2334 . Bad Faith (Third Party) - Refusal to Accept Reasonable
Settlement Demand Within Liability Policy Limits - Essential
Factual Elements
[ Name of plaintiff ] claims that [ name of defendant ] breached the obligation
of good faith and fair dealing because [ name of defendant ] failed to accept
a reasonable settlement demand for a claim against [ name of plaintiff ]. T o
establish [ name of plaintiff ]’ s claim against [ name of defendant ], [ name of
plaintiff ] must prove all of the following:
1. That [ name of plaintiff ] was insured under a policy of liability
insurance issued by [ name of defendant ];
2. That [ name of claimant ] made a claim against [ name of plaintiff ]
that was covered by [ name of defendant ]’s insurance policy;
3. That [ name of claimant ] made a reasonable demand to settle [his/
her/ nonbinary pronoun ] claim against [ name of plaintiff ] for an
amount within policy limits;
4. That [ name of defendant ] failed to accept this settlement demand;
5. That [ name of defendant ]’s failure to accept the settlement demand
was the result of unreasonable conduct by [ name of defendant ];
6. [That a judgment was entered against [ name of plaintiff ] for a sum
of money greater than the policy limits.]
6. [That [ name of defendant ]’s failure to accept the settlement
demand was a substantial factor in causing [ name of plaintiff ]’s
“Policy limits” means the highest amount of insurance coverage available
under the policy for the claim against [ name of plaintiff ].
A settlement demand for an amount within policy limits is reasonable if
[ name of defendant ] knew or should have known at the time it failed to
accept the demand that a potential judgment against [ name of plaintiff ]
was likely to exceed the amount of the demand based on [ name of
claimant ]’ s injuries or losses and [ name of plaintiff ]’ s probable liability .
However , the demand may be unreasonable for r easons other than the
amount demanded.
An insurance company’ s unreasonable conduct may be shown by its
action or by its failur e to act. An insurance company’ s conduct is
unreasonable when, for example, it does not give at least as much
consideration to the interests of the insur ed as it gives to its own
New September 2003; Revised December 2007, June 2012, December 2012, June
2016, November 2021, May 2022
Directions for Use
This instruction is for use in an “excess judgment” case; that is, one in which
judgment was against the insured for an amount over the policy limits, after the
insurer rejected a settlement demand within policy limits. Use the first option for
element 6 if the plaintif f is seeking only the amount of the excess judgment. Use the
second option for element 6 if the plaintif f is seeking damages separate from or in
addition to the excess judgment. (See Howar d v . American National Fire Ins. Co.
(2010) 187 Cal.App.4th 498, 527 [1 15 Cal.Rptr .3d 42].) If there has been both an
excess judgment and other damages, modify element 6 as appropriate to address all
damages involved in the case.
The instructions in this series assume that the plaintif f is the insured and the
defendant is the insurer . The party designations may be changed if appropriate to the
facts of the case. For example, if the plaintif f is the insured’ s assignee, modify the
instruction as needed to reflect the underlying facts and relationship between the
For instructions regarding general breach of contract issues, refer to the Contracts
series (CACI No. 300 et seq.).
If it is alleged that a demand was made in excess of the policy limits and there is a
claim that the defendant should have contributed the policy limits toward a
settlement, then this instruction will need to be modified.
This instruction should also be modified if the insurer did not accept the policy-
limits demand because of potential remaining exposure to the insured, such as a
contractual indemnity claim or exposure to other claimants.
Sources and Authority
• “[T]he implied obligation of good faith and fair dealing requires the insurer to
settle in an appropriate case although the express terms of the policy do not
impose such a duty . [¶] The insurer , in deciding whether a claim should be
compromised, must take into account the interest of the insured and give it at
least as much consideration as it does to its own interest. When there is great
risk of a recovery beyond the policy limits so that the most reasonable manner
of disposing of the claim is a settlement which can be made within those limits,
a consideration in good faith of the insured’ s interest requires the insurer to
settle the claim.” ( Comunale v . T raders & General Ins. Co. (1958) 50 Cal.2d
654, 659 [328 P .2d 198], citation omitted.)
• “Liability is imposed not for a bad faith breach of the contract but for failure to
meet the duty to accept reasonable settlements, a duty included within the
implied covenant of good faith and fair dealing.” ( Crisci v . Security Insurance
INSURANCE LITIGA TION CACI No. 2334
Co. of New Haven, Connecticut (1967) 66 Cal.2d 425, 430 [58 Cal.Rptr . 13, 426
• “In determining whether an insurer has given consideration to the interests of the
insured, the test is whether a prudent insurer without policy limits would have
accepted the settlement of fer .” ( Crisci , supra , 66 Cal.2d at p. 429.)
• “[I]n deciding whether or not to compromise the claim, the insurer must conduct
itself as though it alone were liable for the entire amount of the
judgment. . . . [T]he only permissible consideration in evaluating the
reasonableness of the settlement of fer becomes whether , in light of the victim’ s
injuries and the probable liability of the insured, the ultimate judgment is likely
to exceed the amount of the settlement of fer .” ( Johansen v . California State
Auto. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16 [123 Cal.Rptr . 288,
538 P .2d 744], internal citation omitted.)
• “[A]n insurer is required to act in good faith in dealing with its insured. Thus, in
deciding whether or not to settle a claim, the insurer must take into account the
interests of the insured, and when there is a great risk of recovery beyond the
policy limits, a good faith consideration of the insured’ s interests may require the
insurer to settle the claim within the policy limits. An unreasonable refusal to
settle may subject the insurer to liability for the entire amount of the judgment
rendered against the insured, including any portion in excess of the policy
limits.” ( Hamilton v . Maryland Cas. Co. (2002) 27 Cal.4th 718, 724-725 [117
Cal.Rptr .2d 318, 41 P .3d 128].)
• “The size of the judgment recovered in the personal injury action when it
exceeds the policy limits, although not conclusive, furnishes an inference that the
value of the claim is the equivalent of the amount of the judgment and that
acceptance of an of fer within those limits was the most reasonable method of
dealing with the claim.” ( Crisci , supra , 66 Cal.2d at p. 431.)
• “The covenant of good faith and fair dealing implied in every insurance policy
obligates the insurer , among other things, to accept a reasonable of fer to settle a
lawsuit by a third party against the insured within policy limits whenever there
is a substantial likelihood of a recovery in excess of those limits. The insurer
must evaluate the reasonableness of an of fer to settle a lawsuit against the
insured by considering the probable liability of the insured and the amount of
that liability , without regard to any coverage defenses. An insurer that fails to
accept a reasonable settlement of fer within policy limits will be held liable in
tort for the entire judgment against the insured, even if that amount exceeds the
policy limits. An insurer ’ s duty to accept a reasonable settlement offer in these
circumstances is implied in law to protect the insured from exposure to liability
in excess of coverage as a result of the insurer ’ s gamble - on which only the
insured might lose.” ( Rappaport-Scott v . Interinsurance Exch. of the Auto. Club
(2007) 146 Cal.App.4th 831, 836 [53 Cal.Rptr .3d 245], internal citations
• “An insured’ s claim for bad faith based on an alleged wrongful refusal to settle
CACI No. 2334 INSURANCE LITIGA TION
first requires proof the third party made a reasonable of fer to settle the claims
against the insured for an amount within the policy limits. The o ffer satisfies this
first element if (1) its terms are clear enough to have created an enforceable
contract resolving all claims had it been accepted by the insurer , (2) all of the
third party claimants have joined in the demand, (3) it provides for a complete
release of all insureds, and (4) the time provided for acceptance did not deprive
the insurer of an adequate opportunity to investigate and evaluate its insured’ s
exposure.” ( Graciano v . Mercury General Corp. (2014) 231 Cal.App.4th 414,
425 [179 Cal.Rptr .3d 717], internal citations omitted.)
• “An insurer ’ s duty to accept a reasonable settlement offer is not absolute. ‘ “[I]n
deciding whether or not to settle a claim, the insurer must take into account the
interests of the insured, and when there is a great risk of recovery beyond the
policy limits, a good faith consideration of the insured’ s interests may require the
insurer to settle the claim within the policy limits. An unr easonable refusal to
settle may subject the insurer to liability for the entire amount of the judgment
rendered against the insured, including any portion in excess of the policy
limits.” ’ [¶] Therefore, failing to accept a reasonable settlement of fer does not
necessarily constitute bad faith. ‘[T]he crucial issue is . . . the basis for the
insurer ’ s decision to reject an offer of settlement.’ ” (Pinto v . Farmers Ins.
Exchange (2021) 61 Cal.App.5th 676, 688 [276 Cal.Rptr .3d 13], original italics,
internal citations omitted.)
• “A claim for bad faith based on the wrongful refusal to settle thus requires proof
the insurer unreasonably failed to accept an of fer . [¶] Simply failing to settle
does not meet this standard.” ( Pinto, supra, 61 Cal.App.5th at p. 688, internal
citation omitted.)
• “T o be liable for bad faith, an insurer must not only cause the insured’ s
damages, it must act or fail to act without proper cause, for example by placing
its own interests above those of its insured.” ( Pinto, supra, 61 Cal.App.5th at p.
• “A bad faith claim requires ‘something beyond breach of the contractual duty
itself, and that something more is ‘ “refusing, without pr oper cause , to
compensate its insured for a loss covered by the policy . . . .” [Citation.] Of
course, the converse of “without proper cause” is that declining to perform a
contractual duty under the policy with pr oper cause is not a breach of the
implied covenant.’ ” ( Graciano, supra , 231 Cal.App.4th at p. 433, original
• “Determination of the reasonableness of a settlement of fer for purposes of a
reimbursement action is based on the information available to [the insurer] at the
time of the proposed settlement.” ( Isaacson v . California Ins. Guarantee Assn.
(1988) 44 Cal.3d 775, 793 [244 Cal.Rptr . 655, 750 P .2d 297].)
• “The third party is entitled to set a reasonable time limit within which the
insurer must accept the settlement proposal . . . .” ( Graciano, supra , 231
Cal.App.4th at p. 434.)
INSURANCE LITIGA TION CACI No. 2334
• “Whether [the insurer] ‘refused’ the ‘of fer ,’ and whether it could reasonably have
acted otherwise in light of the 1 1-day deadline imposed by the of fer ’ s terms,
were questions for the jury .” ( Coe v . State Farm Mut. Auto. Ins. Co. (1977) 66
Cal.App.3d 981, 994 [136 Cal.Rptr . 331].)
• “A cause of action for bad faith refusal to settle arises only after a judgment has
been rendered in excess of the policy limits. . . . Until judgment is actually
entered, the mere possibility or probability of an excess judgment does not
render the refusal to settle actionable.” ( Safeco Ins. Co. of Am. v . Superior Court
(1999) 71 Cal.App.4th 782, 788 [84 Cal.Rptr .2d 43], internal citations omitted.)
• “An insurer ’ s wrongful failure to settle may be actionable even without rendition
of an excess judgment. An insured may recover for bad faith failure to settle,
despite the lack of an excess judgment, where the insurer ’ s misconduct goes
beyond a simple failure to settle within policy limits or the insured suf fers
consequential damages apart from an excess judgment.” ( Howar d, supra, 187
Cal.App.4th at p. 527, internal citations omitted.)
• “ ‘An insurer who denies coverage does so at its own risk and although its
position may not have been entir ely gr oundless , if the denial is found to be
wrongful it is liable for the full amount which will compensate the insured for
all the detriment caused by the insurer ’ s breach of the express and implied
obligations of the contract.’ Accordingly , contrary to the defendant’ s suggestion,
an insurer ’ s ‘good faith,’ though erroneous, belief in noncoverage af fords no
defense to liability flowing from the insurer ’ s refusal to accept a reasonable
settlement of fer .” ( Johansen, supra , 15 Cal.3d at pp. 15−16, original italics,
footnotes and internal citation omitted.)
• “[W]here the kind of claim asserted is not covered by the insurance contract
(and not simply the amount of the claim), an insurer has no obligation to pay
money in settlement of a noncovered claim, because ‘The insurer does not . . .
insure the entire range of an insured’ s well-being, outside the scope of and
unrelated to the insurance policy , with respect to paying third party claims.’ ”
( Dewitt v . Monterey Ins. Co. (2012) 204 Cal.App.4th 233, 244 [138 Cal.Rptr .3d
705], original italics.)
• “A good faith belief in noncoverage is not relevant to a determination of the
reasonableness of a settlement of fer .” ( Samson v . T ransamerica Insurance Co.
(1981) 30 Cal.3d 220, 243 [178 Cal.Rptr . 343, 636 P .2d 32], internal citation
• “An insurer that breaches its duty of reasonable settlement is liable for all the
insured’ s damages proximately caused by the breach, regardless of policy limits.
Where the underlying action has proceeded to trial and a judgment in excess of
the policy limits has been entered against the insured, the insurer is ordinarily
liable to its insured for the entire amount of that judgment, excluding any
punitive damages awarded.” ( Hamilton, supra , 27 Cal.4th at p. 725, internal
citations omitted.)
• “[I]nsurers do have a ‘selfish’ interest (that is, one that is peculiar to themselves)
CACI No. 2334 INSURANCE LITIGA TION
in imposing a blanket rule which ef fectively precludes disclosure of policy
limits, and that interest can adversely af fect the possibility that an excess claim
against a policyholder might be settled within policy limits. Thus, a palpable
conflict of interest exists in at least one context where there is no formal
settlement of fer . W e therefore conclude that a formal settlement offer is not an
absolute prerequisite to a bad faith action in the wake of an excess verdict when
the claimant makes a request for policy limits and the insurer refuses to contact
the policyholder about the request.” ( Boicourt v . Amex Assurance Co. (2000) 78
Cal.App.4th 1390, 1398-1399 [93 Cal.Rptr .3d 763].)
• “For bad faith liability to attach to an insurer ’ s failure to pursue settlement
discussions, in a case where the insured is exposed to a judgment beyond policy
limits, there must be, at a minimum, some evidence either that the injured party
has communicated to the insurer an interest in settlement, or some other
circumstance demonstrating the insurer knew that settlement within policy limits
could feasibly be negotiated. In the absence of such evidence, or evidence the
insurer by its conduct has actively foreclosed the possibility of settlement, there
is no ‘opportunity to settle’ that an insurer may be taxed with ignoring.” ( Reid v .
Mer cury Ins. Co. (2013) 220 Cal.App.4th 262, 272 [162 Cal.Rptr .3d 894].)
• “[F]ailing to accept a reasonable settlement of fer does not necessarily constitute
bad faith. ‘[T]he crucial issue is . . . the basis for the insurer ’ s decision to reject
an of fer of settlement.’ ‘[M]ere errors by an insurer in discharging its obligations
to its insured “ ‘does not necessarily make the insurer liable in tort for violating
the covenant of good faith and fair dealing; to be liable in tort, the insurer ’ s
conduct must also have been unr easonable .’ ” ’ ” ( Pinto, supra, 61 Cal.App.5th
at p. 688, original italics, internal citations omitted.)
• “In short, so long as insurers are not subject to a strict liability standard, there is
still room for an honest, innocent mistake.” ( W albr ook Ins. Co. Ltd. v . Liberty
Mut. Ins. Co. (1992) 5 Cal.App.4th 1445, 1460 [7 Cal.Rptr .2d 513, 521].)
Secondary Sources
2 W itkin, Summary of California Law (1 1th ed. 2017) Insurance, §§ 366-368
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-A, Implied
Covenant Liability - Intr oduction , ¶¶ 12:202-12:224 (The Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-B, Bad
Faith Refusal T o Settle , ¶¶ 12:226-12:548 (The Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-C, Bad
Faith Liability Despite Settlement Of Thir d Party Claims , ¶¶ 12:575-12:581.12 (The
Rutter Group)
Croskey et al., California Practice Guide: Insurance Litigation, Ch. 12B-D, Refusal
T o Defend Cases , ¶¶ 12:582-12:686 (The Rutter Group)
2 California Liability Insurance Practice: Claims and Litigation (Cont.Ed.Bar)
Actions for Failure to Settle, §§ 26.1-26.35
2 California Insurance Law and Practice, Ch. 13, Claims Handling and the Duty of
Good Faith , § 13.07[1]-[3] (Matthew Bender)
INSURANCE LITIGA TION CACI No. 2334
26 California Forms of Pleading and Practice, Ch. 308, Insurance , § 308.24
(Matthew Bender)
12 California Points and Authorities, Ch. 120, Insurance , §§ 120.195, 120.199,
120.205, 120.207 (Matthew Bender)
CACI No. 2334 INSURANCE LITIGA TION
Page last reviewed May 2024
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