## Facts

- Seventeen-year-old Debra Betts caused a serious automobile collision; the other driver, Anne Gallucci, suffered catastrophic brain injuries and could not recount events.
- Betts had an Allstate liability policy with $100,000 limits; Gallucci was also insured by Allstate.
- Allstate undertook Betts’s defense in the tort action and provided appointed defense counsel, Ruston & Nance.
- Although the claim was initially assessed as involving shared fault, Allstate later assessed liability as heavily against Betts yet continued to deny liability and refused to accept policy-limits settlement offers throughout litigation, including postverdict proceedings.
- A jury in the tort action returned a $450,000 verdict against Betts, exposing her to $350,000 above policy limits.
- Betts asserted she was not advised of the right to consult independent counsel, the possibility of an action against Allstate for the excess judgment, or assignment of such a claim; she was instead encouraged to file bankruptcy.
- In the present action, Betts sued Allstate for breach of the implied covenant of good faith and fair dealing (bad-faith failure to settle) and sued Ruston for negligent representation and resulting emotional distress.
- The jury awarded (1) $500,000 compensatory damages and $3,000,000 punitive damages against Allstate, and (2) emotional-distress damages jointly and severally against Allstate and Ruston, later reduced by remittitur to $50,000.
- Allstate and Ruston appealed from the judgment; Betts cross-appealed from the remittitur/new-trial ruling affecting emotional-distress damages.

## Issues

1. Whether Allstate breached the implied covenant of good faith and fair dealing by refusing to settle within policy limits and by failing to protect and inform the insured when an excess judgment was reasonably foreseeable.
2. Whether appointed defense counsel was negligent toward the insured, including for failing to advise of conflicts and material legal options, and whether such negligence proximately caused emotional distress.
3. Whether the evidence supported the compensatory and punitive damages against Allstate and the reduced emotional-distress award against Allstate and counsel.

## Decision

- The Court of Appeal upheld the core liability findings against Allstate for bad faith and against Ruston for negligence.
- The court sustained substantial compensatory damages against Allstate based on refusal to settle and related claim-handling and communication failures.
- The court sustained punitive damages against Allstate based on findings supporting malicious, oppressive, or fraudulent conduct.
- The court upheld the reduced emotional-distress award (as remitted by the trial court) against Allstate and Ruston.

## Legal Principles

- An insurer must give at least equal consideration to the insured’s interests when evaluating settlement within policy limits, particularly where the risk of an excess judgment is substantial.
- The duty of good faith includes adequate investigation, fair evaluation of settlement opportunities, and timely communication of material developments affecting the insured’s personal exposure.
- When insurer and insured interests conflict due to potential excess exposure, the insured must be informed of the right to seek independent counsel and of material options to protect the insured’s interests.
- Defense counsel appointed by an insurer owes professional duties of loyalty and competent representation to the insured and may be liable for negligence for failing to advise the insured of conflicts and significant legal options.
- Emotional-distress damages may be recoverable where foreseeable and proximately caused by bad-faith claim handling and/or negligent defense representation in the face of excess exposure.
- Punitive damages may be awarded in insurance bad-faith actions when the insurer’s conduct is found to be malicious, oppressive, or fraudulent.

## Conclusion

The court affirmed liability for an insurer’s bad-faith failure to settle and related failure to inform an insured facing excess exposure, affirmed appointed counsel’s negligence causing compensable emotional distress (as reduced by remittitur), and upheld punitive damages based on sufficiently culpable insurer conduct.


Betts v. Allstate Ins. Co., 154 Cal. App. 3d 688 (Ct. App. 1984)