California Court Of Appeals Pushes Back On Bad Faith "Set Up"

• Published date: 10 October 2022
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Insurance Laws and Products, Trials & Appeals & Compensation
• Law Firm: Meissner Tierney Fisher & Nichols
• Author: Mr Steven L. Miracle

Given the potential for the award of punitive damages and attorney's fees, third-party claimants and their counsel have a clear incentive to exert pressure on an insurance company to make critical settlement decisions shortly after a loss. Typically a policy limits demand, third-party claimants and their counsel seek to settle their claims within a specified (and often condensed) timeframe in the hopes of depriving insurers of the necessary information to make informed settlement decisions. When an insurer is unable or unwilling to pay the limits on the proposed terms, the third-party claimants and their counsel will later attempt to take an assignment of the insureds' 'bad faith' claim predicated on the insurer's failure to settle the claim within the policy limits, thereby exposing the insureds to personal liability. This is generally referred to as a bad faith 'setup.'

This is not a new concept. In 1985, Justice Kaus of the California Supreme Court observed that 'attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insured can later trot out as bad faith.' White v. Western Title Ins. Co., 710 P.2d 309, 328 n.2 (Cal.) (Kaus, J., concurring and dissenting). The Tenth Circuit Court of Appeals has recognized similar concerns over 'manufactured' bad faith claims, noting that '[c]ourts should exercise caution 'when the gravamen of the complaint is not that the insurer has refused a settlement offer, but that it has delayed in accepting one.' This caution 'arises from the desire to avoid creating the incentive to manufacture bad faith claims by shortening the length of the settlement offer while starving the insurer of the information needed to make a fair appraisal of the case.' Wade v. EMASCO Ins. Co., 483 F.3d 657, 669 (2007). Nonetheless, third-party claimants and their counsel continue to employ this strategy to varying degrees of success. Indeed, in some jurisdictions, evidence of the 'set up' is not admissible in a bad faith action.

However, a recent decision by the California Court of Appeals shows that this strategy has its limits. On August 23, 2022, the court handed down a decision in Palma v. Mercury Ins. Co. The case involved a car-on-moped collision that left the moped operator dead. Within a month of the accident, counsel for the moped operator's estate sent a settlement demand to...