PERSONAL INJURY | 2026-09-29
Insurance Bad Faith in California: The Duty to Settle and Third-Party Claims
A California liability insurer that unreasonably refuses a reasonable settlement within policy limits can be liable for the entire judgment — even one far above the limits. This is the heart of third-party bad faith.
Every California insurance policy carries an implied covenant of good faith and fair dealing. In the liability (third-party) context, that covenant imposes a duty on the insurer to settle a claim against its insured within policy limits when a reasonable opportunity arises. An insurer that unreasona
Liability insurance is supposed to protect the insured from claims — and California law enforces that promise through the duty to settle. When an insurer puts its own interests ahead of its insured’s by refusing a reasonable settlement, bad-faith liability can follow. This guide explains third-party insurance bad faith in California.
The Implied Covenant and the Duty to Settle
California implies a covenant of good faith and fair dealing in every insurance contract. In the third-party (liability) context, this includes a duty to accept a reasonable settlement offer within policy limits when there is a substantial likelihood of a judgment against the insured exceeding those limits. The insurer must give at least as much consideration to the insured’s interests as it gives to its own. Foundational California decisions — Comunale v. Traders & General Insurance and Crisci v. Security Insurance — established that an insurer that unreasonably refuses to settle within limits does so at its peril.
The Excess-Judgment Exposure
The central consequence: if the insurer unreasonably rejects a reasonable within-limits settlement and the case proceeds to a judgment above the policy limits, the insurer can be liable for the entire judgment — not just the policy limits. The theory is that the insurer’s breach of the duty to settle exposed the insured to the excess, so the insurer must answer for it. This is what makes a modest policy potentially the source of a large recovery.
What Makes a Refusal “Unreasonable”
Bad faith turns on the reasonableness of the insurer’s conduct — not merely a wrong guess. Factors include the strength of the claimant’s case and the likelihood of an excess verdict, whether a reasonable settlement demand within limits was made, whether the insurer adequately investigated and evaluated the claim, and whether it communicated with and protected its insured. An insurer that mishandles a clear opportunity to settle a strong claim within limits is the classic bad-faith scenario.
How These Claims Reach the Insurer
Often the insured, saddled with an excess judgment, assigns its bad-faith claim against the insurer to the injured claimant (frequently as part of a settlement in which the claimant agrees not to enforce the excess judgment against the insured personally). The claimant then pursues the insurer for the excess. This assignment mechanism is a common route by which third-party bad-faith claims are litigated.
Brandt Fees
When an insured must sue to obtain policy benefits wrongfully withheld, Brandt v. Superior Court allows recovery of the attorney’s fees incurred to obtain those benefits as an element of the bad-faith damages. This further increases the insurer’s exposure for unreasonable conduct.
Frequently Asked Questions
What is third-party insurance bad faith?
An insurer’s breach of its duty to settle a liability claim against its insured reasonably and within policy limits, giving the insured’s interests at least equal weight to its own.
Can the insurer be liable above the policy limits?
Yes. If it unreasonably rejects a reasonable within-limits settlement and an excess judgment results, it can be liable for the entire judgment.
How does a claimant pursue the insurer?
Often through an assignment of the insured’s bad-faith claim, typically coupled with a covenant not to execute the excess judgment against the insured personally.
What are Brandt fees?
Attorney’s fees an insured can recover for having to sue to obtain wrongfully withheld policy benefits, under Brandt v. Superior Court.
Related Personal Injury Guides
Talk to a California Attorney About Insurance Bad Faith
If an insurer’s refusal to settle exposed an insured to an excess judgment, bad-faith liability may reach the full amount. Trembach Law Firm evaluates California third-party bad-faith claims. Call (818) 514-7680.
Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.
Trembach Law Firm | 27001 Agoura Road, Suite 350, Calabasas, CA 91301