Pursuant to Cal. Ins. Code § 790.03 (h), “[k]nowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices: . . .(5) [n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear. (6) [c]ompelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered. . . .(9) [f]ailing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made. (10) [m]aking known to insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration . . .”
In Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880 (1979), the Supreme Court of California court held that § 790.03 (h) created a private cause of action against insurers who commit the unfair practices enumerated in that provision. However, in 1988, Supreme Court of California overruled the decision in Royal Globe and held that § 790.03 (h) was not in fact intended to create a private civil action against an insurer that commits one of the enumerated acts outlined in that provision. Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287 (1988). The Moradi-Shalal court indicated that the decision in Royal Globe had resulted in countless litigation and coerced settlements and has generated confusion and uncertainty regarding its application. Id.
The Supreme Court of California held in Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (1973), that in every insurance contract, there is an implied covenant of good faith and fair dealing. Thus, the duty to so act is immanent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Id. As such, when the insurer unreasonably and in bad faith withholds the payment of the claim of its insured, the insurer is subject to liability in tort. Id.
With respect to settlement, in Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013), the California Court of Appeals held that an insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured. The Reid court further held that an insurer is not liable for a bad faith failure to settle when the insurer has done nothing to foreclose the possibility of settlement and there has been no submission of a settlement demand or any other manifestation that the injured party is in interested in settlement. Id. Lastly, the court indicated that “nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear.” Id. at 277.
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.