Rejection of Reasonable Settlement in Third Party Insurance Claim Not Per Se Unreasonable

In an opinion filed on March 8, the California Court of Appeal, Second District, reversed a jury verdict against an insurer because the jury failed to make an explicit finding that the insurer acted unreasonably in some respect.  In Alexander Pinto v. Farmers Ins. Exch., Case No. B295742, the court held that a bad faith claim requires a finding that the insurer acted unreasonably in some respect.  Because the jury made no such finding (because the verdict form lacked any question asking the jury to make such a finding), the court vacated the verdict in favor of the insured and remanded the case for further proceedings.

The coverage dispute arose out of a single-car traffic accident.  The victim offered to settle his claim against the vehicle owner in exchange for payment of the vehicle owner’s insurance policy limits.  The offer lapsed before the insurer accepted it.  The victim then obtained a judgment in excess of the vehicle owner’s insurance policy limits.  The vehicle owner then assigned her claims against the insurer to the victim.  The victim then sued the insurer alleging that the insurer should be held liable for its alleged bad faith failure to settle.  The victim prevailed at trial against the insurer.

At issue in the appeal was the lack of an express finding by the jury that the insurer had acted unreasonably (again, the lack of an express finding was because the jury had not been asked this question on the verdict form).  The court explained, “[t]he issue is whether, in the context of a third party insurance claim, failing to accept a reasonable settlement offer constitutes bad faith per se.  We conclude it does not.”

The court explained, “[a]n offer to settle an insurance claim is generally multidimensional, the most obvious component being the amount demanded.”  But, the court explained, “[a]n insurer’s duty to accept a reasonable settlement offer is not absolute.”  Therefore, an insured must prove that “the insurer unreasonably failed to accept an offer[,]” including by showing that the insurer acted or failed to act without proper cause, “for example by placing its own interests above those of its insured.”

The court also addressed the special verdict form used during the trial and its reliance on CACI No. 2334.  The court noted that the “enumerated elements of CACI No. 2334 present two issues: Whether the plaintiff was harmed and whether the insurer’s failure to settle caused the harm.”  But, as the court noted, CACI No. 2334 “lacks a crucial element: Bad faith.”  “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”  – a proper verdict form must address whether the insurer’s conduct was reasonable.

Pinto is instructive.  It reiterates standards of proof and clarifies that simply because the amount of a settlement offer might appear reasonable, an insured must still prove that the rejection of an apparently-reasonable offer was unreasonable based upon the specific facts of the case.