Can a Settlement Demand Above Policy Limits Fall within Limits? A Calif. Appellate Court Says Yes

Michael Melendez and Rebeka Shapiro | Cozen O’Connor

California law generally requires that an insurer reject a reasonable settlement demand within the policy limits before it can be liable for a bad faith failure to settle. See Samson v. Transamerica Ins. Co., 30 Cal.3d 220, 237 (1981). But a recent California Court of Appeal (4th Dist.) decision held that a pre-litigation demand exceeding the policy limits could — under the right circumstances — provide the factual basis to assert that an insurer missed the opportunity to settle. Planet Bingo LLC v. Burlington Ins. Co., E074759, 2021 WL 1034830 (Cal. Ct. App. Mar. 18, 2021).

Burlington Insurance Company’s insured, Planet Bingo LLC, designed and supplied electronic gaming devices. In 2008, a fire broke out in a bingo hall in the United Kingdom owned and operated by Beacon Bingo. Security camera footage showed that the fire originated in or very near the racks where Planet Bingo’s devices were stored. Beacon notified Burlington that Beacon’s estimated losses totaled $2.6 million.

Beacon and Burlington conducted lengthy investigations regarding the claim. Because Beacon did not provide information to Burlington, Burlington hired its own investigator. In 2010, Burlington’s investigator concluded that one of Planet Bingo’s devices was the most likely cause of the fire. Nevertheless, in September 2010, Burlington concluded that Planet Bingo was not liable; that there were “coverage issues” relating to the claim; and that neither the distributor of Planet Bingo’s devices, Leisure Electronics Ltd., nor Leisure’s insurer seemed to be pursuing the claim.

During the ensuing nine months, Burlington conducted little further investigation. Planet Bingo complained to Burlington that it was losing business because the unpaid claim was damaging its reputation. In 2011, Burlington informed Planet Bingo that because no one appeared to be pursuing Planet Bingo for the damages, Burlington was closing its file.

Three years later, Leisure’s insurer, AIG Europe Ltd., wrote to Planet Bingo advising that Leisure settled with Beacon for approximately $2.6 million. AIG demanded that amount from Planet Bingo, but stated that it would be willing to engage in alternative dispute resolution: “We are instructed to recover our client’s outlay …. With the objective of avoiding the costs of litigation, our client is prepared to enter into alternative forms of dispute resolution. … [T]he options available … are discussions and negotiations or mediation. Please confirm which option you agree to.” (Ellipses in original.)

The court noted that AIG’s $2.6 million demand was more than twice the Burlington policy’s limits. But Planet Bingo’s expert testified that Burlington should have considered the larger context. Namely, that such an excess demand in the subrogation context actually was an invitation to settle at policy limits. Specifically, that there was an “industry custom in such subrogation claims for accepting policy limits for a full release [o]f the insured.”

Burlington did not read between the lines of AIG’s demand. Instead, Burlington denied coverage on the grounds that the claim arose outside the coverage territory and no suit had been filed in the United States or Canada, as required for Burlington to have a duty to defend. Subsequently, AIG filed suit in California, and Burlington defended its insured. Nine months into the suit, Burlington settled for the policy limits.

After the settlement, Planet Bingo sued Burlington, claiming that Burlington’s failure to settle earlier harmed Planet Bingo. Burlington prevailed on summary judgment based on the argument that because a demand was never made at or below the policy limits, it did not have the opportunity to settle within the policy limits. (Burlington did not address the lack of an excess judgment against the insured.) The question before the appellate court was whether Planet Bingo could make a prima facia case against Burlington when Burlington did not receive a formal demand within the policy limits.

Burlington argued that the lack of such a demand was dispositive, citing Howard v. American National Fire Ins. Co., 187 Cal. App. 4th 498, 525 (2010) (“the opportunity to settle is typically shown by proof that the injured party made a reasonable settlement offer within the policy limits and the insurer rejected it”). But the court ruled that this was not the typical case. It relied heavily on Boicourt v. Amex Assurance Co., 78 Cal. App. 4th 1390 (2000). There, the claimant asked the insurer to disclose the policy limits prior to filing any suit. The Boicourt court held that the pre-suit request to disclose available coverage limits signaled a willingness to settle for the limits, and that an insurer could be liable for failing to act on the opportunity.

The Planet Bingo court ruled “that the existence of an opportunity to settle can be shown by evidence other than a formal settlement offer.” Planet Bingo’s expert testified that AIG’s excess demand to settle its subrogation claim actually signaled a willingness to settle for the limits. The court ruled that this testimony created a triable issue of material fact as to whether Planet Bingo had an earlier opportunity to settle the case within limits.

The takeaway from this decision is that where a settlement demand above limits is made on an insured, a liability insurer cannot merely assume that the demand is not an opportunity to settle within the policy limits. Especially in circumstances where the insured’s liability could exceed the policy limits, the insurer should explore whether the party making the demand is actually seeking to settle within the limits.

“Specific” Means “Specific” – Florida’s Bad Faith Statute Must Be Strictly Construed

Jeffrey Michael Cohen | PropertyCasualtyFocus

The purpose of Florida’s “bad faith” statute is to “avoid unnecessary bad faith litigation.” To that end, the statute provides a civil remedy for any person damaged by an insurer’s conduct. However, as a condition precedent to filing suit, the policyholder must provide appropriate information to the Department of Insurance and the insurer by filing and serving a civil remedy notice (CRN). The CRN must specify the policyholder’s complaint and provide the insurer with a 60-day period to “cure” the alleged deficiency. If the insurer corrects the policyholder’s complaint within the 60-day period, no statutory bad faith lawsuit may be pursued. Florida’s common law does not recognize actions for first-party bad faith. Therefore, absent compliance with the statute, a policyholder may not pursue a first-party bad faith lawsuit.

In Julien v. United Property & Casualty Insurance Co., the court, on motion for rehearing, emphasized well-recognized precedent, i.e., “[b]ecause the statute is in derogation of the common law, we strictly construe the statutory requirements.”

In Julien, the policyholder claimed that a fire damaged his home. He filed a CRN alleging claim delay, an unsatisfactory settlement offer, unfair trade practice, failure to properly investigate the claim, and failure to acknowledge and act promptly to communications regarding the claim. The insurer timely responded to the CRN and denied Julien’s contentions. Julien filed suit, and the insurer moved to dismiss with prejudice because the CRN was facially invalid and, therefore, Julien could not state a cause of action for statutory bad faith.

The trial court granted the motion because the CRN did not comply with the statutory mandate to “state with specificity” five expressly enumerated pieces of information:

  1. The statutory provision, including the specific language of the statute, which the insurer allegedly violated.
  2. The facts and circumstances giving rise to the violation.
  3. The name of any individual involved in the violation.
  4. Reference to the specific policy language that is relevant to the violation.
  5. A statement that the notice is given in order to perfect the right to pursue the statutory remedy.

It seems that Julien, perhaps from a concern that one of his complaints would be omitted, “listed every statutory provision and every policy provision available to him as the insured.” He included 14 statutory provisions, followed by 21 sections of the Florida Administrative Code, and referenced “the entire policy.” The dismissal was affirmed by the appellate court, which held that “Julien did not substantially comply with the specificity standard and this was more than a mere technical defect.”

Julien moved for rehearing, rehearing en banc, and certification of a question of great public importance, arguing that in Pin-Pon Corp. v. Landmark American Insurance Co., No. 2:20-cv-14013, 2020 WL 6588379 (S.D. Fla. Nov. 10, 2020), Judge Middlebrooks granted rehearing and withdrew dismissal of a bad faith claim based on deficiencies in the CRN. Judge Middlebrooks had held that the statute’s specificity standard will not bar a statutory bad faith action where the defect in the CRN information was “purely technical,” the policyholder “substantially complied” with the specificity standard, the insurer received “fair notice” of the policyholder’s claim, and the insurer was “not prejudiced.”

As a result of Judge Middlebrooks’ intervening order, the Fourth District Court of Appeal withdrew its first opinion to “avoid confusion,” but it did not change its conclusion that Julien’s CRN was fatally defective. The court held that it was bound to strictly construe the bad faith statute because it was in derogation of common law, that Julien had not substantially complied with the specificity standard of the statute, and that Julien’s reference to substantially all policy sections and the 35 statutory provisions was more than a technical violation of the statute. In short, the policyholder’s contention that the insurer breached the entire policy and all of Florida’s bad faith laws did not meet the statute’s specificity requirement.

An Insurer Is Not Subject to Strict Liability for the Failure to Accept a Reasonable Settlement

Kathryn Ashton | Clyde & Co.

In March 2021, an appellate court decision clarified what the law has always been in California; that to find an insurer liable for bad faith, the insured (or its assignee or a judgment creditor) must plead and prove the insurer acted unreasonably or without proper cause.

California’s standardized jury instruction pertaining to a cause of action against an insurer for an alleged failure to accept a reasonable settlement demand within the limits of the policy, CACI 2334,[1] states that a plaintiff must prove three elements: (1) that the claimant in the underlying action brought a lawsuit against the insured for a claim that was covered by the policy; (2) that the insurer failed to accept a reasonable settlement demand for an amount within the policy limits; and (3) that a monetary judgment was entered against the insured for a sum greater than the policy limits. While CACI 2334 includes instructions to the jury on the meaning of “policy limits” and a means for evaluating whether the settlement demand was “reasonable,” CACI 2334 did not include, as an element of the plaintiff’s burden of proof, a requirement that the plaintiff prove that in rejecting the settlement demand the insurer acted unreasonably or without proper cause. Under California law, such element is necessary to establish breach of the implied covenant of good faith and fair dealing.

Based on CACI 2334, policyholder counsel often assert the position that a denial of a reasonable settlement offer, within limits, constitutes bad faith per se, a strict liability standard. This left insurers, in some coverage actions, arguing to the court that the standardized jury instruction must be modified to require the jury to also find that, in rejecting the settlement demand, the insurer acted unreasonably or without proper cause, as required under the applicable legal precedent.[2]

This tension between the law and the instruction is noted in the “Directions for Use” accompanying CACI 2334:

Under this instruction, if the jury finds that the policy-limits demand was reasonable, then the insurer is automatically liable for the entire excess judgment. Language from the California Supreme Court supports this view of what might be called insurer “strict liability” if the demand is reasonable. (See Johansen v. California State Auto. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123 Cal.Rptr. 288, 538 P.2d 744] [“[W]henever it is likely that the judgment against the insured will exceed policy limits ‘so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer to settle the claim,’” italics added].)

However, there is language in numerous cases, including several from the California Supreme Court, that would require the plaintiff to also prove that the insurer’s rejection of the demand was “unreasonable.” [Citations omitted] Under this view, even if the policy-limits demand was reasonable, the insurer may assert that it had a legitimate reason for rejecting it. However, this option, if it exists, is not available in a denial of coverage case. (Johansen, supra, 15 Cal.3d at pp. 15−16.)

None of these cases, however, neither those seemingly creating strict liability nor those seemingly providing an opportunity for the insurer to assert that its rejection was reasonable, actually discuss, analyze, and apply this standard to reach a result. All are determined on other issues, leaving the pertinent language as arguably dicta.

For this reason, the committee has elected not to change the elements of the instruction at this time. Hopefully, someday there will be a definitive resolution from the courts. Until then, the need for an additional element requiring the insurer’s rejection of the demand to have been unreasonable is a plausible, but unsettled, requirement….

In Pinto v. Farmers Ins. Exch., Case No. B295742 2DCA1 (Mar. 8, 2021),[3] Division 1 of the Second District Court of Appeal squarely addressed the issue and rejected the notion that an insurer’s failure to accept a reasonable settlement offer by a claimant is unreasonable per se.

In Pinto, a demand was made upon the insurer, within the $50,000 limits, to settle a catastrophic vehicle accident involving multiple individuals. The demand afforded the insurer a short period of time to respond (8 workdays). The demand also did not specify that in exchange for the policy limits, the claimant would release all individuals potentially covered by the policy.

For a variety of reasons, the demand was not accepted “unconditionally” by the insurer. The claimant, after rejecting the insurer’s own policy limits offer, initiated litigation against the insureds and obtained a $10 million settlement from the insureds and an assignment of the insureds’ rights against the insurer in exchange for a covenant not to execute the judgment against the insureds personally. A coverage action was then pursed against the insurer, which resulted in a special verdict in favor of the claimant. The jury was not asked on the verdict form to find, and therefore made no finding, that the insurer acted unreasonably. After rejecting the insurer’s post-trial challenges, the court entered a judgment for almost $10 million against the insurer, which was then appealed.

Citing a litany of California Supreme Court and appellate decisions, the Court of Appeal held, in reversing the judgment, that bad faith liability against an insurer requires a finding that the insurer acted unreasonably: “To hold an insurer liable for bad faith in failing to settle a third party claim, the evidence must establish that the failure to settle was unreasonable.” See Slip Op., at 11. “An insurer’s duty to accept a reasonable settlement offer is not absolute.” Id. “Therefore, failing to accept a reasonable settlement offer does not necessarily constitute bad faith. ‘[T]he crucial issue is … the basis for the insurer’s decision to reject an offer of settlement.’” Id. at 12, citing Walbrook Ins. Co. v. Liberty Mut. Ins. Co., 5 Cal.App.4th 1445, 1460 (1992). “A claim for bad faith based on the wrongful refusal to settle thus requires proof the insurer unreasonably failed to accept an offer.” Slip Op., at 12.

In examining the jury’s findings on the special verdict form, the Court of Appeal held that the form was “facially insufficient to support a bad faith judgment because it included no finding that [the insurer] acted unreasonably in failing to accept [the claimant’s] settlement offer.” Slip Op. at 14. The court noted that the special verdict form was patterned on CACI 2334, but that such instruction did not include whether the insurer’s failure to settle was unreasonable. “Although CACI No. 2334 describes three elements necessary for bad faith liability, it lacks a crucial element: Bad faith.” Slip Op. at 18. “To be liable for bad faith, an insurer must not only cause the insured’s damages, it must act or fail to act without proper cause, for example by placing its own interests above those of its insured.” Id. Because that necessary element was missing, the Court of Appeal found the judgment defective, reversed it, and ordered the trial court on remand to enter a new judgment in favor of the insurer.

The Pinto decision clarifies what the law has always been in California; that to find an insurer liable for bad faith, the insured (or its assignee or a judgment creditor) must plead and prove the insurer acted unreasonably or without proper cause. The case law on the issue has not imposed a strict liability standard upon an insurer for failure to accept a reasonable settlement offer within limits. While CACI 2334 appeared to indicate otherwise, the source authorities upon which the instruction is based demonstrates that bad faith requires a finding that the insurer’s conduct was unreasonable.

As the California Supreme Court cautioned: “[J]ury instructions, whether published or not, are not themselves the law, and are not authority to establish legal propositions or precedent.” People v. Morales, supra, at 48 fn. 7. In reiterating the necessity of this additional element, the Pinto court squarely stated that an insured must prove that the insurer’s conduct concerning the settlement demand was unreasonable. In flatly rejecting the application of a strict liability standard, the Pinto decision provides the guidance that the CACI committee solicited from the courts in its “Directions for Use” commentary.

The Pinto decision is available at the California Courts website.

Keeping the Cap On the Policy: Unreasonable Conduct Is a Necessary Element of a “Bad Faith Failure to Settle” Claim

Jared K. LeBeau | Sheppard Mullin

Pinto v. Farmers Ins. Exch., ___ Cal. App. 5th ___ (2021)

Over the past several years, the insurance industry in California has been plagued by waves of “bad faith failure to settle” claims. These claims arise out of a variety of circumstances and can take many forms, but at their core involve the following: an insured injures a third party; that third party then offers to settle his/her claim for the policy limits; but the insurer, for one reason or another, fails to accept that settlement demand. Once that happens, the third party claimant then takes the position that the “cap is off” the policy such that the insurer should be responsible for paying the full amount of any judgment the claimant obtains against the insured, even if it exceeds the policy limits.

The Judicial Council of California Civil Jury Instruction on “bad faith failure to settle” claims – CACI 2334 – has been the subject of controversy over whether it accurately states the elements of such a claim. California courts have consistently held that to establish “bad faith,” a plaintiff must show that the insurer acted unreasonably. Despite that, as currently drafted, CACI 2334 only requires proof that the insurance company “failed to accept a reasonable settlement demand for an amount within the policy limits.” In essence, this imposes strict liability on an insurer for failing to accept a reasonable settlement demand even if the insurer otherwise acted reasonably.

Earlier this week, in Pinto v. Farmers Insurance Exchange, the California Court of Appeal confirmed that CACI 2334 is deficient for this very reason. There, the third-party claimant (Alexander Pinto) suffered catastrophic injuries in an automobile accident while he was a passenger in a pickup truck that was negligently driven by either Dana Orcutt or Alaxandrea Martin. The pickup truck was insured by Farmers under a policy with a $50,000 per person liability limit, which covered Martin and any permissive driver (e.g., Orcutt).

Pinto’s attorney sent Farmers a demand to settle Pinto’s injury claims for the $50,000 policy limit. The demand required the “insured” to provide a declaration confirming that there was no other applicable insurance and that the insured was not acting within the course and scope of employment at the time of the accident.

Because Farmers was unsure of which of its two insureds (Orcutt or Martin) was driving the vehicle, it endeavored to obtain declarations from each of them. However, despite diligent efforts, it was unable to obtain a declaration from Orcutt. Farmers, therefore, made several attempts to obtain an extension of the demand’s deadline, but its efforts were ignored by Pinto’s attorney. Before the deadline expired, Farmers hand-delivered an acceptance letter and a $50,000 check to Pinto’s lawyer. Farmers also provided a declaration from Martin only, because it had been unable to obtain one from Orcutt. Pinto’s attorney responded that Farmers had failed to “unconditionally accept [Pinto’s] generous offer to settle his case” because Farmers failed to provide Orcutt’s declaration. Pinto then sued Orcutt and Martin, and the parties stipulated a $10 million judgment for which the defendants were jointly and severally liable. After obtaining an assignment from Orcutt and Martin, Pinto then sued Farmers for “bad faith failure to settle.”

At the conclusion of the bad faith trial, the jury made three findings as to Farmers’ conduct toward Martin: (1) Pinto made a reasonable settlement demand; (2) Farmers “fail[ed] to accept a reasonable settlement demand”; and (3) a monetary judgment had been entered against Martin in Pinto’s earlier lawsuit. The jury made those same findings as to Farmers’ conduct toward Orcutt, plus three more: (4) Orcutt failed to cooperate with Farmers; (5) Farmers “use[d] reasonable efforts to obtain Orcutt’s cooperation”; and (6) Orcutt’s lack of cooperation prejudiced Farmers. Farmers argued that, regardless of the reasonableness of the settlement demand, because the jury made no findings that Farmers acted unreasonably in any respect, it was entitled to have judgment entered in its favor. The trial judge rejected Farmers’ argument and entered judgment for Pinto for $9,935,000.

The Court of Appeal reversed and ordered that judgment be entered in favor of Farmers. The court held that even if Pinto’s policy limit demand was reasonable, Farmers could not be held liable for rejecting it unless its decision to reject was itself unreasonable: “A claim for bad faith based on a refusal to settle [] requires proof the insurer unreasonably failed to accept an offer. [cites] Simply failing to settle does not meet that standard. A facially reasonable demand might go unaccepted due to no fault of the insurer.” Because the jury did not find that Farmers acted unreasonably, the court reasoned, Farmers was entitled to a judgment in its favor.

In so ruling, the court specifically addressed CACI 2334, which it found to be deficient because the instruction does not include the “crucial element” of bad faith liability – unreasonable conduct by the insurer: “Although CACI No. 2334 describes three elements necessary for bad faith liability, it lacks the crucial element: Bad faith.”

The court also made clear that honest mistakes or mere errors do not constitute unreasonable conduct. Instead, the court stated that “[t]o be liable for bad faith, an insurer must not only cause the insured’s damages, it must act or fail to act without proper cause, for example by placing its own interests above those of its insured.”

It is unclear whether the Judicial Council will amend CACI 2334 in light of Pinto. What is clear is that “bad faith failure to settle” claims – like any bad faith claim – require proof that the insurer acted unreasonably. It is often the case in these alleged cap-off suits that there is little to no evidence that the insurer actually acted unreasonably. Instead, the plaintiff is proceeding on some technicality and relying on a strict liability interpretation of the tort. Pinto should give insurers a significant tool to defend themselves against these types of suits.

Pinto will likely appeal this decision to the California Supreme Court. It is unclear whether the Supreme Court will grant review, but per California Rule of Court 8.1115, unless otherwise ordered by the Supreme Court, Pinto will remain citable as persuasive authority.

Bad Faith Termination for Convenience

Patrick Tighe | Snell & Wilmer

Many construction contracts include a clause that allows an owner to terminate a contractor’s remaining work on a project at the owner’s convenience. And during a global pandemic and these turbulent economic times, termination for convenience clauses are receiving renewed attention, including under what circumstances an owner may not terminate for convenience.

At the outset, some courts have at times viewed termination for convenience clauses suspiciously because such clauses typically confer an unfettered right to terminate only upon the owner. To some courts, this lack of mutuality appears to constitute an “illusory promise” lacking consideration, and thus, a provision some courts may not enforce. To remedy this issue, some courts have required an owner to have good faith reasons when exercising the termination for convenience clause. If an owner acts in bad faith when terminating for convenience, the owner will have violated the implied duty of good faith and fair dealing. See generally 5 Bruner & O’Connor Construction Law § 18:47.

But when does an owner act in bad faith when terminating for convenience? Few Arizona courts have analyzed termination for convenience clauses, let alone explained the limitations on exercising such provisions. However, in Arizona’s Towing Professionals, Inc. v. State, the Arizona Court of Appeals held that the owner of the contract acted in bad faith when it invoked its “cancellation for convenience” provision to thwart administrative or judicial review of a state’s decision in awarding contracts after the bidding process. More recently, the Arizona Court of Appeals held that the City of Avondale did not act in bad faith or abuse its discretion in terminating for convenience its contract with a towing company when the owner of the towing company was arrested for two felony counts stemming from his involvement with a prior town business for which he had been general manager. Go Services, LLC v. City of Avondale, 1 CA-CV 16-0482, 2017 WL 6328004 (App. Dec. 12, 2017).

Beyond Arizona, other courts have held that a party acts in bad faith when it terminates a contract for convenience simply to acquire a better bargain from another source. See, e.g., Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cl. 1996). For instance, in Greer Properties, Inc. v. LaSalle National Bank, the Seventh Circuit held that a party could not terminate a contract for convenience “to shop around for a better price.” The Seventh Circuit explained: “When the [defendant] entered a contract with [the plaintiff and] agreed to pay them a specific price for the property, [the defendant] gave up their opportunity to shop around for a better price. By using the termination clause to recapture that opportunity, [the defendant] would have acted in bad faith.”

Although few Arizona courts have explored the limitations on termination for convenience clauses, precedent from federal appellate courts indicate that an owner acts in bad faith when it terminates for convenience simply because the owner got a better deal. To avoid potential allegations of bad faith, an owner may want to confer with counsel before deciding to exercise its termination for convenience rights simply because the owner found a better bargain elsewhere.