Crisci v. Security Insurance Co.
66 Cal. 2d 425 (1967)
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Rule of Law:
An insurer that unreasonably rejects a settlement offer within the insured's policy limits breaches the implied covenant of good faith and fair dealing, making it liable for the entire judgment against the insured, including any amount exceeding the policy limits, as well as for the insured's resulting mental distress.
Facts:
- Rosina Crisci owned an apartment building and held a general liability insurance policy with Security Insurance Company of New Haven, Connecticut, with a limit of $10,000.
- A tenant, June DiMare, was seriously injured and developed a severe psychosis after a wooden staircase tread gave way, causing her to fall.
- The DiMares sued Crisci for $400,000, alleging negligent maintenance.
- Security's own claims manager and attorney believed that if a jury found the accident caused the psychosis, the verdict would be at least $100,000.
- The DiMares offered to settle the case for $10,000, the full amount of Crisci's policy.
- Security rejected the $10,000 offer, as well as a subsequent $9,000 offer (to which Crisci offered to contribute $2,500), and was only willing to pay $3,000 for physical injuries.
- After a jury awarded the DiMares $101,000, Crisci, a 70-year-old widow, became indigent and suffered a severe decline in physical and mental health, including suicide attempts.
Procedural Posture:
- June DiMare and her husband sued Rosina Crisci in a California trial court for personal injuries.
- A jury awarded the DiMares a judgment of $101,000 against Crisci.
- Security paid its policy limit of $10,000, leaving Crisci liable for the remaining $91,000.
- Rosina Crisci then filed this action against Security Insurance Company in a California trial court.
- The trial court found for Crisci, awarding her $91,000 for the excess judgment and $25,000 for mental suffering.
- Security Insurance Company, as the appellant, appealed the judgment to the Supreme Court of California.
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Issue:
Is an insurer liable for a judgment against its insured in excess of the policy limits, and for the insured's resulting mental distress, when the insurer unreasonably rejects a settlement offer within those limits?
Opinions:
Majority - Peters, J.
Yes. An insurer is liable for judgments exceeding policy limits and for the insured's mental distress when it unreasonably rejects a settlement offer within those limits. Every insurance contract contains an implied covenant of good faith and fair dealing, which requires the insurer to give the insured's interests at least as much consideration as its own. Liability is imposed not for fraud or dishonesty, but for the failure to meet the duty to accept reasonable settlements. Security's refusal to settle was unreasonable because it knew there was a great risk of a substantial recovery beyond the policy limits. Furthermore, the wrongful refusal to settle is a tort, and in tort actions, the injured party can recover damages for all proximately caused harm, including mental suffering. Because liability insurance is purchased for peace of mind, damages for mental distress are a foreseeable consequence of an insurer's tortious breach.
Analysis:
This case solidified the tort of insurance bad faith in California, shifting the standard from proving actual dishonesty to a more objective reasonableness test. By holding that an insurer's unreasonable failure to settle is a tort, the court opened the door for insureds to recover damages for emotional distress, greatly increasing the potential liability for insurers. This decision incentivizes insurers to settle legitimate claims within policy limits rather than gambling with the insured's assets to minimize their own payout. The 'prudent insurer' test established a clear, albeit fact-intensive, standard for evaluating an insurer's conduct in future cases.
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