Horvitz & Levy obtained reversal of a nearly $10 million judgment against Farmers Insurance Exchange and secured a published decision disapproving a controversial model jury instruction (CACI No. 2334) that the plaintiffs’ bar frequently used to support claims of bad faith failure to settle against liability insurers.
Under California law, an insured (or an insured’s assignee) who pursues a bad faith claim against a liability insurer must prove that the insurer unreasonably deprived the insured of benefits owed under the policy. However, CACI No. 2334 suggests that a liability insurer is strictly liable for bad faith any time it rejects or fails to accept a reasonable settlement demand and a judgment exceeding policy limits is later entered against the insured—regardless whether the insurer had reasonable grounds for rejection or reasonably tried to accept a demand but was thwarted for reasons beyond its control.
In this action, a passenger injured in a single-vehicle accident made a policy limits demand to Farmers under a policy covering both the owner of the vehicle and the permissive driver. Farmers did everything within its power to accept the demand, including delivering a policy limits check before the demand expired. However, the permissive driver refused to provide a declaration required by the demand attesting to her lack of other insurance. The claimant deemed the failure to provide the declaration as a rejection of his demand. He then secured an excess judgment against the vehicle owner and permissive driver, obtained an assignment of their claims against Farmers, and sued Farmers for bad faith. Over Farmers’ objection, the trial court modeled the verdict form upon CACI No. 2334, omitting any requirement that the jury determine whether Farmers acted unreasonably. The court then entered a nearly $10 million bad faith judgment against Farmers based merely upon the jury’s findings that the demand was reasonable and Farmers failed to accept it.
Farmers retained Horvitz & Levy to challenge the judgment on appeal. The Court of Appeal agreed with Horvitz & Levy’s arguments and reversed the judgment in a published decision. The court held that, like every bad faith claim, a bad faith claim for failure to settle requires a finding that the insurer acted unreasonably, and the insurer’s mere failure to accept a reasonable demand is not unreasonable per se. The court noted that CACI No. 2334 erroneously omits the “crucial” element of unreasonable conduct by the insurer. Because, at the claimant’s behest, the verdict form did not require the jury to decide whether Farmers behaved unreasonably in any way, the court reversed the judgment for the claimant with directions that judgment be entered for Farmers.