Third party bad faith excess exposure California insurers face arises when a carrier defending its own policyholder against someone else's injury claim refuses a reasonable settlement demand within policy limits and a judgment later exceeds those limits. This doctrine is one of the most significant tools for holding insurance companies accountable in California, because it converts a policy with a modest limit into unlimited exposure for the carrier that gambled and lost.
Excess
Carrier exposure for the full judgment above policy limits
1958
Comunale set the core excess-exposure rule
Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 established the core principle: when an insurer has the opportunity to settle a claim against its insured within the applicable policy limits and unreasonably refuses to do so, the insurer becomes liable for the entire judgment, including the portion that exceeds the policy limits. The insured has no independent voice in most settlement decisions, because the policy gives the insurer the right to control the defense and negotiations. If the insurer could reject reasonable demands with no consequence beyond paying the limits, it would have every incentive to gamble with its insured's personal assets while risking nothing itself.
Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425 extended Comunale by holding that an insured can recover damages for emotional distress caused by an insurer's unreasonable failure to settle within limits, even without proof of fraud or malice. The elderly defendant in Crisci faced losing her home and modest savings after her insurer rejected a demand within limits. Crisci matters because excess-exposure bad faith damages are not limited to the dollar amount of the excess judgment. Emotional distress, and in appropriate cases punitive damages, can be layered on top of the excess judgment, multiplying the carrier's total exposure.
Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9 asks whether a prudent insurer, evaluating the claim with an eye toward the insured's interests as well as its own, would have accepted the demand given the facts available at the time. Courts weigh liability evidence, the severity of injuries, whether the demand was clear and time-limited, the adequacy of the insurer's investigation, and its own internal claim valuation.
Because reasonableness is judged on the information available at the time, the earlier a clear, well-documented settlement demand is placed on the table, the stronger the eventual bad faith case. A proper demand includes complete medical records and bills, a clear liability statement, documentation of economic loss, and a firm deadline for acceptance.
After an excess judgment, the insured often assigns its bad faith claim against the carrier to the injured claimant in exchange for an agreement not to pursue the insured's personal assets. These agreements must be carefully structured to preserve the claim and avoid arguments of collusion or a non-adversarial underlying judgment.
When an excess-exposure bad faith claim succeeds, available damages typically include the full underlying judgment above the original limits, emotional distress damages tied to the insured's exposure, and, where the insurer's conduct rose to malice, oppression, or fraud under Civil Code section 3294, punitive damages. A formal offer to compromise served under Code of Civil Procedure section 998, structured within policy limits, functions as one of the clearest forms of evidence that a reasonable settlement opportunity existed.
The framework this fits into
How insurance pressure and trial preparation shaped a passenger's recovery.
Read the full caseRelated strategy
How a well-timed 998 offer sets up an excess-exposure bad faith claim.
See the 998 strategyRelated breakdowns on insurance pressure and trial strategy.
We handle catastrophic injury and insurance bad faith cases as counsel or co-counsel on a contingency-fee basis, which means clients pay no attorney fees unless there is a recovery.
Refer a caseThird party bad faith occurs when an insurer defending its policyholder against someone else's claim unreasonably refuses to settle within policy limits, exposing the insured to personal liability for any judgment above those limits.
Yes. Under Comunale v. Traders & General and Crisci v. Security Insurance, an insurer that unreasonably rejects a reasonable settlement demand within policy limits can be liable for the entire excess judgment.
The Johansen test asks whether a prudent insurer, giving the insured's interests equal consideration with its own, would have accepted the settlement demand based on the information available at the time.
