Ninth Circuit: Excess Insurers Must Tread Carefully When Rejecting Demands Exceeding Primary Limits

Under California law, a liability insurer has a good faith duty to reasonably settle claims within its policy limits. In Diamond Heights Homeowners Association v. National American Insurance Co., the California Court of Appeal held that where a proposed settlement demand exceeds a defending primary insurer’s limits and has been approved by the insured and the primary insurer, an excess insurer has three options: (1) approve the proposed settlement; (2) reject it and assume the insured’s defense; or (3) reject it and face a potential lawsuit from the insured. 227 Cal.App.3d 563, 580-581 (1991). The rationale for this rule is that the excess insurer cannot force the primary insurer to continue defending a case that should resolve within the excess insurer’s limits.   Read the article………….