Demand Within Limits Not Required for California Bad Faith Failure-to-Settle Liability

A federal court in California has denied an insurer’s motion to dismiss an insured’s bad faith failure-to-settle claim, holding that a demand within limits or other settlement opportunity within limits is not a prerequisite to bad faith liability.  Aspen Spec. Ins. Co. v. Willis Allen Real Estate, 2015 WL 3765008 (S.D. Cal. June 15, 2015).  The court concluded that, to survive a motion to dismiss, California law only requires the insured to allege “some circumstance” demonstrating that the insurer knew a settlement within policy limits was feasible. 

The insured, a real estate company, was sued for rescission of a home purchase and for recovery of improvements costs after a landslide caused a portion of the claimants’ backyard to slide into a canyon.  During settlement discussions, the insured learned that it could resolve the underlying claims for less than the policy limits, but the insurer refused to give policy limits settlement authority and made settlement offers below the amount requested.  While settlement discussions were still ongoing, the insurer brought a coverage action against the insured, seeking declaratory judgment and rescission of the policy due to misrepresentations.  The insured counterclaimed for breach of contract and bad faith failure to settle.

In analyzing whether the insured’s bad faith counterclaim survived the insurer’s motion to dismiss, the court first stated that “under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.”  According to the court, an insurer can be liable for bad faith failure to pursue a settlement if there is evidence either that: (1) “the injured party has communicated to the insurer an interest in settlement”; or (2) “some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated.” Further, the court stated that California law does not require the “other circumstance” to be presented by the claimant or injured party.  The court held that the insured had sufficiently presented evidence of “some other circumstance” demonstrating that the insurer knew a within-limits settlement was feasible by alleging that the insured had informed the insurer that it could settle the underlying suit for less than the policy limits.