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Insurance Coverage & Bad Faith Newsletter - Spring 2021

Alexander Pinto v. Farmers Insurance Exchange

(Bad Faith Verdict Reversed as Plaintiff Failed to Include Instruction Requiring That Insurer Acted Unreasonably in Refusing to Accept Reasonable Settlement Demand)

(April 2021) - In Pinto v. Farmers Ins. Exch., --- Cal.App.5th--- (March 8, 2021), the California Second District Court of Appeal reversed a judgment finding that Farmers Insurance Exchange (“Farmers”) acted in bad faith by refusing to accept a reasonable offer to settle a personal injury lawsuit within policy limits. The jury verdict form did not include a finding relative to whether Farmers had acted unreasonably in failing to accept a reasonable offer to settle the underlying claim within policy limits.

The parties’ dispute arose out of an automobile accident on March 31, 2013 involving a pickup truck (“truck”) roll-over, wherein there were four individuals in the truck. Initially, it was unclear who was driving the truck at the time of the accident. Ultimately, Farmers was able to determine, through its investigation, that Dana Orcutt (“Orcutt”) was driving the truck. In the meantime, one of the passengers in the truck, Alexander Pinto, asserted a claim against Orcutt (as a permissive user of the truck) and the owner of the truck (who was also a passenger), Alexandrea Martin. Pinto has sustained serious injuries as a result of the accident (rendered a quadriplegic). Pinto’s attorney sent a policy limits demand to the Farmers’ adjuster assigned to the claim, Tanya Cannon, at the Farmers document center in Oklahoma on July 1, 2019 offering to settle Pinto’s claim against Martin (the demand did not include Orcutt). The demand included as conditions that the insured provide a release, a declaration that the insured had not been acting in the course and scope of employment, and a copy of any insurance policy. The demand was set to expire on July 16. Because the demand was sent to the Farmers document center and encompassed the July 4th holiday, Farmers had eight days to respond to the demand. 

Subsequently, Cannon sent the demand to Martin and Orcutt on July 6. On July 11, because Cannon had not heard from Orcutt, she retained a private investigator that found Orcutt. According to the investigator, Orcutt advised him that she had no other insurance and was not acting in the course and scope of employment. However, Orcutt never provided a declaration to Cannon, despite her requests for one. On July 11, Cannon called Pinto’s counsel three times asking for an extension to respond to the policy limits demand deadline. Counsel never responded to Cannon’s requests. Subsequently, an attorney retained by Farmers, Limor Lehavi, faxed a letter to Pinto’s attorney tendering the Farmers per person limits of $50,000 to Pinto in exchange for a release of all claims against all insureds under the Farmers policy. The letter also advised that Farmers could not pay policy limits without a release of all of its insureds. The letter also requested a declaration for use in securing a statement of no insurance and scope of employment conditions required by Pinto’s demand. In addition, the letter asked if there were any outstanding liens, and whether Pinto intended to pursue a claim against GM, which could slow the payment of limits, should GM cross-claim against the insureds.

Pinto’s counsel responded by confirming that the demand applied to Orcutt and Martin. Further, Pinto was unmarried. Lastly, the demand was extended 24 hours to 5:00 p.m. the next day to satisfy all of the conditions. Before 5:00 p.m. the next day, Farmers hand-delivered a letter to Pinto’s counsel’s office accepting the offer and enclosing a $50,000 check and form releasing Orcutt and Martin. Farmers also faxed a declaration from Martin to counsel, but not Orcutt, as Farmers was unable to secure a declaration from her. Pinto’s counsel rejected Farmers’ response and contended that Farmers had failed to perform an adequate investigation.

Thereafter, Pinto filed suit against Martin and Orcutt. Subsequently, Pinto settled his lawsuit in exchange for an assignment of rights against Farmers and the understanding that the settlement would be treated as a judgment of $10 million. In addition, Orcutt and Martin would pay Pinto $65,000 (Orcutt was insured under a policy for $15,000). Subsequently, Pinto filed a bad faith lawsuit against Farmers.

In the bad faith lawsuit, the jury made three findings:

  • Pinto made a reasonable settlement demand;
  • Farmers failed to accept a reasonable settlement demand; and
  • A monetary judgment had been entered against Martin in Pinto’s earlier lawsuit.

The jury also made the same findings against Orcutt, but also found that Orcutt had failed to cooperate with Farmers and that such failure had prejudiced Farmers. The jury made no finding that Farmers had acted unreasonably by failing to accept Pinto’s reasonable settlement offer. A judgment was entered against Farmers for $9.935 million.

In reversing the judgment, the Court of Appeal described the issue presented as follows:

Farmers contends the judgment must be vacated because the jury did not find, and no evidence established, that it acted unreasonably in failing to settle Pinto's claim against Martin. Pinto counters that failure to accept a reasonable settlement offer is itself unreasonable per se.

I. Whether the Verdict Supports the Judgment

The issue is whether, in the context of a third party insurance claim, failing to accept a reasonable settlement offer constitutes bad faith per se. We conclude it does not.

A. Legal Principles

1. Bad Faith Liability Requires a Finding That the Insurer Acted Unreasonably

"In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party's lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer's breach." (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312 [84 Cal. Rptr. 2d 455, 975 P.2d 652].)

In evaluating whether an insurer acted in bad faith, "the critical issue [is] the reasonableness of the insurer's conduct under the facts of the particular case." (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713 723 {68 Cal. Rptr. 3d 746, 171 P.3d 10821.) To hold an insurer liable for bad faith in failing to settle a third party claim, the evidence must establish that the failure to settle was unreasonable.

2. An Insurer's Failing To Accept a Reasonable Offer Is Not Unreasonable Per Se

An offer to settle an insurance claim is generally multidimensional, the most obvious component being the amount demanded. Other components include the conditions for acceptance and the scope of any release.

An insurer's duty to accept a reasonable settlement offer is not absolute. '"n deciding whether or not to settle a claim, the insurer must take into account the interests of the insured, and when there is a great risk of recovery beyond the policy limits, a good faith consideration of the insured's interests may require the insurer to settle the claim within the policy limits. An unreasonable refusal to settle may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-661 [328 P.2d 198].)' [Citation.]" (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 724-725 [117 Cal. Rptr. 2d 318, 41 P.3d 128], italics added.)

Therefore, failing to accept a reasonable settlement offer does not necessarily constitute bad faith. "[T]he crucial issue is ... the basis for the insurer's decision to reject an offer of settlement." (Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1460 [7 Cal. Rptr. 2d 513].) "[M]ere errors by an insurer in discharging its obligations to its insured "'does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer's conduct must also have been unreasonable."'" (Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414. 425 {179 Cal. Rptr. 3d 7177.) "[S]o long as insurers are not subject to a strict liability standard, there is still room for an honest, innocent mistake." (Walbrook, at p. 1460; accord, Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1280 [31 Cal. Rptr. 2d 433] ["erroneous denial of a claim does not alone support tort liability; instead, tort liability requires that the insurer be found to have withheld benefits unreasonably"].)

A claim for bad faith based on the wrongful refusal to settle thus requires proof the insurer unreasonably failed to accept an offer. ( Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 798 [41 Cal. Rptr. 401], disapproved on other grounds in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433 [58 Cal. Rptr. 13, 426 P.2d 173].)

Simply failing to settle does not meet this standard. A facially reasonable demand might go unaccepted due to no fault of the insurer, for example if some emergency prevents transmission of the insurer's acceptance.

The Court of Appeal also rejected Pinto’s argument that the failure to accept a reasonable settlement offer is per se unreasonable. The Court of Appeal reasoned as follows:

Pinto relies on two further Supreme Court cases which are to the same effect as Comunale and no more apposite: Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, and Johansen v. California State Auto. Assn. Inter­ Ins. Bureau (1975) 15 Cal.3d 9 [123 Cal. Rptr. 288, 538 P. 2d 744]. 

We reiterate the court's latest statement on the matter: '"[A] good faith consideration of the insured's interests may require the insurer to settle the claim within the policy limits. An unreasonable refusal to settle may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits."' (Hamilton v. Maryland Casualty Co., supra, 27 Cal.4th at p. 725, italics added; see also Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 401 [97 Cal. Rptr. 2d 151, 2 P.3d 1] ["An insurer that breaches its implied duty of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits may be held liable for the full amount of the judgment against the insured in excess of its policy limits" (italics added)]; Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 916-917 [164 Cal. Rptr. 709, 610 P.2d 1038] ["an insurer may be held liable for a judgment against the insured in excess of its policy limits where it has breached its implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within the policy limits" (italics added)].)

The court has never held that failure to accept a reasonable settlement is per se unreasonable. 

As result, because the verdict form did not include a finding relative to whether Farmers acted unreasonably by failing to accept a reasonable settlement offer, the Court of Appeal reversed the judgment in favor of Pinto and entered judgment in favor of Farmers. The Court of Appeal reasoned as follows relative to entering judgment in favor of Farmers:

The question remains: what to do about the defective judgment.

The plaintiff "bear[s] the responsibility for a special verdict submitted to the jury on [his] own case" and must therefore ensure that a special verdict allows the jury to "'resolve all of the ultimate facts"' so that ""'nothing shall remain to the court but to draw from them conclusions of law."'" (Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 959- 960; 961-962 [17 Cal. Rptr. 2d 242].) "It is incumbent upon counsel to propose a special verdict that does not mislead a jury into bringing in an improper special verdict." (Id. at p. 960, fn. 8.) A plaintiff who fails to do so "is bound by the erroneous special verdict." (Ibid.)

Pinto argues that Farmers successfully objected to the very "reasonableness" special verdict question that it now argues was required, proposed special verdict question No. 7. Under the doctrine of invited error, he argues, Farmers is estopped from urging the defective verdict as a ground for reversal. We disagree.

The '"doctrine of invited error' is an 'application of the estoppel principle:' 'Where a party by his conduct induces the commission of error, he is estopped from asserting it as a ground for reversal' on appeal." (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 403 [87 Cal. Rptr. 2d 453, 981 P.2d 79).) The purpose of the doctrine is to "prevent [] a party from misleading the trial court and then profiting therefrom in the appellate court." (Ibid.)

The proposed special verdict question at issue, No. 7, which Pinto proposed and to which Farmers objected, asked: "Did Farmers breach its duty of good faith and fair dealing to [Martin] by acting unreasonably and by failing to give as much consideration to her interests as they gave to their own interests?"

If the jury answered "no," it was instructed to answer question No. 9, which asked whether Farmers "fail[ed] to accept a reasonable settlement demand for an amount within [Martin's] policy limits." Question No. 9 eventually became the foundation of the special verdict form.

Farmers objected to question No. 7, and it was never given.

Question No. 7 would not have been the correct reasonableness question because it asked nothing about the settlement offer, which was discussed only in question No. 9. Although Pinto complained at length about Farmers's many bad acts, in the end it cured any deficiency by tendering the full $50,000 policy limits. Those acts therefore had nothing to do with Pinto’s damages, which comprised solely the loss of that $50,000.

In fact, the jury could not have both answered "yes" to question No. 7 and made any finding about the settlement offer, because pursuant to Pinto's protocol, question No. 9, the only question mentioning the settlement offer, would not be encountered should the jury answer yes to question No. 7. There is therefore no way question No. 7 could have cured the verdict.

Pinto argues it was Farmers that insisted that the special verdict mirror CACI No. 2334, and is therefore responsible for the error. The record is flatly to the contrary. Farmers proposed that a special verdict question mirroring CACI No. 2334 be modified to ask whether Farmers's failure to accept Pinto's settlement offer was "the result of unreasonable conduct by Farmers," which Farmers at all times argued was essential to Pinto's bad faith failure-to-settle theory.

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