Bad Faith in California Requires Unreasonable Conduct or Conduct Without Proper Cause


Even an Ineffective Refusal to Defend is not Bad Faith if Made in Good Faith

In, hopefully the last appeal between the parties, First One Lending Corporation and John Vescera (collectively, “Appellants”) appealed the district court’s grant of summary judgment to The Hartford Casualty Insurance Company on its claim for the amount of a settlement to a third party and bad faith and punitive damages in First One Lending Corporation; John Vescera v. The Hartford Casualty Insurance Company, No. 20-55016, United States Court Of Appeals For The Ninth Circuit (March 19, 2021)


Appellants’ claim sought $1.5 million in indemnification, the amount Appellants paid to settle a prior lawsuit that the Neighborhood Assistance Corporation of America (NACA) brought against Appellants.

The NACA settlement agreement resolved NACA’s claims against Appellants under the Lanham Act and for harm to NACA’s reputation. These were covered claims under the insurance policy’s provision for “personal and advertising” injuries. Hartford failed to create a genuine dispute of material fact in arguing that the NACA settlement included non-covered restitution. There is no suggestion that NACA itself received restitution from the settlement. Nor did Hartford shown that the NACA settlement included restitution for homeowners, which the insurance policy would not have covered. Homeowners were not parties to NACA’s suit against Appellants, nor was there any “final adjudication” in the NACA litigation of Appellants’ alleged wrongs against homeowners. It is also undisputed that nothing required NACA to use its settlement proceeds to reimburse homeowners, even as NACA may have chosen to do so.

Hartford claimed that Vescera’s statements in his criminal proceedings require a different conclusion under the doctrine of judicial estoppel. Hartford has not explained how Vescera’s statements could estop First One, which was not a party to the criminal proceedings. Nor has Hartford shown that Vescera’s statements in the criminal proceedings were “clearly inconsistent” with Appellants’ position in the case before the Ninth Circuit. In both instances, Vescera and Appellants maintained that NACA had no obligation to pay homeowners, even as they may have hoped that NACA would do so.

Hartford’s alternate argument that California Insurance Code § 533 precludes coverage similarly fails. Section 533 states that “[a]n insurer is not liable for a loss caused by the wilful act of the insured . . . .” Cal. Ins. Code § 533. The Ninth Circuit has previously held that the claims in NACA’s complaint did not fall under § 533 because the Lanham Act trademark infringement claim did not require a showing of willfulness and at least some claims in the complaint were not inseparably intertwined with willful conduct.

While this appeal involves the duty to indemnify, the NACA settlement included payment for the Lanham Act claims and Hartford has not shown that all or part of the $1.5 million settlement was for willful conduct. Nor does the settlement fall within the policy’s exclusion of personal and advertising injury resulting from the rendering of, or the failure to render, financial services. The NACA settlement agreement only included covered claims and in arguing otherwise, Hartford points to the same evidence we in an earlier case involving the same subjects.

The district court correctly granted summary judgment for Hartford on Appellants’ claims that Hartford denied insurance coverage in bad faith. To show a bad faith denial of coverage, a plaintiff must prove that “(1) benefits due under the policy were withheld; and (2) the reason for withholding benefits was unreasonable or without proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001). Although the Ninth Circuit previously concluded that Hartford had to defend Appellants in the NACA litigation and now conclude Hartford must indemnify Appellants for the NACA settlement, Hartford did not act unreasonably in denying coverage, particularly given Vescera’s statements during his criminal trial.

Because Hartford failed to defend Appellants, it has the burden of proving by a preponderance of the evidence that the settlement payments were allocable to claims not actually covered, its defense is ineffective.

While California case law precludes indemnification and reimbursement of claims that seek the restitution of an ill-gotten gain, Hartford did no prove that all or part of the NACA settlement was for non-covered restitution or otherwise excluded claims.

The district court’s grant of summary judgment to Hartford on Appellants’ claim for $1.5 million in indemnification was, therefore, reversed and the Ninth Circuit directed the district court to enter judgment for Appellants on that claim. However, the Ninth affirmed the district court’s grant of summary judgment to Hartford on Appellants’ bad faith and punitive damages claims because its position on the claim, although not enforceable, was reasonable because of the testimony of a person involved in a criminal case.


Even when an appellate court finds that an insurer wrongfully failed to defend its insured, that fact is not sufficient to allow a cause of action for bad faith tort damages if its acts were reasonable. In light of a criminal conviction and testimony in a criminal trial the insurer had a reasonable ground to deny defense. Since Hartford couldn’t provide enough evidence to establish excluded actions involved in the settlement reached by NACA, it was required to pay the settlement reached by NACA.  This case teaches that it would have been prudent for Hartford to provide a defense under a reservation of rights and get involved in the settlement talks so that it could have the proof needed for reimbursement and would have saved several appeals. Defense should only be refused if there is absolute, convincing evidence that there was no coverage for defense.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost

equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at;  Follow Mr. Zalma on Twitter at; Go to Barry Zalma videos at at; Go to Barry Zalma on YouTube-; Go to the Insurance Claims Library – Read posts from Barry Zalma at; and Read last two issues of ZIFL here.


This entry was posted in Zalma on Insurance. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.