In California, when it comes to insurance bad faith litigation we usually think of first party bad faith where an insurer owes a duty to its own insured. In fact, third party bad faith is barely recognized except where the third party insurer refuses to accept reasonable settlements within liability policy limits. What this means is where a demand was made of a third party insurer (in instances like car collisions or falling trees from a neighbor’s yard) the insurer does not have the same duty to the person issuing the demand as it would to its own insured. In rare instances if a reasonable demand for policy limits is made to a third party insurer, the insurer may open up liability to its own insured above and beyond policy limits if it does not accept a policy limits demand within a reasonable time period if it knows the damage for the third party is above policy limits.
Although what I’ve just written is quite a mouthful, the point of it is that third party bad faith may become an even more difficult hurdle for those who seek a proper settlement from an insurance company. If your own insurance company refuses to answer a proper demand and it opens you up to potential liability, then you may not have much recourse against your own insurance company with the newly proposed changes to the California Jury Instructions. The California Civil Instructions Committee oversees jury instructions within California and have voted to adopt changes that are unfriendly to the public and favors insurance companies. California Civil Instructions (CACI) 2334 as it currently stands reads as follows:
2334. Bad Faith (Third Party)—Refusal to Accept Reasonable Settlement Within Liability Policy Limits—Essential Factual Elements
Name of plaintiff] claims that [he/she/it] was harmed by [name of defendant]’s breach of the obligation of good faith and fair dealing because [name of defendant] failed to accept a reasonable settlement demand in a lawsuit against [name of plaintiff]. To establish this claim, [name of plaintiff] must prove all of the following:
1. That [name of plaintiff in underlying case] brought a lawsuit against [name of plaintiff] for a claim that [[he/she/it] alleged] was covered by [name of defendant]’s insurance policy;
2. That [name of defendant] failed to accept a reasonable settlement demand for an amount within policy limits; and
3. That a monetary judgment was entered against [name of plaintiff] for a sum greater than the policy limits.
“Policy limits” means the highest amount available under the policy for the claim against [name of plaintiff].
A settlement demand is reasonable if [name of defendant] knew or should have known at the time the settlement demand was rejected that the potential judgment was likely to exceed the amount of the settlement demand based on [name of plaintiff in underlying case]’s injuries or loss and [name of plaintiff]’s probable liability.
The above jury instruction would be filled in and handed to a jury to use during the deliberation process. However, the Committee proposes to do two things. 1) add an additional element wherein "that [name of defendant]’s failure to accept this settlement demand was unreasonable." and 2) defines "unreasonable" to mean "that the insurer had no proper cause for its conduct."
As a plaintiff’s attorney that represents consumers, the analysis of the proposed provisions comes down to the fact that besides proving that the insurer failed to accept a reasonable offer within policy limits as stated by the current jury instruction, an insured must now show that the defendant insurer’s conduct in doing so was unreasonable and by definition, that the conduct is "without proper cause". This change is extremely insurance company friendly because now Plaintiffs must prove that a rejected settlement demand is unreasonable specifically because the insurer had no proper cause to reject the demand. This CACI instruction proposed change has been highly disturbing as there has been no case law change that warrants such a change in the bad faith jury instruction and thereby takes changes in the law away from the Courts and the Legislature which are the traditional means for change in the law.