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Some of the Most Important Cases Creating the Tort of Bad Faith  

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In Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654 (1958), the  insurance company wrongfully refused to defend its insured who had been  sued in the underlying action for damages arising out of an automobile  accident. It also refused to conclude the suit after receiving an offer  of settlement for about 25 percent of the ultimate judgment obtained  against its insured. The refusal resulted in an excess judgment against  its insured. In the subsequent bad faith action the insurer was held  liable for the entire judgment including the excess limits and other  resulting damages. This was clearly an extra-contractual recovery since  under a straight breach of contract claim the insurer would have been  liable for only the amount of the policy.  In Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 799, 41 Cal.Rptr.  401 (1964), an injured person who had recovered a judgment against an  insured brought an action, as assignee of the insured, against the  insurer. 

The Court of Appeal held that the assignment by the insured to  the injured person of any right of action that the insured might have  against his insurer for unreasonably rejecting the injured person\\u2019s  settlement offer to the insurer would subject the insurer to liability  for the amount of recovery by the injured person against the insured in  excess of the policy limit if the insurer acted in bad faith in  rejecting the offer of settlement. The court in this case held that a  wrongful refusal to settle sounded only in contract was expressly  disapproved. 

The court stated that, in determining whether to accept a  settlement offer, the insurer must give the interest of the insured at  least as much consideration as its own. When there is a great risk of an  excess judgment, good faith requires acceptance of an offer within  policy limits.  In Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 799, 41 Cal.Rptr.  401 (1964), an injured person who had recovered a judgment against an  insured brought an action, as assignee of the insured, against the  insurer. The Court of Appeal held that the assignment by the insured to  the injured person of any right of action that the insured might have  against his insurer for unreasonably rejecting the injured person\\u2019s  settlement offer to the insurer would subject the insurer to liability  for the amount of recovery by the injured person against the insured in  excess of the policy limit if the insurer acted in bad faith in  rejecting the offer of settlement. When there is a great risk of an  excess judgment, good faith requires acceptance of an offer within  policy limits. The Court of Appeal concluded that if bad faith occurred  before the assignment the action could be maintained by the assignee.

ZALMA OPINION  

It is important that everyone involved in insurance claims understand  that the tort of bad faith exists and must be dealt with whenever a  claims is investigated and attempts to settle fail. The insurance claim  professional can learn to avoid the mistakes made by their predecessors  who cause the creation of the tort by not treating their insureds fairly  and in good faith, and sometime by attempting to defraud or hurt their  insureds to avoid payment of legitimate claims. Because of the creation  of the tort of bad faith such wrongful conduct is rare but still exists  and needs to be removed from the industry.  \\xa9 2021 \\u2013 Barry Zalma