Daily Blast March 13, 2012

On March 13, 2012, the Fourth Appellate District, Division One issued an opinion in the case of Dewitt v. Monterey Insurance Company (Mar. 13, 2012, D057887) ___ Cal.App.4th ___. It holds that a plaintiff is not entitled to jury instruction CACI No. 2334 regarding elements of bad faith for refusal to settle if the carrier has not assumed a duty to defend and there is no finding of a duty to indemnify. In other words, if the insurance company does not assume a duty to defend (or assumes a defense with a proper reservation of rights) and there is no finding of a duty to indemnify (there is no coverage) then there can be no liability for bad faith failure to settle a third-party claim.

The case gives a nice summary of the law governing bad faith claims based on an insurers alleged failure to accept a reasonable settlement offer. It walks through the authorities that say an insurer can be liable for failure to accept a reasonable settlement offer in a case in which the insurer has refused to defend an action and coverage is later determined to exist. It also explains the corollary rule, which is that if an insurer rejects a settlement offer on the basis that the policy provides no coverage, and its coverage position is later vindicated, then there is no liability for damages from refusal to settle. (Slip Opn., pp. 10-16.) The opinion clarifies that CACI No. 2334 is intended for use if the insurer assumed the duty to defend, but failed to accept a reasonable settlement offer. (Id. at p. 16.) It also discusses the right of an insurer to contest coverage if there is an adequate reservation of rights or if there is a breach of duty to defend but there is no adjudication of coverage. (Id. at p. 17.)

In the case before the court, plaintiff claimed the carrier acted in bad faith by failing to accept reasonable settlement offers within the policy limits. The court had previously found on summary judgment that there was a duty to defend. However, before the case went to the jury, the plaintiff abandoned the breach of contract claim and stated, “The jury’s not deciding the breach of the duty to indemnify.” Plaintiff requested CACI No. 2334. The trial court refused to give 2334 but gave other bad faith instructions. The jury found the insurer did not unreasonably fail to provide a defense. 

The Court of Appeal affirmed the trial court’s decision to deny the instruction because the use note for 2334 makes clear that it is only to be given if the insurer assumed the duty to defend. The court noted that this is consistent with established authority that “an insurer has a duty to accept a reasonable settlement offer only with respect to a covered claim.” (Slip Opn., p. 24.)

The appellate court cautioned that one cannot say that insurer may be liable on a theory of bad faith only where it has formally assumed a duty to defend. However, the court noted the lack of authority to permit a plaintiff to prevail on a bad faith claim against an insurer based upon a failure to settle without having established “either that the insurer assumed the duty to defend the insured or that the insurer owed the insured a duty to indemnify.” (Slip Opn., p. 25, emphasis in original.) Since the plaintiff did not establish a duty to indemnify or an assumption of the duty to defend, plaintiff was not entitled to instruction 2334. (Id. at pp. 26-28.)

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