Insurer That Breaches Duty To Defend Is Not Liable For Bad Faith Failure To Settle Unless Insured Shows Insurer Owed Indemnity

Insurer That Breaches Duty To Defend Is Not Liable For Bad Faith Failure To Settle Unless Insured Shows Insurer Owed Indemnity

05.08.2012

The California Court of Appeal held in DeWitt v. Monterey Insurance Co., 204 Cal.App.4th 233 (3/13/2012) that an insurer that refuses to defend can be held liable for bad faith failure to accept a reasonable settlement offer only if the insured establishes that the insurer owed a duty to indemnify.

The insured sued the insurer for refusing to defend and indemnify the insured in an underlying personal injury action.  Before trial in the coverage action, the trial court granted summary adjudication in favor of the insured, finding that the insurer breached its duty to defend.

At trial, the insured presented evidence to show that the insurer had breached the covenant of good faith and fair dealing by, among other things, unreasonably refusing to defend him, failing to accept reasonable settlement offers, and failing to timely pay policy benefits. However, the insured elected to abandon its breach of contract claim at trial and did not seek a determination as to whether the insurer owed a duty to indemnify.

Although the trial court instructed the jury on several theories of bad faith liability,the trial court denied the insured’s request for jury instructions on bad faith failure to settle because the insured failed to proffer evidence establishing that the insurer owed a duty to indemnify. The jury returned a special verdict finding that the insurer was not liable for bad faith and the trial court entered judgment in favor of the insurer on the jury verdict. The insured appealed.

The California Court of Appeal, Fourth District, affirmed, rejecting the insured's argument that the trial court erroneously refused his request for a jury instruction for bad faith failure to settle. The Court reasoned that an "insurer has a duty to accept a reasonable settlement offer only with respect to a covered claim." As a result, the Court determined that an insured can prevail on a bad faith claim based on an unreasonable refusal to settle if the insured establishes there was actual coverage for the underlying action. In order to make such a showing, the insured must present evidence establishing either (1) that the insurer assumed the insured's defense without a reservation of its rights to contest coverage; or (2) that the insurer owed a duty to indemnify. The Court concluded that the insured had failed to make the requisite showing because he "failed to present substantial evidence that [the insurer] assumed the duty to defend him, and also failed to either demonstrate that the issue of indemnity had been determined in his favor in a prior proceeding, or request that the jury make such a determination in this action."

There has been an ongoing debate in California as to whether an insurer's duty to defend encompasses an implied duty to accept reasonable settlement offers. Although the facts of DeWitt are unique, this case suggests that insurers that defend under a reservation of rights or refuse to defend can be held liable for bad faith failure to settle only if there is actual coverage for the underlying action and the insurer owes a duty to indemnify.

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