## Facts

- Muriel Johansen was injured in an automobile accident and sued Gary and Joyce Dearing.
- The Dearings were insured under an automobile liability policy issued by California State Automobile Association Inter-Insurance Bureau (CSAA) with limits of $10,000.
- During the tort litigation, Johansen offered to settle for the policy limits; CSAA refused, asserting the accident was not covered.
- Johansen obtained a $33,889.30 judgment against the Dearings, exceeding the policy limits.
- CSAA filed a declaratory relief action to establish noncoverage; an appellate decision determined the policy did cover the accident.
- After coverage was established, CSAA paid only the amount within policy limits and refused to pay the excess portion of the judgment.
- The Dearings assigned their claims against CSAA to Johansen, who sued CSAA to recover the unpaid excess based on CSAA’s refusal to accept the within-limits settlement demand.
- The trial court entered judgment for CSAA; the California Supreme Court granted review.

## Issues

1. Whether an insurer that rejects a reasonable settlement offer within policy limits based on a good-faith belief in noncoverage can avoid liability for an ensuing excess judgment when coverage is later found to exist.
2. Whether the insurer’s settlement duty is governed by the insurer’s subjective good-faith coverage position or by the objective reasonableness of rejecting the settlement given the risk of liability and potential damages.

## Decision

- The California Supreme Court reversed the judgment for CSAA.
- The court held that an insurer that refuses a reasonable within-limits settlement offer because it believes there is no coverage assumes the risk that coverage will be found and may be liable for all resulting damages, including the portion of the judgment exceeding policy limits.
- The court rejected a “good faith coverage dispute” exception to excess-judgment liability where the within-limits settlement offer was reasonable.

## Legal Principles

- When a reasonable settlement offer within policy limits is available, the insurer must give at least equal consideration to the insured’s financial exposure and must act as a prudent insurer would without policy-limits constraints.
- An insurer that refuses a reasonable within-limits settlement demand on the ground of noncoverage bears the risk of an erroneous coverage position; if coverage is later established, the insurer may be liable for the entire judgment, including amounts above policy limits.
- The insurer’s subjective good-faith belief in noncoverage does not bar excess liability when the refusal to settle is unreasonable in light of the likelihood of liability and magnitude of potential recovery.
- An insurer may litigate coverage, but doing so does not excuse rejecting a reasonable settlement that would protect the insured from an excess judgment if coverage is ultimately found.

## Conclusion

The court held that CSAA’s refusal to accept a reasonable policy-limits settlement based on a coverage denial exposed it to liability for the excess judgment once coverage was established, even if CSAA had disputed coverage in good faith.


Johansen v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 538 P.2d 744 (Cal. 1975)