## Facts

- A collision occurred between a truck driven by Dewey Merritt and a truck driven by Salvador Bernal and owned by J.A. Stafford Co. (the insured).
- Merritt sued Bernal and Stafford Co. for personal injuries; Merritt’s employer sued for property damage.
- A judgment awarded Merritt $434,000 for injuries and awarded $21,000 for property damage; the judgment was affirmed on appeal.
- Reserve Insurance Co., Stafford Co.’s liability insurer, paid Merritt $100,000 (policy limit for personal injury) and paid the full property-damage amount; a $334,000 balance remained unpaid on Merritt’s judgment.
- Stafford Co. paid Merritt $20,000 and assigned to Merritt its claims against Reserve and Reserve’s agents in exchange for Merritt’s covenant not to execute against Stafford Co. for the unpaid balance.
- As assignee, Merritt sued Reserve alleging (1) bad faith failure to settle/protect the insured and (2) negligent defense of the underlying action, alleging Reserve controlled the defense and retained counsel as its agent.
- The trial court entered judgment on the pleadings for Reserve on the negligent-defense count; the bad-faith claim proceeded to trial, and the jury returned a $499,000 verdict for Merritt.
- Reserve appealed the bad-faith judgment (and denial of JNOV); Merritt appealed the dismissal of the negligent-defense count.

## Issues

1. Whether the evidence supported a finding that the insurer breached the implied covenant of good faith and fair dealing in settlement and defense handling, causing an excess judgment.
2. Whether California law recognizes an independent tort claim against an insurer for “negligent defense,” separate from bad faith.
3. Whether alleged litigation negligence is attributable to insurer-retained defense counsel (malpractice) rather than to the insurer.

## Decision

- The court reversed the judgment for Merritt on the bad-faith claim, concluding the evidence did not support a bad-faith finding sufficient to sustain the verdict.
- The court affirmed judgment on the pleadings for Reserve on the negligent-defense claim, holding no independent cause of action lies against an insurer for negligent defense.
- The disposition left Merritt without recovery against Reserve on either theory in this action.

## Legal Principles

- When an insurer assumes control of defense and settlement, it must give at least equal consideration to the insured’s interests when evaluating settlement within limits.
- Bad faith requires more than mistake, poor prediction, or ordinary negligence; excess exposure alone does not prove bad faith.
- The reasonableness of claims handling is assessed based on information available when decisions were made, not by hindsight after an adverse verdict.
- California does not recognize a separate tort of “negligent defense” against an insurer; the insured’s remedy against the insurer lies in contract-based duties and the implied covenant of good faith and fair dealing.
- Alleged professional negligence in trial tactics or litigation performance is a claim against defense counsel (malpractice), because counsel’s professional duties run to the insured even if counsel is selected and paid by the insurer.

## Conclusion

The court set aside the insured’s assignee’s large bad-faith verdict because the record showed, at most, misjudgment rather than conduct meeting the bad-faith standard, and it rejected an attempt to reframe alleged attorney malpractice as an independent tort claim for negligent defense against the insurer.


Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 110 Cal. Rptr. 511 (Ct. App. 1973)