Primary Insurance Must Pay All Losses in Excess of Policy Limits After Denying a Within-Limits Settlement Offer

Judgement or settlement which exceeds policy limits after denying a settlement offer within policy limits and the excess settlement rule. California Court of Appeals ruled that primary insurance companies are responsible for paying all losses in excess of policy limits after denying a within–limits settlement offer, regardless of whether the excess loss arises out of a verdict, judgment or a settlement.

Insured or Excess Insurer Contributed to Excess Settlement or Judgement When Rejected a Within-Limits Settlement Offer or Policy Limit Demand

The Second District California Court of Appeal’s August 5, 2016 opinion in Ace American Ins. Co. v. Fireman’s Fund Ins. Co. found that “where the insured or excess insurer has actually contributed to an excess settlement, [the insured or excess insurer] may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.” The lack of a final judgment was immaterial, as there was “no persuasive reason to hold that the [policyholder] or its assignee, [the excess insurance company], must suffer that loss with no remedy simply because the case reached an eventual settlement instead of being litigated through trial.”

In order words, in the event that a policyholder(s) do not have excess insurance, policyholders should argue that their first party insurance company or primary insurer who rejected a within-limits settlement offer is obligated to pay the full amount of any subsequent settlement which exceeds that insured’s policy limits. There is no reason why the first party insured should be forced to contribute or pay a settlement of which first party insured could recover by filing at first party bad faith action against their primary insurance company.

What is Insurance Bad Faith?

California insurance bad faith actions arise when insurance company breaches the implied obligation of good faith and fair dealing. Insurance companies must, unreasonably or without proper cause, act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.

Generally, the term bad faith for insurance purposes means an insurance company:

1. Unreasonably denies a claim;
2. Unreasonably delays the claims process;
3. Unreasonably terminates the claim
4. Unreasonably underpays a claim.

Insurer’s Failure to Reasonably Settle Claim within Policy Limits

The court found that when an insurer’s failure to reasonably settle a claim within policy limits, after primary or “first party” insurance rejected a within-limits settlement offer and there is a judgement against their insured/policyholder, whether by settlement or verdict, the first party insurance company must pay any excess monies, whether through jury verdict, settlement, or judgment. Policy limits demands can be a powerful tool for plaintiffs’ insurance lawyers and can cause headaches for claims adjusters. While, it all depends on the circumstances surrounding the claim or issue, an insurer that misses an opportunity for a reasonable settlement of a claim against its insured can now be liable for the full amount of a later judgment, regardless of the policy limits.

If you believe that your primary insurance company rejected a within-limits settlement offer and an later there was a subsequent settlement or judgement which exceeds your policy limits or you believe that your insurance company may be acting in bad faith, speak to one of our Los Angeles insurance lawyers for a free consultation and case review. Call our office at (310) 943-1171, our attorneys speak English, French, Spanish, Russian, Armenian, and Italian.