Insurer's Refusal to Settle Claims Within Policy Limits
It is true that the early decisions holding liability insurers liable in tort for breach of the implied covenant involved the insurers' refusal to settle claims within policy limits when there was a "great risk of a recovery beyond the policy limits . . . ." (Comunale v. Traders & General Ins. Co., supra, 50 Cal. 2d at p. 659; Crisci v. Security Ins. Co. (1967) 66 Cal. 2d 425, 429-431 58 Cal. Rptr. 13, 426 P.2d 173).
A consideration of the insured's exposure to liability in excess of policy limits continues to be a significant "factor in determining the reasonableness of the claimant's settlement offer" (Camelot by the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co. (1994) 27 Cal. App. 4th 33, 51 32 Cal. Rptr. 2d 354), and the absence of such exposure to excess liability may under appropriate facts militate strongly against a finding of the insurer's bad faith. (Id. at pp. 51-53).
But the doctrine of insurance bad faith now occupies a much larger area than potential liability to third parties for a recovery in excess of policy limits; it extends to first party insurance coverage (Gruenberg v. Aetna Ins. Co., supra, 9 Cal. 3d at p. 574) and allows recovery for consequential damages, such as mental suffering or economic loss, unrelated to policy limits. (Larraburu Bros., Inc. v. Royal Indem. Co. (9th Cir. 1979) 604 F.2d 1208, 1215).
A line of decisions has found liability insurers liable for bad faith without relying on the risk of excess liability. ( J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal. App. 4th 6, 13 68 Cal. Rptr. 2d 837; Dalrymple v. United Services Auto. Assn. (1995) 40 Cal. App. 4th 497, 514 46 Cal. Rptr. 2d 845 dicta; Bodenhamer v. Superior Court (1987) 192 Cal. App. 3d 1472, 1476 238 Cal. Rptr. 177; Clark v. Bellefonte Ins. Co. (1980) 113 Cal. App. 3d 326, 337 169 Cal. Rptr. 832 dicta; cf. MacGregor Yacht Corp. v. State Comp. Ins. Fund (1998) 63 Cal. App. 4th 448 74 Cal. Rptr. 2d 473 implied duty in absence of tort liability).
As explained in a leading text, "absent an excess judgment, there can be no bad faith action based on declining a reasonable offer to settle within policy limits. However, the insurer's refusal to settle may be actionable on some other basis." (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, P 12:359, p. 12B-35).