Every liability insurer owes its insured a duty to settle claims within policy limits when a reasonable opportunity to do so exists. When the insurer breaches that duty and the resulting trial produces a verdict that exceeds the policy limits, the insured faces personal exposure for the excess. That personal exposure is the mechanism that gives the insured a bad faith claim against their own insurer, and it is the same mechanism that makes the bad faith claim valuable to a plaintiff who has obtained an above-limits verdict but cannot collect the full amount from a judgment-proof defendant.
Bad faith failure-to-settle cases are central to civil litigation strategy in any jurisdiction with significant auto or premises liability caseloads. They are the pathway through which an otherwise uncollectable excess verdict becomes recoverable, and they are built through strategic conduct at every stage of the underlying litigation.
The Duty to Settle: The Governing Standard
In California, the duty to settle is rooted in Comunale v. Traders and General Insurance Company, 50 Cal. 2d 654 (1958), and its progeny. An insurer that withholds consent to a settlement demand within policy limits, where a reasonable settlement opportunity existed and where the insured was exposed to liability in excess of policy limits, breaches its covenant of good faith and fair dealing. The breach is not conditioned on proving subjective malice: an objectively unreasonable refusal to settle is sufficient to establish bad faith in California and in most jurisdictions that follow the objective reasonableness standard.
The specific elements that courts examine include: whether the settlement demand was within policy limits; whether the insurer had a reasonable opportunity to accept the demand before the trial; whether the underlying liability and damages were sufficiently clear that a reasonable insurer would have accepted the demand; and whether the insurer placed its own financial interest (avoiding a within-limits payment) ahead of the insured's interest in avoiding excess exposure.
Structuring the Settlement Demand to Create the Record
The bad faith record begins with the pre-trial settlement demand. To create an actionable record, the demand must be in writing, must specify an amount within the defendant's policy limits, must include a reasonable deadline for acceptance, and must be accompanied by sufficient medical records and damages documentation to allow the insurer to evaluate the claim and determine that the demand is reasonable.
A demand that does not include supporting documentation gives the insurer a legitimate basis to claim it could not evaluate the demand within the specified time frame. A demand that does not specify a deadline is harder to enforce as a triggering event for the bad faith analysis. Send the demand at a stage in the litigation when the medical records are complete, the damages are documented, and liability is clear or reasonably foreseeable from the available evidence.
The Coblentz Agreement
When the insurer has denied coverage or refused to defend the insured, the insured can enter into a stipulated judgment agreement with the plaintiff, sometimes called a Coblentz agreement after Coblentz v. American Surety Co. of New York, 416 F.2d 1059 (9th Cir. 1969). Under a Coblentz agreement, the insured consents to a judgment in the plaintiff's favor in an amount exceeding the policy limits, agrees not to contest the judgment, and assigns to the plaintiff the insured's bad faith rights against the insurer. The insurer is bound by the resulting judgment if it was not given notice and an opportunity to defend and if the underlying liability was reasonably clear.
Coblentz agreements require careful structuring. The judgment amount must bear a reasonable relationship to the actual damages; a grossly inflated stipulated judgment will not bind the insurer. The assignment of bad faith rights must be explicit and clearly drafted. Many states have adopted the Coblentz framework; confirm that the applicable jurisdiction recognizes the assigned bad faith claim before proceeding.
The Assignment of Bad Faith Rights
When the excess verdict follows a contested trial rather than a Coblentz procedure, the insured's bad faith rights arise from the excess exposure created by the insurer's refusal to settle. The insured can assign those rights to the plaintiff in exchange for a covenant not to execute the excess judgment against the insured's personal assets. The plaintiff then brings the assigned bad faith claim directly against the insurer, seeking the full amount of the excess judgment as damages for the insurer's breach of the duty to settle.
The assigned bad faith claim is subject to the plaintiff's burden of proving the elements of bad faith by a preponderance of the evidence. The insurer can defend by arguing that its refusal was reasonable given the liability uncertainty that existed at the time the demand was made, that the plaintiff's damages were genuinely disputed, or that the plaintiff's demand was defective in form or timing.
Building the Evidence Record in the Underlying Case
Because the bad faith case is built on what the insurer knew and did at the time of the demand, the correspondence between the insurer's claims adjuster and defense counsel during the pre-trial period is critical evidence. The insurer's reserves on the claim are relevant: an insurer that reserved above the policy limits in anticipation of a verdict at the time it refused the within-limits demand cannot credibly claim it believed liability was doubtful.
Preservation requests should include the insurer's complete claims file, adjuster notes, all communications between the adjuster and assigned defense counsel, the reserve history, and any internal communications about the plaintiff's settlement demand. In bad faith litigation, those internal documents are typically discoverable and frequently provide the strongest evidence of an objectively unreasonable coverage decision.
For auto accident cases where the defendant carried minimum liability limits but serious injuries produced verdicts well above those limits, the bad faith claim against the insurer is often the only practical path to meaningful recovery for the plaintiff after the initial verdict.