On March 8, 2021, a California appellate court reversed a $9.935 million bad faith verdict against an insurer by drawing a distinction between rejection of a reasonable settlement offer within policy limits and unreasonable rejection of such a settlement offer. In Alexander Pinto v. Farmers Insurance Exchange, 2021 WL 857776 (March 8, 2021), a three judge panel unanimously reversed a jury verdict in favor of the plaintiff and remanded the case to the trial court instructing that a judgment be entered in favor of the insurer.
The lawsuit arose from a March 31, 2013 single car roll-over accident in which one passenger – Alexander Pinto – was rendered a quadriplegic and the car owner – Alaxandrea Martin, also a passenger – suffered brain damage. The accident was apparently the result of the driver, Dana Orcutt, operating the vehicle while under the influence of drugs and/or alcohol. Farmers Insurance Company had issued an auto insurance policy to Martin which had a per occurrence limit of $100,000 and a per person limit of $50,000.
The accident was reported to Farmers on April 9, 2013, which appointed an investigator and subsequently a claims adjuster. After completing its investigation, Farmers tendered its $100,000 policy limits to all injured parties except Orcutt, who was the driver at fault. There is no indication that any of the injured parties accepted the tender. Farmers requested that Orcutt advise if she had other coverage, but she never responded.
On July 5, 2019, over six years later, Farmers received a letter from an attorney representing Pinto offering to settle Pinto’s claim against Martin for the policy limits. Pinto’s offer was contingent on “the insured” providing a release, a declaration that “the insured” had not been acting within the course and scope of employment at the time of the accident, and a copy of any applicable insurance policy. The offer was set to expire on July 16, 2019, 11 days after it was received by Farmers.
Farmers immediately forwarded the settlement demand to both Martin – the named insured – and Orcutt – insured as a permissive driver. After no response from Orcutt, Farmers hired a private investigator who located her. Orcutt advised that she had no other insurance and had not been acting within the course and scope of any employment when the accident happened. Orcutt never responded to Farmers’ request for a declaration.
On July 11, 2019, Farmers repeatedly called Pinto’s attorney to request an extension of the deadline on the settlement demand, but received no response. Farmers then retained an attorney who faxed a letter to Pinto’s counsel on July 15, 2019 tendering the $50,000 per person policy limit. The letter also requested that Pinto clarify that the payment was for the release of both of Farmers’ insureds, noting that Farmers could not pay without a release for both. Noting the need for additional time to finalize the non-monetary terms of the settlement, Farmers sought a 30 day extension of the settlement demand.
Pinto’s attorney responded by agreeing that the release applied to Martin and Orcutt, but refused to extend the deadline of July 16, 2019. In response, Farmers delivered a letter to Pinto’s counsel the next day which enclosed a $50,000 check and a settlement release form. Farmers also faxed a declaration signed by Martin, but was unable to obtain one from Orcutt.
The next day, Pinto’s counsel rejected Farmers’ tender on grounds that Farmers had not met all of Pinto’s requirements by the stated deadline. On August 7, 2019, Pinto filed suit against Orcutt and Martin for negligence. The case settled with Martin and Orcutt assigning their rights against Farmers to Pinto and agreeing that the settlement was worth $10 million. Pinto also received $65,000 from a different insurer for Orcutt.
Pinto then filed suit against Farmers for alleged bad faith failure to accept a reasonable settlement offer. At trial, Farmers argued that the fact that $50,000 was a reasonable amount did not mean that Farmers had unreasonably failed to accept that demand. The jury’s special verdict form made several findings related to Farmers, including: (1) Pinto made a reasonable settlement demand; (2) Farmers failed to accept a reasonable settlement demand; (3) a monetary judgment against Martin had been entered in the prior lawsuit; (4) Orcutt failed to cooperate with Farmers; (5) Farmers used reasonable efforts to obtain Orcutt’s cooperation; and (6) Orcutt’s lack of cooperation prejudiced Farmers. Critically, the jury did not find that Farmers acted unreasonably. After the verdict, the trial court entered judgment for Pinto in the amount of $9,935,000. Farmers appealed.
The issue on appeal was whether, in the context of a third party insurance claim, the failure to accept a reasonable settlement offer constitutes bad faith per se. The Court of Appeal explained that “the critical issue [is] the reasonableness of the insurer’s conduct.” (Pinto, supra, 2021 Westlaw 857776 at *5; citing Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 723 (2007).) The Court went on to hold that “an insurer’s duty to accept a reasonable settlement offer is not absolute,” and that a claim for bad faith failure to settle “requires proof that the insurer unreasonably failed to accept an offer.” (Pinto, supra, 2021 Westlaw 857776 at *5, *6.) The Court rejected the contention that the failure to accept a settlement demand for a reasonable sum is proof that the insurer acted unreasonably. The Court noted that there could be multiple reasonable reasons why such a demand might not be accepted. In sum, the Court made clear that failure to accept a policy limits demand by itself will not support recovery of an excess policy limits verdict.
Because the jury had not been asked to find, and thus did not find, that Farmers acted unreasonably in failing to accept the settlement demand, the Court found that there was no legal basis for the verdict or judgment for bad faith. (Pinto, supra, 2021 Westlaw 857776 at *6, *8.) Critically, the Court concluded that the failure to properly instruct the jury and to provide a proper special verdict form in accord with standard California jury instructions was the fault of Pinto’s counsel. (Id. at *10) Therefore, the Court did not send the case back to the trial court for a new trial, but instead the Court ordered that judgment be entered in Farmers’ favor. (Id.)
The Pinto case stands for the important proposition that whether a policy limits demand is reasonable in amount is not the sole determinative factor of bad faith liability. Rather, the insurer’s decision and conduct in failing to the accept the settlement demand must be unreasonable in order for bad faith liability to attach. This case will certainly impact jury instructions and special verdict forms in all future bad faith failure to settle cases.
It should be noted that Farmers’ actual conduct in this matter was far from unreasonable. The facts showed that Farmers’ investigation of the claim and Farmers’ attempt to respond to the settlement demand were detailed, prompt and comprehensive. Farmers’ initial investigation in 2013 led to an offer by Farmers to tender its full $100,000 per occurrence limit to all the injured parties, except for the at-fault driver. When the settlement demand from Pinto was received, despite having only eight business days to respond, Farmers contacted its named insured and obtained a declaration from that insured, retained a private investigator to locate Orcutt, retained counsel to seek an extension so that Farmers could comply with the non-monetary provisions in the settlement demand, and even messengered a check for the per-person policy limit to Pinto’s counsel prior to the expiration of the settlement demand. Although the Court of Appeal refrained from overtly praising Farmers’ conduct, the opinion clearly shows that the Court viewed Farmers’ claims handling in this matter favorably.
Although it is not stated directly in the opinion, the Court impliedly viewed Pinto’s rejection of the settlement payment tendered by Farmers and Farmers’ efforts to comply with the other non-monetary settlement terms as an attempt to set Farmers up for a bad faith failure to settle lawsuit, an attempt that would have succeeded in obtaining a judgment of nearly 200 times the policy limits had the appellate court not intervened.
This decision should be a deterrent against plaintiffs’ counsel making policy limits demands with unreasonably short deadlines or which contain too many non-monetary requirements, including ones that the insurers themselves cannot necessarily satisfy. Insurers will be able to cite the Pinto case in support of requests for extensions of time to respond to settlement demands and/or requests for clarification or waiver of non-monetary requirements of a settlement demand.
Although this case ultimately was a win for Farmers, it shows how seriously insurers must take policy limits demands – even those that seem unreasonable in timing or terms. Insurers must take whatever steps they can to investigate and adequately respond to such demands. Had the insured offered a proper jury instruction and submitted a proper special verdict form addressing the unreasonableness of Farmers’ conduct, and the jury had found that Farmers acted unreasonably, the nearly $10 million judgment against Farmers would not have been reversed by the Court of Appeal. Under established principles of appellate review, the Court of Appeal would not have been able to reverse an adverse jury verdict simply because it disagreed with the jury and viewed Farmers’ conduct as reasonable. The threat of bad faith liability for a failure to accept a reasonable policy limits settlement demand thus remains, but Pinto provides an insurer with the ability to argue that its failure to accept the demand, in whole or in part, was not unreasonable based on the totality of the facts and circumstances surrounding the demand.