Appellants, policyholder and primary insurer, challenged the judgment of the Superior Court of Sacramento County (California) which awarded appellee excess insurer damages in an action where appellee filed suit against appellants based on their alleged violation of the duty of reasonable settlement, which resulted in a large verdict against appellant policyholder.
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Appellee excess insurer sued appellants, policyholder and primary insurer, for breach of their duty of reasonable settlement, after appellants’ refusal to accept a reasonable settlement offer ultimately resulted in appellee having to pay damages. The trial court awarded appellee damages against appellants in the amount it had to pay as a consequence of appellants’ breach. Appellants challenged the trial court’s judgment. The court affirmed the judgment of the trial court and stated that the parties had a three-way relationship, which engendered reciprocal duties of care, which were breached by appellants and were the proximate cause of appellee’s damages. The court rejected arguments that appellee was limited by equitable subrogation, that appellant policyholder had no duty to settle based on a policy provision of its contract, and likewise that appellant primary insurer’s hands were tied by the same provision. The court also found that appellant policyholder’s imprudent refusal to settle was supported by substantial evidence and rejected the contention that any settlement offers were illusory because the argument was first raised in appellants’ challenge.
The court affirmed the trial court’s award of damages to appellee excess insurer. The court held that appellee was entitled to damages because appellants, policyholder and primary insurer, violated their duty to accept a reasonable settlement, breached their duties of good faith, and were negligent in informing appellee that its coverage was threatened. Accordingly, the court found that appellants were the proximate cause of appellee’s damages.