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An
insurer is liable for all consequential damages resulting
from its bad faith failure to defend, regardless of foreseeability.
A third party beneficiary, however, cannot recover against
an insurer for bad faith without establishing that its claim
was covered under the policy. Pershing Park Villas Homeowners
Assn. v. United Pacific Ins. Co., 219 F.3d 895 (9th
Cir. 2000).
An
HOA brought suit against a developer for construction defects
in a 12-unit condominium. The developer tendered defense
of the suit to its insurer, which assumed the defense but
withdrew four months before trial, alleging that the damages
were not covered under the policy. After a default judgment
against the developer of $339,000, the developer filed a
petition for bankruptcy.
The
developer then joined the homeowners to bring suit against
the insurer for breach of contract, bad faith and other
torts based on the insurer's failure to defend or indemnify
the developer. Damages sought by the developer included
the default judgment, consequential damages for emotional
distress and loss of prospective economic advantage. The
homeowners sought recovery of the default judgment directly
from the insurer as third party beneficiaries to the policy.
On
a motion for partial summary judgment, the trial court found
that the insurer was liable for the entire default judgement
as a consequence of its failure to defend. A jury found
that the insurer breached the duty of good faith and fair
dealing for a total award to the plaintiffs of $27 million,
reduced on a motion for new trial to $5 million.
On
appeal, the court upheld the ruling but transferred the
damages for the default judgment to the developer as the
insured instead of the homeowners. The court reasoned that
the insurer's covenant of good faith with the developer
did not extend to the homeowners.
The
insurer contended on appeal that the finding of bad faith
could not render it automatically liable without a showing
of proximate cause between the insurer's bad faith and the
default judgment. The court rejected this argument, citing
the rule that an insurer is liable for consequential damages
regardless of foreseeability after a bad faith refusal to
defend. The insurer's challenge to the award of damages
to compensate the developer for emotional distress also
was rejected by the court because these damages stemmed
from the damages for economic loss proximately caused by
the insurer's breach of good faith. There was no need to
show severe, substantial or enduring emotional distress.
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