In Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, the California Supreme Court held that an insurer that had assumed the defense of its insureds, but failed to accept a reasonable settlement offer within policy limits, could be liable for its bad faith refusal to settle. The insurer in Johansen defended a third party's action against its insureds for damages arising out of an automobile accident, but reserved its right to litigate the issue of whether the accident was covered under the insureds' policy. (Id. at p. 13.) In the course of providing a defense, the insurer refused the third party's settlement offer that was within the policy limits on the ground that it did not believe the accident was covered under the policy. (Ibid.) The third party recovered a judgment against the insureds that was in excess of the policy limits. (Ibid.) "In a subsequent declaratory judgment action ... the Court of Appeal determined that the insurer's policy did in fact cover the accident." (Johansen, supra, 15 Cal.3d at p. 12.) The third party subsequently brought a lawsuit (as the insureds' assignee) against the insurer for bad faith refusal to accept the third party's settlement offer in the underlying litigation. (Id. at pp. 13-14.) The trial court ruled in favor of the insurer on the ground that the insurer had a bona fide belief that coverage did not exist. (Id. at pp. 14-15.) The Johansen court reversed, concluding that an insurer's bona fide belief that coverage does not exist is not a valid basis for refusing to accept a settlement offer. (Johansen, supra, 15 Cal.3d at pp. 15-16.) The Johansen court stated, " 'An insurer who denies coverage does so at its own risk and although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract.' " (Johansen, supra, at p. 15.) The Johansen court further clarified that "a 'wrongful' denial of coverage as used in Comunale means merely an erroneous denial of coverage required by the policy." (Id. at p. 16, fn. 4.) The Johansen court also made clear that if the insurer had been correct that coverage did not exist, the insurer could not be held liable for bad faith refusal to settle: "We cannot accept the insurer's complaint that the Comunale rule requires an insurer to settle in all cases irrespective of whether the policy provides coverage. Clearly, if the insurer's belief that the policy did not provide coverage in the instant case had been vindicated, it would not be liable for damages flowing from its refusal to settle; all that Comunale establishes is that an insurer who fails to settle does so 'at its own risk.' Moreover, contrary to defendant's assertion, an insurer in defendant's position retains the ability to enter an agreement with the insured reserving its right to assert a defense of noncoverage even if it accepts a settlement offer. If, having reserved such rights and having accepted a reasonable offer, the insurer subsequently establishes the noncoverage of its policy, it would be free to seek reimbursement of the settlement payment from its insured." (Johansen, supra, 15 Cal.3d at p. 19.) The California Supreme Court reiterated the rule established in Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 that "California authorities establish that an insurer who fails to accept a reasonable settlement offer within policy limits because it believes the policy does not provide coverage assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits." (Johansen, supra, at p. 12.) It does not matter whether the failure to accept the settlement offer was in good faith, i.e., the insurer's "refusal to settle stems from a bona fide belief that the policy does not provide its insured coverage." (Id. at pp. 12-13, 15.) The court explained that "the implied covenant of good faith and fair dealing imposes a duty on the insurer to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits." (Johansen v. California State Auto. Assn. Inter-Ins. Bureau, supra, 15 Cal.3d at pp. 14-15.) Therefore, "in deciding whether or not to compromise the claim, the insurer must conduct itself as though it alone were liable for the entire amount of the judgment. Thus, the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim's injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one." (Johansen, supra, at p. 16.) The court rejected the contention "that the Comunale rule requires an insurer to settle in all cases irrespective of whether the policy provides coverage." (Johansen v. California State Auto. Assn. Inter-Ins. Bureau, supra, 15 Cal.3d at p. 19.) If it turns out that the policy does not provide coverage, the insurer will not "be liable for damages flowing from its refusal to settle; all that Comunale establishes is that an insurer who fails to settle does so 'at its own risk.'" (Ibid.) The insurer "retains the ability to enter an agreement with the insured reserving its right to assert a defense of noncoverage even if it accepts a settlement offer. If, having reserved such rights and having accepted a reasonable offer, the insurer subsequently establishes the noncoverage of its policy, it would be free to seek reimbursement of the settlement payment from its insured." (Ibid.)