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March 2012

DeWitt v. Monterey Insurance Company ? No Bad Faith Refusal to Settle in the Absence of a Duty to Indemnify

Insured Not Entitled to Jury Instruction on the Elements of Bad Faith Based on Refusal to Settle Where Insured Neither Established Coverage Nor Asked the Jury to Determine Duty to Indemnify

(March 13, 2012) ___ Cal.App.4th ___; 12 C.D.O.S. 2972

The California Court of Appeal, Fourth Appellate District, affirmed the trial court's denial of the insured's request to instruct the jury on the elements of a bad faith claim for refusal to settle.  The insured did not establish that the insurer assumed his defense or that the insurer owed him a duty to indemnify.

Monterey Insurance Company issued a business owner policy to the owner of an apartment complex.  That policy also extended coverage to the owner's property manager and employees for acts within the scope of their duties.  While the policy was in effect, the purported on-site manager, DeWitt, held a party in his apartment where he allegedly furnished alcohol.  Two minors attended the party and became intoxicated.  They left the party with one of them behind the wheel of a car and the other his passenger.  The driver lost control of his car and it rolled over several times.  The passenger, Howard, suffered severe permanent injuries as a result.

Howard sued the apartment complex owner, its off-site property manager, and DeWitt (Howard action).  All three tendered to Monterey.  Monterey accepted the tender of the owner and off-site property manager, but declined to defend DeWitt after concluding he was not an insured. 

Default judgment was subsequently entered against DeWitt.  The court then held a prove-up hearing before entering a default judgment in favor of Howard and against DeWitt in the amount of $4,697,318.

Howard's lawyer then sent a letter to Monterey, demanding the policy limits of $1 million to settle his client's claims against all three defendants.  In response, the complex owner and property manager served Howard with an offer to compromise the claims against just the two of them for $50,000.  Howard accepted the offer and dismissed the owner and off-site property manager from the Howard action.

Monterey then moved for an order setting aside the default judgment against DeWitt and to file a complaint to intervene.  Monterey's motion was denied, which was upheld on appeal.  Following the appeal, Monterey paid $3.5 million to Howard in satisfaction of the default judgment against DeWitt in the Howard action. 

Following the filing of satisfaction of judgment against him, DeWitt sued Monterey, alleging breach of contract and bad faith (DeWitt action).  At trial, DeWitt presented the following evidence:  the default judgment entered against him in the Howard action, Monterey's refusal to accept Howard's settlement demand for policy limits, and Monterey's subsequent payment of $3.5 million to satisfy the default judgment entered against DeWitt in the Howard action.  DeWitt did not present evidence of Monterey's duty to indemnify, nor did he ask the jury to determine this issue.

Nevertheless, DeWitt asked the court to instruct the jury on the elements of bad faith for refusing to accept a reasonable settlement demand pursuant to CACI No. 2334.  The court declined to do so because the notes to that jury instruction states that it was to be used only where the insurer had assumed the defense and then failed to accept a reasonable settlement offer. 

Instead, the trial court provided the jury with a special verdict form that asked them if Monterey "unreasonably or without good cause failed to provide a defense" to DeWitt in the Howard action.  The jury responded in the negative.

DeWitt subsequently appealed the trial court's refusal to instruct the jury pursuant to CACI No. 2334.  He argued he was entitled to the instruction in light of Monterey's breach of the duty to defend and its failure to accept Howard's policy limits settlement demand.

The Court of Appeal disagreed.  While it agreed with DeWitt that an insurer could be liable for bad faith even though it did not assume the duty to defend, the appellate court, nevertheless, held DeWitt was not entitled to have the jury instructed on the elements of a bad faith claim for refusal to settle.  DeWitt failed to establish coverage, either in the prior Howard action or in his coverage action against Monterey.  DeWitt did not even submit this issue to the jury in the latter action. 

The Court of Appeal further rejected DeWitt's argument that Monterey "effectively undertook [his defense]" when it moved to intervene.  Monterey sought to intervene on behalf of itself only and further expressly reserved its right to contest coverage in its moving papers.

In summary, the Court of Appeal held the trial court did not err in refusing DeWitt's request to instruct the jury on the elements of a bad faith refusal to settle pursuant to CACI No. 2334 because (1) DeWitt failed to present substantial evidence that Monterey had assumed a duty to defend, (2) failed to establish that coverage had been determined in the Howard action, and (3) failed to request the jury determine the issue of coverage in his action against Monterey. 

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This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com

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Jordan S. Altura
Lyndy Stewart


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