Where party fails to prove insurance coverage or that alleged insurer waived right to contest coverage, party is not entitled to jury instruction on bad faith

Posted in: Insurance Law by Steven Vartabedian on

Erica Howard suffered severe injuries as a result of a car accident when she was being driven home from a New Year’s Eve party by Paul Peterson, who had become intoxicated at the party put on by Donald DeWitt. The location of the party was an apartment complex, where DeWitt served as the on-site manager. Lisa Capelletti owned the apartment complex; she insured herself for $1 million per occurrence under a policy provided by Monterey Insurance Company.

Howard settled her claim against Peterson for $250,000 (policy limit) and her claim against Cappelletti for $50,000 (under the Monterey policy). Prior to these settlements, DeWitt was denied coverage by Monterey, which declined to provide him with a defense. Howard got a default judgment against DeWitt in the amount of $4.7 million. Monterey unsuccessfully tried to get this default judgment set aside, and eventually negotiated a settlement with Howard for $3.5 million in satisfaction of the judgment.

In DeWitt v. Monterey Insurance Co. (filed March 13, 2012) 2012 DJDAR 3311, DeWitt’s claim of bad faith against Monterey resulted in a defense jury verdict. DeWitt appealed claiming the trial court erred in denying his request that the jury be instructed in CACI No. 2334, which sets forth the elements of bad faith when an insurer assumes the duty to defend but fails to accept a reasonable settlement offer. The Court of Appeal, Fourth Appellate District, Division One, affirmed.

There is no basis in the record, wrote the appellate court, to conclude the instruction was required on the ground that Monterey waived any coverage defenses by defending DeWitt in the Howard action. An insurer has a duty to accept a reasonable offer only with respect to covered claims. DeWitt argued that once Monterey moved to set aside Howard’s default judgment against DeWitt, it effectively undertook DeWitt’s defense. The court disagreed that there was any waiver of the coverage issue; that Monterey was acting on its own behalf reserving the right to contest coverage. The only other basis upon which DeWitt could assert this claim of bad faith was to establish in the trial court that coverage (Monterey’s duty to indemnify DeWitt) had either been determined in the Howard action or was proven in the instant trial. DeWitt’s counsel expressly stated during the jury instruction conference that the question of “breach of the duty to indemnify” was not to be decided.

This case should be a reminder to any attorney prosecuting a bad faith/failure-to- settle claim that it is absolutely essential to either prove coverage or demonstrate that the insurer assumed the defense without a reservation of rights (showing waiver of issue of coverage). From a defense standpoint, if plaintiff’s counsel cannot do either, move for summary judgment. On this point, I am surprised that Monterey’s motion for summary judgment on this ground was denied. Denial of the requested jury instruction essentially achieved the same result, but after the cost of a jury trial.

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