Insurer’s Breach of the Implied Covenant of Good Faith and Fair Dealing Law Definition Elements Defense Lawyer

Definition. An insured has a tort cause of action against its insurer for breach of the covenant of good faith and fair dealing that is implied by law in the insurance contract if the insurer: (1) Unreasonably or without proper cause withholds policy benefits due directly to the insured; (2) Wrongfully refuses to defend or settle, within policy limits, a third-party claim against the insured; or (3) Unreasonably fails to properly investigate a claim by or against the insured; (4) or Unreasonably engages in abusive practices or conduct that impairs the insured’s right to receive the benefits for which it contracted. (Pinto v. Farmers Insurance Exchange (2021) 61 Cal.App.5th 676.)

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1. Element 1: Insurance Contract

2. Element 2: Duty

3. Element 3: Breach

4. Element 4: Causation and Damages

5. Remedies

6. Statute of Limitations

7. Affirmative Defenses

Element 1: Insurance Contract

A plaintiff must have a contractual relationship with the insurer to recover for “bad faith.” (Pinto v. Farmers Insurance Exchange (2021) 61 Cal.App.5th 676.)

A “bad faith” action against an insurer requires an underlying contractual relationship between the plaintiff and the insurer. (Benavides v. State Farm General Ins. Co. (2006) 136 Cal.App.4th 1241.)

The implied covenant of good faith and fair dealing does not exist before a contract has come into existence. (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230.)

Contractual Liability:

An insurer’s good faith obligations are limited to the purposes and objectives of the existing insurance contract, and the insurer generally has no duty to provide additional coverages beyond those provided in the policy. (Shultz Steel Co. v. Hartford Accident & Indemnity Co. (1986)187 Cal. App. 3d 513, 524 [insurer had no obligation to advise insured regarding adequacy of coverage limits or availability of other coverages].)

An insurer’s refusal to defend the insured against a claim that is excluded under the policy is not a breach of the implied covenant of good faith and fair dealing because the covenant is based on the terms of the contract between the parties. (Waller v. Truck Ins. Exchange (1995) 11 Cal. 4th 1, 36.)

An insurer’s refusal to pay a claim is not in bad faith where the claim is not covered under the policy. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal. 4th 1.)

Element 2: Duty

An insurance company has a duty to its insureds to act in good faith and to deal fairly with them in all insurance matters. (Brodkin v. State Farm Fire & Casualty Co. (1989) 217 Cal. App. 3d 210, 218.)

To Whom Duty is Owed [Proper Plaintiffs and Standing to Sue]

Insureds

Only insureds or additional insureds (such as a permissive driver of an insured vehicle or an individual or entity designated as an additional insured by endorsement under the policy) have standing to sue the insurer for breach of the implied covenant of good faith and fair dealing. See Northwestern Mutual Ins. Co. v. Farmers Ins. Group, 76 Cal. App. 3d 1031, 1042, 143 Cal. Rptr. 415, 421 (1978) (permissive automobile user who is not a named insured under policy has standing to sue as an additional insured); Fireman’s Fund Ins. Co. v. Maryland Cas. Co., 21 Cal. App. 4th 1586; 26 Cal. Rptr. 2d 762 (1994) (Primary insurer’s duty to act in good faith owed to insured, not to excess carrier).

A joint insured may be entitled to sue the insurer for wrongful refusal to settle a claim against another insured. Tan Jay Int’l Ltd. v. Canadian Indemnity Co., 198 Cal. App. 3d 695; 155 Cal. Rptr. 843 (1988); Truestone, Inc., v. Travelers Ins. Co., 55 Cal. App. 3d 165, 170, 127 Cal. Rptr. 386, 389 (1976) (where corporation and its sole shareholder were joint insureds, shareholder could sue insurer for unreasonable refusal to settle claim against corporation, which resulted in excess judgment against corporation and reduced value of shareholder’s stock); Delos v. Farmers Group, Inc., 93 Cal. App. 3d 642, 659, 155 Cal. Rptr. 843, 853 (1979) (where husband and wife were co-insureds, husband could sue insurer for wrongful refusal to settle wife’s uninsured motorist claim).

Assignees of the insured may sue for breach of the implied covenant of good faith and fair dealing. (Murphy v. Allstate Ins. Co., 17 Cal. 3d 937; 132 Cal. Rptr. 424 (1976)), as well as the estate of the insured. Cal. Code Civ. Pro. §337.30; Shapero v. Allstate Ins. Co., 14 Cal. App. 3d 433; 92 Cal. Rptr. 244).

Trustee for Bankrupt Insured

The bankruptcy trustee of a bankrupt insured has standing to sue insurer for breach of the implied covenant of good faith and fair dealing. Reichert v. General Ins. Co., 68 Cal. 2d 822, 830, 69 Cal. Rptr. 321, 327 (1968).

Non-Insureds

When an insurer voluntarily provides a defense to a non-insured, a relationship is created which gives rise to a duty similar to that owed by one who voluntarily comes to the aid of another. Mosier v. Southern California Physicians Ins. Exchange, 63 Cal. App. 4th 1022; 74 Cal. Rptr. 2d 550 (1998).

Designated Beneficiaries

A designated beneficiary of a policy has standing to sue for tort damages for breach of the implied covenant of good faith and fair dealing. Hatchwell v. Blue Shield of California, 198 Cal. App. 3d 1027, 1034, 244 Cal. Rptr. 249, 253 (1988).

Third Party Claimants

A third party claimant has no standing to sue prior to obtaining a judgment against the insured because the covenant of good faith and fair dealing exists for the benefit of the insured, not the third party. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 941, 132 Cal. Rptr. 424, 426 (1976); Coleman v. Gulf Ins. Group, 41 Cal. 3d 782, 795, 226 Cal. Rptr. 90, 96 (1986) (third

party claimants could not pursue bad faith action against insurer where insurer allegedly filed frivolous appeal and then offered to settle their claim for less than one-half of their judgment against insured).

After obtaining a judgment against the insured, a third party claimant may sue the insurer directly under Insurance Code §11580(b)(2) as a judgment creditor and third party beneficiary. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 942-44, 132 Cal. Rptr. 424, 427-28 (1976).

Who Owes Duty [Proper Defendants]

An action for breach of the implied covenant of good faith and fair dealing lies only against the insurer covering the risk. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 576, 108 Cal. Rptr. 480, 487 (1973).

No action for breach, or conspiracy to cause breach, of the implied covenant lies against an insurer’s officers, agents, employees, or attorneys because they are not parties to the contract. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 576, 108 Cal. Rptr. 480, 486-87 (1973); Doctors’ Co. v. Superior Court, 49 Cal. 3d 39, 44-45, 260 Cal. Rptr. 183, 186 (1989). See also Delos v. Farmers Group, Inc., 93 Cal. App. 3d 642; 155 Cal. Rptr. 843 (1979).

The California Insurance Guarantee Association (CIGA) cannot be sued for breach of the implied covenant of good faith and fair dealing because it was created by the Legislature to handle claims against insolvent insurers and is not a party to the insurance contract. Isaacson v. California Ins. Guarantee Ass’n, 44 Cal. 3d 775, 789, 244 Cal. Rptr. 655, 664 (1988).

Attorneys-in-fact for a reciprocal inter-insurance exchange may be liable for bad faith and breaches of fiduciary-like duties. Tran v. Farmers Group, Inc., 104 Cal.App.4th 1202 (2002) (plaintiff held to have adequately pled cause of action against inter-insurance exchange with regard to suit on individual carrier’s policy).

Coverage counsel can be personally liable in tort for related causes of action of fraud, conspiracy, etc. on a claim he misrepresented coverage to a judgment creditor of the insured. Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 107 Cal.App.4th 54 (2003).

Element 3: Breach

An insurer’s liability for “bad faith” depends on whether its refusal to pay policy benefits or defend a claim against the insured is unreasonable. (Neal v. Farmers Ins. Exchange (1978) 21 Cal. 3d 910, 925.)

First Party Claims (Brought by Insured)

Failure to Reasonably Investigate Claim

Thoroughness of Investigation

An insurer has a duty to thoroughly investigate a claim by the insured. Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819, 169 Cal. Rptr. 691, 696 (1979); Othman v. Globe Indemnity Co., 759 F. 2d 1458, 1495 (9thCir. 1985); Stalberg v. Western Title Ins. Co., 230 Cal. App. 3d 1223, 282 Cal. Rptr. 43 (1991).

The insurer must fully inquire into all possible bases that might support the insured’s claim. Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819, 169 Cal. Rptr. 691, 696 (1979) (in investigating claim under disability policy covering accidental injuries, insurer breached implied covenant by denying claim on grounds that insured’s disability resulted from illness and not injury, without making any effort to consult insured’s doctors, who would have disclosed that the disability was caused by accident and not illness, or had insured examined by doctor chosen by insurer).

In the investigation of a claim for reimbursement of medical expenses for experimental cancer therapy for the insured’s wife, the insurer acted in bad faith by denying coverage on the basis that the treatment was not FDA approved and was not “necessary” within the meaning of the policy, without contacting the doctor who had prescribed the treatment or other doctors who gave reports stating that the therapy was beneficial. McLaughlin v. Connecticut General Life Ins. Co., 565 F. Supp. 434, 454 (N.D. Cal. 1983); see also Hanson v. Prudential Ins. Co., 772 F. 2d 580 (9th Cir. 1985).

The insurer may reasonably rely on the investigation of others. Othman v. Globe Indemnity Co., 759 F. 2d 1458, 1465 (9th Cir. 1985) (insurer did not breach implied covenant by relying on reports prepared by police who had thoroughly investigated insured’s fire).

Fair Claim Settlement Regulations

All carriers in California are required to comply with California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5, beginning with section 2695.1, which provides for the timely response of carriers to claims and other communications, recordkeeping, training and certification, and other standards of conduct with regard to the fair handling of claims.

Failure to Determine Coverage

Under a first party property policy, the insurer did not breach the implied covenant by failing to determine whether the insured’s claim was covered where the loss occurred before the policy period. McMillin Scripps North Partnership v. Royal Ins. Co., 19 Cal. App. 4th 215, 1222-23, 23 Cal. Rptr. 2d 243 (1993) (insurer was not liable for environmental investigation costs where there was no coverage). See also Safeway, Inc. v. National Union Fire Ins. Co., 805 F. Supp. 1484 (N.D. Cal. 1992) (In a first party case, genuine coverage issue negated bad faith).

Insured’s Failure to Cooperate

An insurer may not be liable for failure to thoroughly investigate a claim if the insured fails to provide information requested by the insurer. Blake v. Aetna Life Ins. Co., 99 Cal. App. 3d 901, 919-920, 160 Cal. Rptr. 528, 538-539 (1979) (insurer did not fail to properly investigate widow’s claim for accidental death benefits after insured’s death by drug overdose where police required “due proof” that death was an accident and not suicide, and insurer made repeated requests for information regarding circumstances of insured’s death, but was frustrated by widow, who insisted that all inquiries be directed to her attorney).

Notice of Claim Required

The duty to investigate does not arise until the insurer receives actual notice of the insured’s claim for benefits. Constructive notice is insufficient. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 57, 221 Cal. Rptr. 171, 202-03 (1985).

The duty to investigate arises after the insurer receives both written notice of the claim and written proof of loss if required under the policy. Paulfrey v. Blue Chip Stamps, 150 Cal. App. 3d 187, 199, 197 Cal. Rptr. 501, 508 (1983).

The insured must substantially comply with the notice provisions of the policy. Paulfrey v. Blue Chip Stamps, 150 Cal. App. 3d 187, 199, 197 Cal. Rptr. 501, 508 (1983) (no compliance where insured waited several years after a disabling injury to submit claim despite insurer’s forwarding of claim forms and repeated follow-up telephone calls).

Fraudulent Claims

In the investigation of the insured’s burglary loss claim, where the insurer had reason to believe the claim was fraudulent and reported it to the State Bureau of Fraudulent Claims, resulting in criminal charges against the insured, the insurer was not liable for reporting the claim or for failing to continue its investigation because the fraudulent claim report was privileged. Frommoethelydo v. Fire Ins. Exchange, 42 Cal. 3d 208, 219, 228 Cal. Rptr. 160, 166 (1986).

Unreasonable Failure to Pay Claim

Insurers who fail to pay undisputed claims promptly may be liable for failure to settle. Neal v. Farmers Ins. Exchange, 21 Cal. 3d 910, 921, 148 Cal. Rptr. 389, 394 (1978); Beck v. State Farm Mutual Automobile Ins. Co., 54 Cal. App. 3d 347, 355, 126 Cal. Rptr. 602, 607 (1976); Comunale v. Traders General Ins. Co., 50 Cal. 2d 584; 328 P. 2d 198 (1958).

The insurer may have breached the implied covenant of good faith and fair dealing by withholding uninsured motorist benefits while a dispute existed over an offset of medical benefits. Neal v. Farmers Ins. Exchange, 21 Cal. 3d 910, 921, 148 Cal. Rptr. 389, 394 (1978).

The insurer may have breached the implied covenant by withholding medical expenses pending resolution of a contested workers compensation claim. Silberg v. California Life Ins. Co., 11 Cal. 3d 452, 461, 113 Cal. Rptr. 711, 717 (1974).

Other Abusive Conduct or Practices

Examples of bad faith conduct or practices with respect to first party claims include:

- - Denying a claim based on known improper standards (Beck v. State Farm Mutual Auto. Ins. Co., 54 Cal. App. 3d 347, 354-55, 126 Cal. Rptr. 602, 606-607 (1976) (insurer refused to pay uninsured motorist claim on grounds that insurer knew were invalid)).
  - Unreasonably delaying payment of valid claim (Richardson v. Employers Liability Assurance Corporation, 25 Cal. App. 3d 232, 239, 102 Cal. Rptr. 547, 552 (1972) (insurer stalled for several months in paying insured’s valid uninsured motorist claim, which exceeded policy limits, by taking position that uninsured motorist claims should be paid only as a last resort, defending arbitration demanded by insured without presenting any evidence, and refusing to pay policy limits after arbitrator awarded them to insured, forcing insured to initiate suit to confirm the arbitration award)).
  - Misrepresenting coverage to avoid payment of claim (Delos v. Farmers Group, Inc., 93 Cal. App. 3d 642, 664, 155 Cal. Rptr. 843, 859 (1979) (after insured presented uninsured motorist claim, insurer advised her that she had waived uninsured motorist coverage when she renewed policy, when insurer knew that such coverage was required by law and could not be waived)).
  - Threatening to close file without payment of valid claim (Mustachio v. Ohio Farmers Ins. Co., 44 Cal. App. 3d 358, 362, 118 Cal. Rptr. 581, 583 (1975) (insurer threatened to retire its file without payments if insured did not accept its initial offer within 10 days, where amount of insured’s loss was in dispute)).
  - Threatening or attempting to rescind policy without valid grounds (Fletcher v. Western Nat’l Life Ins. Co., 10 Cal. App. 3d 376, 392, 89 Cal. Rptr. 78, 87 (1970) (after paying insured’s disability claim for several years, insurer threatened to rescind policy on ground that insured had made material misrepresentations in policy application when insurer had no evidence of any misrepresentations)).
  - Threatening to cut off disability benefits without proper cause (Pistorius v. Prudential Ins. Co., 123 Cal. App. 3d 541, 547, 176 Cal. Rptr. 660, 663, 664 (1981) (insurer adopted practice of periodically cutting off payments to see if insured would complain and threatened to sue insured to recover all disability payments previously paid when insured protested the threatened termination of benefits)).
  - Unjustifiably conditioning payment of benefits (Sprague v. Equifax, Inc., 166 Cal. App. 3d 1012, 1032, 213 Cal. Rptr. 69, 82 (1985) (after terminating insured’s disability benefits without valid reason, insurer agreed to reinstate benefits on condition that such payments not be construed as admission that insured was entitled to benefits under policy)).
  - Refusing to grant settlement authority (Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169;231 Cal. Rptr. 791 (1986) (disapproved on other grounds in Buss v. Superior Ct., 16 Cal. 4th 35; 65 Cal. Rptr. 2d 366 (1997) (carrier defending under reservation of rights refused to authorize defense counsel to engage in settlement discussions).

The following conduct may be evidence of bad faith, depending on the facts:

- - Denying benefits through unduly restrictive requirements or interpretation of information provided in insured’s claim forms (McCormick v. Sentinel Ins. Co., 53 Cal. App. 3d 1030, 1046, 200 Cal. Rptr. 732, 741 (1984); but see Delgado v. Heritage Life Ins. Co., 157 Cal. App. 3d 262, 278, 203 Cal. Rptr. 672, 681 (1984) (insufficient evidence of bad faith where insured submitted inconsistent and ambiguous disability claim and insurer, without investigation, interpreted insured’s ambiguous answers restrictively so as to exclude coverage)).
  - Falsely accusing insured to avoid payment of claim (Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575, 108 Cal. Rptr. 480, 486 (1973) (triable issue of fact whether insurer wrongfully accused insured of arson to avoid paying insured’s fire damage claim)).
  - Dilatory claims handling (Fleming v. Safeco Ins. Co., 160 Cal. App. 3d 31, 37, 206 Cal. Rptr. 313, 315 (1984) (insurer handling uninsured motorist claim took over seven months to confirm that other driver was uninsured; evidence showed insurer delayed in communicating with insured’s attorney and in completing requests for information, and passed investigation to various adjusters, some of whom did not have authority to pay the $15,000 policy limits)).

Third Party Claims (Brought Against Insured)

Failure to Conduct Reasonable Investigation of Claim

An insurer’s duty to conduct a reasonable investigation of a third party claim arises after it receives actual notice of the claim against its insured. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 57, 221 Cal. Rptr. 171, 202 (1985) (no bad faith for failure to investigate claim against corporate insured where insurer mistakenly thought claim was against another corporation, even though under circumstances insurer should have known that its insured was being sued).

An insurer that fails to investigate before denying coverage, cannot thereafter defend its decision using facts that the insurer becomes aware of thereafter. CNA Cas. v. Seaboard Sur. Co., 176 Cal. App. 3d 598, 222 Cal. Rptr. 276 (1986).

An auto claim investigation was reasonable where the insurer retained an independent investigator who was on the scene and took photographs on the day of the accident and obtained statements from the driver and eight witnesses within a few days of the accident, even though the investigator failed to inform the insurer of other adverse witnesses. Davy v. Public Nat’l Ins. Co., 181 Cal. App. 2d 387, 396, 5 Cal. Rptr. 488, 493 (1960).

An insurer had no continuing duty to investigate or monitor a loss after the insurer properly denied the insured’s tendered defense. Gunderson v. Fire Ins. Exchange, 37 Cal. App. 4th 1106, 1117, 44 Cal. Rptr. 2d 272, 279 (1995) (no bad faith where insurer denied insured’s tender of lawsuit to quiet title to an easement under policy that required physical injury to tangible property, and discontinued investigation in absence of new tender by insured).

Failure to Defend

Potential for Coverage

The insurer must defend the entire claim even if not all claims are potentially covered; unless the insurer can prove that a claim was not even potentially covered because it did not even possibly embrace any triggering harm of the specified sort within its policy period or periods caused by an included occurrence. Buss v. Superior Court, 16 Cal. 4th 35, 57-58, 65 Cal. Rptr. 2d 366 (1997); Hogan v. Midland Nat’l Ins. Co., 3 Cal. 3d 553, 564, 91 Cal. Rptr. 153 (1970).

For the insurer to have a duty to defend, the third party’s claim must be based on a risk or conduct that is potentially covered under the policy. Montrose Chemical Corporation v. Superior Court, 6 Cal. 4th 287, 300, 24 Cal. Rptr. 2d 467, 475 (1993); Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275, 54 Cal. Rptr. 104, 126 (1966).

In third party cases involving the duty to defend, an insurer must defend the insured if there is any potential for coverage at the outset of the proceedings, even if it is later determined that the claim against the insured was not covered under the policy. Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275, 54 Cal. Rptr. 104, 112 (1966); Montrose Chemical Corporation v. Superior Court, 6 Cal. 4th 287, 295, 24 Cal. Rptr. 2d 467, 471 (1993).

Facts extrinsic to the allegations of the complaint may give rise to a duty to defend when they reveal a possibility that the claim may be covered by the terms of the policy. Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 277, 54 Cal. Rptr. 104, 113 (1966); Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1080, 17 Cal. Rptr. 2d 210, 214 (1993).

No duty to defend exists where undisputed facts outside the allegations of the complaint conclusively eliminate coverage. Montrose Chemical Corporation v. Superior Court, 6 Cal. 4th 287, 301, 24 Cal. Rptr. 2d 467, 475 (1993).

Where the only potential for liability rests upon a question of law, there is no duty to defend. Waller v. Truck Ins. Exchange, 11 Cal. 4th 1, 25-26, 44 Cal. Rptr. 2d 370, 383 (1995) (insurer had no duty to defend insured against shareholder dispute where claims against insured involved emotional and physical distress that derived inseparably from allegations of intentional and business torts, which were excluded under policy).

If undisputed facts conclusively demonstrate that the claim does not fall within the basic coverage grant of the policy, there is no duty to defend. See e.g., Loyola Marymount University v. Hartford Accident & Indemnity Co., 219 Cal. App. 3d 1217, 1225-26, 271 Cal. Rptr. 528 (1990) (complaint against insured sought only contract damages; policy covered only tort liability not arising out of contract); Hurley v. State Farm Fire & Casualty Co., 10 Cal. App. 4th 533, 539, 12 Cal. Rptr. 2d 629, 632 (1992) (complaint sought only economic damages; policy required bodily injury or physical injury to tangible property); Montrose Chemical Corporation v. Superior Court, 6 Cal. 4th 287, 298, 24 Cal. Rptr. 2d 467, 473 (1993) (acts complained of occurred outside policy period or at location admittedly not covered by policy).

The insurer may properly refuse to defend where undisputed facts conclusively establish that the insured’s liability is excluded under the policy. California Ins. Guarantee Ass’n v. Wood, 217 Cal. App. 3d 944, 949, 266 Cal. Rptr. 250, 252 (1990) (no duty to defend insured employer against claim for negligent infliction of emotional distress by employee’s wife arising out of her husband’s alleged wrongful termination by insured where policy excluded coverage for liability arising out of insured’s business pursuits).

Insurer’s Knowledge of Request for Defense

A claim of tortious failure to defend requires direct evidence that the insurer knew the insured was requesting a defense and was entitled to a defense. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 44-45, 221 Cal. Rptr. 171, 196-97 (1985).

Insured’s Harmful Acts

Pursuant to Insurance Code Section 533 (prohibiting insurers from indemnifying an insured for its willful acts), an insurer has no duty to defend against claims arising out of the insured’s inherently harmful acts such as:

- - - - Child molestation (J.C. Penney Casualty Co. v. M.K., 52 Cal. 3d 1009, 1025, 278 Cal. Rptr. 64, 73 (1991); Coit Drapery Cleaners v. Sequoia Ins. Co., 14 Cal. App. 4th 1595, 1612, 18 Cal. Rptr. 692, 703 (1993). A duty to defend may arise, however, where the wrongful conduct also involves “para-sexual” acts. Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1085, 17 Cal. Rptr. 210, 216 (1993) (in addition to child molestation, complaint alleged that teacher allowed child to sit on his lap, referred to her by pet names, hugged her and kissed her on her forehead in front of other students, excused her from attending class without good cause, and discussed his relationship with her with other faculty members)).

- - - - Homicide (Studley v. Benicia United School Dist., 230 Cal. App. 3d 454, 459, 281 Cal. Rptr. 631 (1991) (second degree murder following trial); State Farm Fire & Casualty Co. v. Dominguez, 131 Cal. App. 3d 1, 5, 182 Cal. Rptr. 109 (1982) (insured convicted of first degree murder)).
      - Unprovoked assault without legal justification (Fire Ins. Exchange v. Altieri, 235 Cal. App. 3d 1352, 1359, 1 Cal. Rptr. 2d 360, 365 (1991) (insured assaulted person from behind by grabbing his hair and hitting him in the face after betting a friend that he would be first to strike victim); Jacobs v. Fire Ins. Exchange, 36 Cal. App. 4th 1258, 1279, 42 Cal. Rptr. 906, 919 (1995) (insured willfully aimed and shot a gun at another person just a few feet away without legal justification)).
      - Wrongful termination (St. Paul Fire & Marine Ins. Co. v. Superior Ct., 161 Cal. App. 3d 1199, 208 Cal. Rptr. 5 (1984) (Insurer not obligated to defend insured against action for wrongful termination of employment because termination not seen as “accidental event” under policy.)

Failure to Settle Claim

Likelihood of Recovery Beyond Limits

An insurer who unreasonably fails to accept a reasonable offer to settle a claim against the insured breaches the implied covenant of good faith and fair dealing if the offer is within the limits of the insurance coverage and if there is a substantial likelihood of recovery against the insured in an amount in excess of the policy limits. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 941, 132 Cal. Rptr. 424, 426 (1976); Johansen v. California State Automobile Ass’n Inter-Insurance Bureau, 15 Cal. 3d 9, 16, 123 Cal. Rptr. 288, 292 (1975).

The insurer must settle the claim against the insured where the likelihood of recovery beyond the policy limits is substantial. Northwestern Mutual Ins. Co. v. Farmers Group, Inc., 76 Cal. App. 3d 1031, 1041, 143 Cal. Rptr. 415, 420 (1978); Davy v. Public Nat’l Ins. Co., 181 Cal. App. 2d 387, 396, 5 Cal. Rptr. 488, 495-96 (1960) (insurer’s failure to request opinion from attorney retained to try case against insured, before rejecting offer on eve of trial that was within policy limits and was only $1,500 more than insurer had previously offered, was evidence of bad faith).

Unreasonable Refusal to Settle

To constitute bad faith, the insurer’s refusal to settle must be unreasonable under all of the circumstances. Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 661, 328 P. 2d 198, 201 (1958).

The insurer must settle the claim against its insured if accepting the settlement offer is the most reasonable manner of disposing of the claim. Crisci v. Security Ins. Co., 66 Cal. 2d 425, 430, 58 Cal. Rptr. 13, 17 (1967) (where claimant, who fell through stairs to insured’s apartment and was suspended 15 feet above the ground, sued insured for resulting physical injuries and mental illness and originally demanded $400,000 with no evidence of prior mental illness, insurer acted in bad faith in rejecting policy-limit demand of $10,000, resulting in a $90,000 judgment against insured).

An insurer’s refusal to settle is not a breach of the implied covenant of good faith and fair dealing unless the insurer had an opportunity to settle within policy limits; i.e., the injured party must have offered to settle within the policy limits before an excess judgment was rendered against the insured, and the insurer must have failed to respond to the offer within the time provided for acceptance. McLaughlin v. National Union Fire Ins. Co., 23 Cal. App. 4th 1132, 1146-47, 29 Cal. Rptr.2d 559, 566-67 (1994) (no bad faith in rejecting settlement demand of $24 million where policy limits were $20 million less defense costs, because settlement offer exceeded policy limits). See also Heredia v. Farmers Ins. Exch., 220 Cal. App. 3d 1345; 279 Cal. Rptr. 511 (1991) (demand that exceeded policy limits can still give rise to liability of carrier for excess payment if insureds can prove insurer failed to inform them of settlement offer and give insured opportunity to contribute).

A formal settlement offer is not an absolute prerequisite to a bad faith claim following an excess verdict. Boicourt v. Amex Assur. Co., 78 Cal. App. 4th 1390; 93 Cal. Rptr. 2d 763 (2000). (claimant made request for disclosure of policy limits and insurer refused to contact the insured about the request).

What Constitutes Reasonable Offer

The settlement offer must be capable of acceptance. Coe v. State Farm Mutual Automobile Ins. Co., 66 Cal. App. 3d 981, 994, 136 Cal. Rptr. 331, 338 (1977) (insurer could not accept settlement offer in which third party victim demanded policy limits without providing for payment of worker’s compensation lien against third party victim’s claim).

The terms of the settlement offer must be sufficiently clear. Betts v. Allstate Ins. Co., 154 Cal. App. 3d 688, 708, 201 Cal. Rptr. 528, 539 (1984) (insurer’s outright rejection of third party’s settlement demand, without seeking clarification of its terms, was bad faith).

The time limit for accepting the offer must be reasonable. Coe v. State Farm Mutual Automobile Ins. Co., 66 Cal. App. 3d 981, 994, 136 Cal. Rptr. 331, 338 (1977); Critz v. Farmers Ins. Group, 230 Cal. App. 2d 788, 798, 41 Cal. Rptr. 401, 406 (1964) (policy-limits demand allowing one week for acceptance was reasonable where insurer had completed its investigation and evaluation of claim when demand was made).

Evaluation of Settlement Demand

An insurer’s failure to evaluate objectively a settlement demand against the insured may constitute bad faith. Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 873, 110 Cal. Rptr. 511, 521 (1973); Garner v. American Mutual Liability Ins. Co., 31 Cal. App. 3d 843, 848-849, 107 Cal. Rptr. 604, 607 (1973).

In evaluating a claim against the insured, the insurer must consider a number of factors which dictate the course, nature and intensity of any potential settlement negotiations, including (1) an informed and careful weighing of the facts in light of applicable standards in the community; (2) a careful measuring of the legal facets of the case; (3) the probabilities of an adverse verdict and its anticipated range if adverse; (4) the strengths and weaknesses of the evidence to be presented by either side; (5) the experience and capacity of counsel; (6) the severity of the injuries or damage; (7) consideration of the results obtained in the past in similar litigation; (8) the appeal of the claimant, the insured and known witnesses; and (9) the desire or instructions of the insured regarding settlement. Garner v. American Mutual Liability Ins. Co., 31 Cal. App. 3d 843, 849-850, 107 Cal. Rptr. 604, 608 (1973).

In evaluating the reasonableness of a settlement demand, the insurer must consider in good faith the interests of the insured equally with its own. Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 659, 328 P. 2d 198, 201 (1958); Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 871, 110 Cal. Rptr. 511, 520 (1973) (no bad faith for excess judgment against insured where claim was subject to $300,000 worker’s compensation lien, no settlement demand was made within $100,000 policy limits or within limits supplemented by insured’s net worth, and no one associated with the case ever suggested that it could be settled prior to judgment).

In settling a third party claim, the insurer must consider the interests of each of its insureds who are at risk. Rankin v. Curtis, 183 Cal. App. 3d 939, 945-46, 228 Cal. Rptr. 753, 757 (1986) (insurer breached covenant by defending only church when camp counselor was also potentially insured under policy, and by settling only on behalf of church before advising camp counselor of action); Strauss v. Farmers Ins. Exchange, 26 Cal. App. 3d 1017, 1021, 31 Cal. Rptr. 811, 814 (1994) (no bad faith for refusing to settle policy-limit demand against insured employer without release of defendant employee, who was also insured under employer’s policy).

Proximate Cause

The insured must establish that the claimant would have accepted a contribution within policy limits from the insurer. Continental Cas. Co. v. Royal Ins. Co., 219 Cal. App. 3d 111; 268 Cal. Rptr. 193 (1990) (lump sum settlement offer made to several defendants). Tan Jay Int’l, Ltd. v. Canadian Indemn. Co., 198 Cal. App. 3d 695, 243 Cal. Rptr. 907 (1988).

Workers’ Compensation Claims

The insurer has unique settlement considerations under workers’ compensation insurance policies because such policies usually contain retrospective premium provisions that provide for a premium increase based on outstanding claims against the insured. See, e.g., Security Officers Service, Inc. v. State Compensation Ins. Fund, 17 Cal. App. 4th 887, 896, 21 Cal. Rptr. 2d 653, 657 (1993); Tricor California, Inc. v. State Compensation Ins. Fund, 30 Cal. App. 4th 230, 240, 35 Cal. Rptr. 2d 550, 556 (1994).

Timely Tender of Policy Limits

Timely tender of policy limits by the insurer constitutes good faith as a matter of law. State Farm Mutual Automobile Ins. Co. v. Crane, 217 Cal. App. 3d 1127, 1136, 266 Cal. Rptr. 422, 427 (1990); Lehto v. Allstate Ins. Co., 31 Cal. App. 4th 60, 73, 36 Cal. Rptr. 2d 814, 820 (1994) (insurer acted in good faith in interpleading its $50,000 policy limits to be apportioned among five claimants after investigating head-on collision caused by insured).

Other Abusive Conduct or Practices

Examples of bad faith conduct or practices with respect to third party claims include:

Failing to properly evaluate claim against insured (Hughes v. Blue Cross of Northern California, 215 Cal. App. 3d 832, 845-846, 263 Cal. Rptr. 850-857 (1989)).
Failing to keep insured apprised of settlement negotiations (Ivy v. Pacific Automobile Ins. Co., 156 Cal. App. 2d 652, 663, 320 P. 2d 140, 148 (1958) (insurer entered stipulation resulting in excess judgment against insured without first informing insured)).
Failing to settle after excess judgment has been rendered against insured (State Farm Mutual Automobile Ins. Co. v. Brewer, 406 F. 2d 610, 612-613 (9th Cir. 1968) (insurer refused to settle for $10,000 policy limits after $42,000 verdict was rendered against insured)).

Element 4: Causation and Damages

An insurer who breaches the implied covenant of good faith and fair dealing is liable in tort for all damages proximately resulting from the breach, whether the insurer could have foreseen the damages or not. Crisci v. Security Ins. Co., 16 Cal. 2d 425, 433, 58 Cal. Rptr. 13, 18 (1967).

The insurer is liable to the insured for all damages proximately caused by the insurer’s breach. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 59-60, 221 Cal. Rptr. 171, 204 (1985); Crisci v. Security Ins. Co., 66 Cal. 2d 425, 433 (1967) (insured’s emotional distress damages were proximately caused by insurer’s unreasonable failure to settle tenant’s claim against insured, which resulted in excess judgment against insured and her subsequent loss of apartment building, which was her sole source of income, due to her inability to pay excess judgment).

Recoverable damages must be proximately caused by the insurer’s tortious conduct. Sarchett v. Blue Shield of California, 43 Cal. 3d 1, 16, 233 Cal. Rptr. 76, 86 (1987) (although health insurer breached implied covenant by failing to advise insured of policy provision for independent review of claim denials after denying his $1,200 claim, knowing that insured was unaware of that provision, $20,000 jury verdict could not be upheld because court could not determine if insured had sustained any damage independently attributable to insurer’s breach).

Attorney’s Fees

Attorneys’ fees incurred by the insured to compel the insurer to pay contract benefits are an economic loss proximately caused by the insurer’s tortious refusal to pay the amounts due under the policy. Brandt v. Superior Court, 37 Cal. 3d 813, 817, 210 Cal. Rptr. 211, 213 (1985).

There is no limitation to the amount recoverable as Brandt fees, at least as based on policy limits.

See also Cassim v. Allstate, 100 Cal.App.4th 776 (2002) [Review Granted Oct. 30, 2002; referenced here to permit tracking].

Property Loss

If the insurer’s bad faith proximately causes the insured to suffer property losses, those losses are recoverable in an action for breach of the implied covenant of good faith and fair dealing. Merlo v. Standard Life & Accident Ins. Co., 59 Cal. App. 3d 5, 16, 130 Cal. Rptr. 416, 423-424 (1976) (where insured lost his home to foreclosure because he was unable to pay mortgage after insurer unreasonably ceased paying disability benefits due, insured was entitled to recover his equity in the property as an element of compensatory damages).

Loss of Future Earnings

Loss of future earnings may be recoverable if proximately caused by the insurer’s breach of the implied covenant of good faith and fair dealing. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 580, 108 Cal. Rptr. 480, 489-490 (1973) (if insured could prove that his impaired credit rating, lost profits, and ultimate closure of his business were proximately caused by insurer’s bad faith refusal to pay his business fire damage claim, such losses would be recoverable as compensatory damages).

Remedies

Compensatory Damages (Cal. Civ. Code §3333).

Emotional Distress Damages (Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 108 Cal. Rptr. 480 (1973) (emotional distress damages resulting from insurer’s unreasonable withholding of policy benefits were recoverable); Crisci v. Security Ins. Co., (1967) 66 Cal. 2d 425, 58 Cal. Rptr. 13 (emotional distress damages resulting from insurer’s unreasonable failure to settle claim against insured were recoverable)).
Punitive Damages (Cal. Civ. Code §3294; Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 822, 169 Cal. Rptr. 691, 698 (1979) (punitive damages recoverable against insurer where insurer acted with fraud, oppression or malice, or where insurer ratified acts of its agents or employees in conscious disregard of risk to others)).
Attorney’s Fees (Brandt v. Superior Court, 37 Cal. 3d 813, 817, 210 Cal. Rptr. 211 (1985) (attorney’s fees incurred to obtain policy benefits were recoverable)).
Speculative Economic Losses Are Not Compensable (California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 62, 221 Cal. Rptr. 171 (1985)).

Statute of Limitations

For bad faith claims based on breach of contract, the statute of limitations is four years from the time the insurer commits an act that constitutes bad faith. Cal. Civ. Proc. Code §337(1). The Supreme Court of California has yet to rule on the applicable statute of limitations for actions alleging insurer bad faith based on breach of the implied covenant of good faith and fair dealing.

Affirmative Defenses

Comparative Fault. The California Superior Court has held that insurers can no longer assert comparative bad faith as an affirmative defense. Kransco Co. v. American Empire Surplus Lines Ins. Co., 23 Cal. 4th 390; 97 Cal. Rptr. 2d 151 (2000) (insured’s breach of its duty of good faith and fair dealing is not a tort whereas insurer’s breach is a tort).

Advice of Counsel (Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 878, 110 Cal. Rptr. 511, 521 (1973) (insurer’s reasonable reliance on advice of counsel may be offered along with other evidence of reasonable conduct to negate allegations of bad faith); State Farm Mutual Auto. Ins. Co. v. Superior Court, 228 Cal. App. 3d 721, 725-26, 279 Cal. Rptr. 116, 118 (1991) (advice of counsel defense need not be specifically pleaded)).
Settlement and Release (Sheehan v. Atlanta International Ins. Co., 812 F. 2d 465, 470 (9th Cir. 1987) (insured’s release of its tort claims in settlement with insurer for first party benefits is complete defense to subsequent action on tort claims)). Edwards v. Comstock Ins. Co., 205 Cal. App. 3d 1164; 252 Cal. Rptr. 807 (1988) (valid release of contract claim by insured bars subsequent bad faith claim).
Res Judicata (Crowley v. Katleman, 8 Cal. App. 4th 666, 682, 34 Cal. Rptr. 2d 386, 389 (1994) (final judgment on merits of same claim precludes relitigation of that claim between identical parties)).
Collateral Estoppel (Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 874, 151 Cal. Rptr. 285, 288-89 (1978) (party cannot relitigate identical issue actually litigated in prior action against party to prior action)).
ERISA Preemption (Commercial Life Ins. Co. v. Superior Court, 47 Cal. 3d 473, 483-84, 253 Cal. Rptr. 682, 688 (1988) (state actions under employee benefits group insurance plans are preempted by federal Employee Income Security Act of 1974 (ERISA)).
Workers’ Compensation (Marsh & McLennan, Inc. v. Superior Court, 49 Cal. 3d 1, 6, 259 Cal. Rptr. 733, 735 (1989) (Workers’ Compensation Act provides exclusive remedy for work related injury claims)).

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