Lessons Learned from Carrier Beating $10M Bad Faith Verdict on Appeal
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Lessons Learned from Carrier Beating $10M Bad Faith Verdict on Appeal

Key Takeaways

  • On March 8, 2021, due to a deficient special verdict, California’s Appellate Court reversed a jury verdict and judgment finding bad faith against an insurer for failing to accept a reasonable settlement offer

  • The California Court of Appeals ruled that the special verdict lacked any indication that the insurer’s failure to settle was unreasonable and therefore lacked a required element of a bad faith cause of action

  • The Court of Appeals indicated that an insurer’s failure to accept a reasonable settlement offer is not per se bad faith, and that a showing of unreasonableness or conduct without proper conduct is required

 

In a published decision issued on March 8, 2021, California’s appellate court refused to find that an insurer’s failure to accept a reasonable settlement offer was per se bad faith. In Pinto v. Farmers Insurance Exchange, a vehicle accident victim offered to settle his claim against the vehicle’s owner in exchange for payment of insurance limits. The insurer failed to accept the offer before it lapsed, due to the victim’s rejection of tender, and the victim obtained a judgment against the owner in excess of the policy limits. The owner assigned her claims against the insurer to the victim who brought suit alleging insurer bad faith. At trial, the special verdict form did not inquire into the reasonableness of the insurer’s conduct and the jury made no finding that the insurer acted unreasonably, however, a verdict was entered against the insurer for bad faith.

The court held that failing to accept a reasonable settlement offer does not constitute bad faith per se. In its discussion, the court noted that an offer to settle an insurance claim is “multidimensional” and that the amount demanded is not the only factor to consider. Instead, the crucial issue is the basis for the insurer’s decision to reject the offer and that mere errors in discharging its obligations does not necessarily violate the covenant of good faith and fair dealing.

The court further held that the verdict was facially deficient. The court noted that if a fact necessary to support a cause of action is not included in a special verdict, judgment on that cause of action cannot stand. The verdict form in this case did not ask about the reasonableness of the insurer’s failure to settle. 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 (e.g., by placing its own interests above those of its insured). The court additionally held that the judgment was defective, as a special verdict based solely on an insufficient jury instruction cannot support a judgment.

With respect to the applicable remedy, the court noted that the defective verdict was due to the victim’s failure to propose an appropriate verdict sheet and that he vigorously opposed the attempts to clarify the erroneous verdict. As a plaintiff responsible for an erroneous special verdict is bound by the error, the court reversed the judgment and remanded the matter with directions to enter a judgment for the insurer along with costs.

A key takeaway of the decision is that a bad faith claim against an insurer requires more than showing that the settlement offer that was rejected was reasonable or even that the insurer made mistakes in handling the claim. Instead, bad faith requires showing that the insurer acted unreasonably in rejecting the settlement demand, such as putting its own interests above that of the insured.

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