CHAPTER 2 BAD FAITH CASES AGAINST AN INSURER

• Jurisdiction: United States
• Publication year: 2018

To better understand why there is a tort of bad faith, I have digested below cases that brought about the tort of bad faith. The cases digested show the reasons why plaintiffs mistreated by insurers are now allowed to recover tort damages and punitive damages. The tort, however, requires that the plaintiff prove that the actions of the insurer were in violation of the covenant of good faith and fair dealing.

A. Punitive Damages Affirmed Against Insurer

The growth of punitive damages against an insurer can best be understood by reviewing the words of appellate courts that affirmed a trial court's award of punitive damages. As you read the digests of the early cases below, note how the opinions work hard to create the tort of bad faith and affirm the punitive damages award and allow the long history of punitive damages to be available to a person harmed by his or her insurer.

1. Comunale v. Traders & General Ins. Co.

Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 328 P.2d 198 (1958)

Mr. and Mrs. Comunale were struck in a marked pedestrian crosswalk by a truck driven by Percy Sloan. Mr. Comunale was seriously injured, and his wife suffered minor injuries. Sloan was insured by defendant Traders and General Insurance Company under a policy that contained limits of liability in the sum of $10,000 for each person injured and $20,000 for each accident. He notified Traders of the accident and was told that the policy did not provide coverage because he was driving a truck that did not belong to him. When the Comunales filed suit against Sloan, Traders refused to defend the action, and Sloan employed competent counsel to represent him. On the second day of the trial Sloan informed Traders that the Comunales would compromise the case for $4,000, that he did not have enough money to effect the settlement, and that it was highly probable the jury would return a verdict in excess of the policy limits. Traders was obligated to defend any personal injury suit covered by the policy, but it was given the right to make such settlement as it might deem expedient. Sloan demanded that Traders assume the defense and settlement of the case. Traders refused, and the trial proceeded to judgment in favor of Mr. Comunale for $25,000 and Mrs. Comunale for $1,250.

Sloan did not pay the judgment, and the Comunales sued Traders under a provision in the policy that permitted an injured party to maintain an action after obtaining judgment against the insured. (See Ins. Code, § 11580, subd. (b)(2).) In that suit judgment was rendered in favor of Mr. Comunale for $10,000 and in favor of Mrs. Comunale for $1,250. This judgment was satisfied by Traders after it was affirmed in Comunale v. Traders & General Ins. Co., 116 Cal. App. 2d 198, 253 P.2d 495.

Comunale obtained an assignment of all of Sloan's rights against Traders and then sued to recover from Traders the portion of his judgment against Sloan which was in excess of the policy limits. The jury returned a verdict in Comunale's favor, but the trial court entered a judgment for Traders notwithstanding the verdict.

Liability in Excess of the Policy Limits

In determining whether Traders was liable for the portion of the judgment against Sloan in excess of the policy limits, [the court concluded it had to] take into consideration the fact that Traders not only wrongfully refused to defend the action against Sloan but also refused to accept an offer of settlement within the policy limits. It is not claimed the settlement offer was unreasonable in view of the extent of the injuries and the probability that Sloan would be found liable, and Traders' only reason for refusing to settle was its claim that the accident was not covered by the policy.

There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything [that] will injure the right of the other to receive the benefits of the agreement. This principle is applicable to policies of insurance. The implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty.

The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. When there is great risk of a recovery beyond the policy limits, so that the most reasonable manner of disposing of the claim is a settlement [that] can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.

There is an important difference between the liability of an insurer who performs its obligations and that of an insurer who breaches its contract. The policy limits restrict only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured; they do not restrict the damages recoverable by the insured for a breach of contract by the insurer.

The decisive factor in fixing the extent of Traders' liability is not the refusal to defend; it is the refusal to accept an offer of settlement within the policy limits. Where there is no opportunity to compromise the claim and the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys' fees and costs.

Most of the cases dealing with the insurer's failure to settle involve an insurer who had assumed the defense of the action against the insured. It is generally held that since the insurer has reserved control over the litigation and settlement it is liable for the entire amount of a judgment against the insured, including any portion in excess of the policy limits, if in the exercise of such control it is guilty of bad faith in refusing a settlement.

An insurer who denies coverage does so at its own risk, and although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount [that] will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract. The insurer should not be permitted to profit by its own wrong.

A breach [that] prevents the making of an advantageous settlement when there is a great risk of liability in excess of the policy limits will, in the ordinary course of things, result in a judgment against the insured in excess of those limits.

If Traders had performed its contract, it would have settled the action against Sloan, thereby protecting him from all liability. The allowance of a recovery in excess of the policy limits will not give the insured any additional advantage but merely place him or her in the same position as if the contract had been performed.

It follows from what we have said that an insurer who wrongfully declines to defend and who refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.

Assignability of the Cause of Action

An action for damages in excess of the policy limits based on an insurer's wrongful failure to settle is assignable whether the action is considered as sounding in tort or in contract. Traders relies on a clause in the policy [that] provides that an assignment of an interest under the policy [would] be binding only if Traders consents thereto. However, it is well settled that such a provision does not preclude the transfer of a cause of action for damages for breach of a contract. Accordingly, Sloan could assign his cause of action to Comunale.

The Comunales were treated badly. The insurer failed to consider the interests of its insureds and by so doing—by failing to accept a reasonable settlement offer—violated the duty owed to the Comunales.

2. Critz v. Farmers Ins. Grp.

Critz v. Farmers Ins. Grp., 230 Cal. App. 2d 788, 41 Cal. Rptr. 401 (Cal. Ct. App. 1964)

Plaintiff Betty Critz was a passenger in an automobile driven by her husband. They were involved in a collision with an automobile driven by David Arnold. Arnold lost control of his vehicle while trying to negotiate a curve; his automobile crossed over to the opposite side of the road and crashed head-on into the Critz car. Mrs. Critz received numerous injuries, including the loss of sight in one eye and fractures of the neck and jaw. Arnold had liability insurance issued by defendant Farmers Insurance Group, with a coverage limit of $10,000 for injuries to one person.

Date of the accident was February 19, 1960. Defendant commenced an investigation of the accident. Almost five months after the accident, on July 8, 1960, plaintiff offered to settle her claim against Arnold for $10,000, the policy amount. The offer was made through Clifford Lewis, a Sacramento attorney, and took the form of a letter [that] required acceptance or rejection within one week. Without notifying Arnold of the offer, defendant replied with a counteroffer of $8,250.

At that point Mr. Lewis prepared a document and secured David Arnold's signature to it. The document recited that Mrs. Critz' settlement offer had been unreasonably rejected by Arnold's insurer and subjected Arnold to potential personal liability in excess of the policy limit. The document purportedly assigned to Mrs. Critz any right of action Arnold might have against his insurance company. In it Mrs. Critz undertook to hold Arnold free and harmless from all efforts to collect an injury judgment from him personally.

Through Mr. Lewis, plaintiff then filed an injury suit against Arnold. In ignorance of the

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