable efforts” to settle lawsuits against its insured.  (PPG Industries, Inc. v. TransAmerica Ins. Co.(1999) 20 Cal.4th 310, 312.)  California law imposes a duty to settle “to protect the insured from exposure to liability in excess of coverage.”  (Murphy v. Allstate Ins. Co.(1976) 17 Cal.3d 937, 941.)  This is necessary so the insured does not suffer “as a result of the insurer’s gamble” not to  accept a reasonable settlement, a gamble “on which only the insured might lose.”  (Id.)  Thus, the insurance company’s duty to settle protects the insured by imposing on the insurance company the risk of a judgment above policy limits where a reasonable settlement offer is rejected.

The only permissible consideration” with respect to the duty to settle is “whether . . . the ultimate judgment is likely to exceed the amount of the settlement offer.”  (Johansen v. California State Auto Ass’n Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16.)  An insurance company’s “belief that the policy does not provide coverage” is not a basis to refuse a reasonable settlement offer. (Howard, supra, 187 Cal.App.4th at 525.)

The duty to settle extends beyond the coverage terms of the policy.  The California Supreme Court has held that the insurance company has a duty “to settle in an appropriate case although the express terms of the policy do not impose such a duty.”  (Comunale v. Traders & General Insurance Co. (1958) 50 Cal.2d 645.)  It is not reasonable or good faith conduct for an insurance company to refuse to settle based on a “no coverage position.”  (Howard, supra, 187 Cal.App.4th at 531.)

Policyholders who have been sued and have an opportunity to settle the case within policy limits, but the insurance company refuses, should consider seeking independent legal advise. A settlement may be in the insured’s best interests, and an unreasonable refusal to settle by the insurance company may give rise to bad faith liability.