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Significant Bad Faith Damages Imposed, Where Other Insurers Defended, There Was No Settlement Demand Within Non-Defending Insurer's Limits, and the Compensatory Damages Did Not Exceed Total Limits


The California Court of Appeal in Howard v. American National Fire Ins. Co., 2010 WL 3156851 (August 11, 2010) struck down important insurer defenses in a liability coverage case and affirmed bad faith damages against a non-defending insurer.


In 1993, a Catholic priest, Father Oliver O’Grady, was criminally convicted of having molested James and Joh Howard when they were children. James and Joh sued O’Grady. They also sued the Roman Catholic Bishop of Stockton for negligent supervision of O’Grady from 1977 through 1991.

The Bishop was defended by two of its liability insurers. The third, American National Fire Insurance Company, declined the Bishop’s tender on the ground that the molestation did not take place during its 1978-1979 policy period. Although James alleged in the complaint that the molestation as to him began “in approximately 1979,” American relied on his subsequent deposition testimony that his first specific memory of molestation was in 1984. (Joh alleged that O’Grady did not begin molesting him until 1984, and he did not contend that coverage was afforded as to his claim under the American policy.)

Before trial, the Bishop’s insurers were presented with a settlement demand of $1.85 million for both James and Joh. American made no offer to contribute. At trial, the jury awarded James and Joh each $3 million in compensatory damages and $12 million in punitive damages. The trial court reduced the judgment for James to $2.5 million in compensatory damages and $3 million in punitive damages. A similar judgment was entered for Joh.

The Bishop had difficulty providing collateral for an appeal bond and paid $1 million toward satisfaction of the judgment. Fearing that the diocese assets were at risk, the Bishop negotiated a settlement, with two insurers paying their remaining policy limits. The Bishop agreed to prosecute litigation against American and pay the proceeds to James and Joh. The participating insurers also assigned their contribution rights to James and Joh.

In the coverage and bad faith suits filed by James, Joh and the Bishop, the trial court found that James was molested during American’s policy period and awarded damages against American totaling $3 million, consisting of its $500,000 policy limit, $1.5 million in bad faith damages and attorneys’ fees. Both sides appealed.

The Court of Appeal substantially affirmed the lower court’s ruling and rejected commonly recognized defenses to insurance breach of contract, breach of the duty to settle and bad faith.

Breach of Duty to Defend

The Court pointed to the complaint’s allegation and James’ deposition testimony that O’Grady molested James in the 1970’s and concluded that American owed a duty to defend the Bishop. The Court rejected American’s reliance upon a single statement by James of a specific memory of molestation in 1984 as negating any possibility of molestation earlier, during the policy period. The Court noted that “[i]f coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend."

American argued that it could not be liable for breach of contract because the Bishop was defended by other insurers and thus suffered no damages. The Court acknowledged California law to that effect but stated that, “[i]n cases in which the insured faces potential liability beyond the policy limits of the defending insurer’s policy, courts have concluded that an insured can demonstrate that he has suffered damages from an insurer’s breach of the duty to defend, apart from defense costs, in the form of exposure to personal liability.”

The Court held that American breached its duty to defend and could not avail itself of the oft-cited proposition that liability is foreclosed by another insurer’s decision to defend.

Breach of Duty to Indemnify and Settle

Citing evidence in the bad faith litigation that James told the police and church officials in 1993 that O’Grady began molesting him when he was four years old (in 1979, during the American policy period) and that O’Grady testified that he had sexual contact with James in the 1970’s, the Court held that American had a duty to indemnify.

American asserted it could not have breached any duty to settle because there was no settlement demand within its $500,000 policy limit. The Court acknowledged that, in cases involving only one insurer, the insurer could not be said to have breached the duty to settle if it never had an opportunity to settle within its limits."

However, in a multiple-insurer setting, the Court stated that each insurer “must conduct itself as though it alone were liable for the entire amount of the judgment” and evaluate whether the judgment is likely to exceed the settlement demand (not the policy limits). The Court added that “each insurer’s obligation is to cover the full extent of the insured’s liability up to policy limits.” 

American pointed out that the Bishop’s defense counsel did not opine that potential liability would reach or exceed the $1.85 million amount of the demand. The Court, instead citing evidence of verdict ranges of $150,000 to $10 million for priest molestation cases, concluded the $1.85 million settlement demand was reasonable. 

American also asserted that the Bishop was never exposed to liability in excess of the aggregate of all the policies’ limits and thus was not harmed by American’s failure to settle. The $2.5 million compensatory damage award to James was less than the $4.3 million total limits of all the policies.

The Court stated that, while an excess judgment is the most common way to establish a breach of the duty to settle, an insured may recover “where the insurer’s misconduct goes beyond a simple failure to settle within policy limits or the insured suffers consequential damages apart from an excess judgment.” Noting that the $1.85 million settlement demand was within the collective policy limits of the Bishop’s several insurers, the Court stated that American’s failure to tender its policy limits was a breach of its duty to settle, because such tender might have resulted in a settlement had the Bishop’s other insurers also tendered their limits.

According to the Court, damages were shown by evidence that the Bishop was exposed to “dire financial circumstances” as a result of American’s failure to defend, indemnify and settle James’ claim. Also cited was evidence that even the defending insurers refused to settle or indemnify the judgment, and as a result, the Bishop was forced to reach, and partially fund, his own post-judgment settlement.

Bad Faith

American argued it might have acted mistakenly or with bad judgment, but not unreasonably, such that it was not liable for bad faith. Invoking the “genuine dispute” doctrine, American argued that its decisions were prompted by a legitimate dispute as to whether the alleged molestation of James took place during the American policy period.

The Court noted that, “it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement.” Not deciding whether the doctrine applied, the Court stated that American’s refusal to settle could not be the result of a reasonable dispute in any event, stating that “American’s no-coverage position was founded on an unfair and selective reading of James Howard’s deposition testimony that distorted James’s account of specific episodes of molestation into an admission that no molestation occurred during the policy period, and the insurer’s refusal to settle ignored powerful indications that a multimillion-dollar judgment was likely.” According to the Court, American’s reliance on James’ testimony at trial that his “first memory” of molestation took place in 1980 (after American’s policy expired) in refusing to indemnify the Bishop was not reasonable because “the trial testimony was far too uncertain.”

As for the duty to indemnify, the Court acknowledged that although the “genuine dispute” doctrine “may negate bad faith” in that context, it applied only where the insurer based its position on reasonable grounds.


The Court imposed every type of bad faith damages against American: (1) the entire amount paid by the Bishop to settle with James, rejecting American’s argument that some of the settlement was in payment of non-covered punitive damages; (2) the $500,000 policy limit “due” to James on the underlying judgment as part of American’s duty to indemnify, notwithstanding other insurers’ indemnity payments; (3) Brandt fees, calculated by a percentage of the total fees incurred to recover policy benefits multiplied by the 50% contingent fee percentage multiplied by all damages; (4) prejudgment interest; and (5) certain litigation costs.


The Howard decision is a striking illustration of how “bad” facts could result in very adverse law for insurers. The Court viewed the somewhat conflicting or uncertain testimony as to when events took place, decades ago, as establishing not only the duty to defend but also the duty to indemnify (i.e., actual coverage). Because of American’s “selective” reading of the testimony, the Court found that the insurer acted in bad faith in failing to settle and indemnify the judgment, rejecting application of the “genuine dispute” doctrine in both contexts. Significantly, the Court rejected defenses commonly thought available in situations involving multiple insurers, particularly where other insurers are defending. The Court imposed bad faith damages on American for failing to offer its full limits, even where the settlement demand exceeded its policy limit and where participating insurers also failed to offer their limits. Arguably, American did not “cause,” at least on its own, those “failure to settle” damages. This decision is a stern warning to insurers that every fact situation must be examined carefully and that automatic reliance on “standard” defenses can risk significant exposure.

This decision is not yet final. We will monitor its status with interest.

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