Insurance Law

Insured Not Required to Plead Existence of a Within-Limits Settlement Demand in Order to State a Claim for Bad Faith Failure to Settle

In Aspen Specialty Ins. Co. v. Willis Allen Real Estate, the district court denied a liability carrier’s motion to dismiss an insured’s bad faith claim for failure to effectuate a settlement within policy limits despite the fact that the complaint failed to allege a within-limits demand. The court held that, to survive a motion to dismiss a claim for bad faith failure to settle, California law only requires the insured to allege “some circumstance” demonstrating that the insurer knew that a settlement within policy limits could be feasibly negotiated.

In this case, the third-party claimants purchased a home through the insured, a real estate company. Thereafter, a landslide caused a significant portion of the claimants’ backyard to slide into an adjacent canyon. The claimants sued multiple defendants, including the insured, seeking rescission of the house purchase and recovery of the cost of making home improvements. The insured tendered the defense of the underlying lawsuit to its professional liability carrier, who agreed to defend and investigate the claims against the insured.

During the underlying litigation, the parties engaged in settlement efforts, including mediation. The insured’s defense counsel allegedly informed the carrier about the possibility of liability in excess of the policy limits and requested the authority to settle up to the policy limits. The insured also purportedly learned during settlement negotiations that it could resolve the underlying claim for substantially less than the policy limits, but the carrier nevertheless refused to give policy limits settlement authority and made settlement offers below the amount requested. The insured contended the carrier’s “lowball” offers prevented a settlement from being effectuated and drew out settlement negotiations. The claimants eventually settled with the insured, but only after the claimants had settled with all other defendants. The settlement completely exhausted the policy and the insured was required to contribute substantial monies of its own.

Before the settlement with the claimants was completed, the carrier filed a complaint against the insured seeking declaratory relief and rescission of the policy due to alleged misrepresentations. The insured counterclaimed for breach of contract and tortious breach of the implied covenant of good faith and fair dealing, alleging the carrier acted in bad faith when it ignored liability exposure and refused to give policy limits settlement authority. The carrier moved to dismiss the insured’s counterclaim on the basis that it failed to allege that the claimants made a settlement demand within policy limits.

In denying the insurer’s motion to dismiss, the district court held that the insured’s counterclaim pleaded sufficient facts that the carrier “refused in bad faith a reasonable opportunity to settle.” In so holding, the court stated that “under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” The court explained that, in a case where the insured is exposed to a judgment beyond policy limits, an insurer may be liable for bad faith failure to pursue a settlement if there is evidence either that: (1) “the injured party has communicated to the insurer an interest in settlement” or (2) “some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated.” The court further held that the “other circumstance” need not be presented by the claimant or injured party. Based on the foregoing, the court found that the insured sufficiently alleged such a circumstance, by alleging facts that: (1) the insured had informed the insurer that its conversations with the claimant suggested that a settlement for significantly less than the policy limits was possible; (2) the claimants engaged in mediation in hopes of settling the case; and (3) the insured’s defense counsel warned the carrier of potential damages in excess of the policy limits and requested policy limits settlement authority, but the carrier refused. Accordingly, the court held that the insured’s allegations were sufficient to survive the insurer’s motion to dismiss.

Aspen Specialty Ins. Co. v. Willis Allen Real Estate, 2015 U.S. Dist. LEXIS 77928 (S.D. Cal. June 15, 2015), [subscribers can access an enhanced version of this opinion: | Lexis Advance].

Originally published in California Insurance Law Review - 2015

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.


For more information about LexisNexis products and solutions, connect with us through our corporate site