In Encarnacion v. 20th Century Ins. Co., Nos. B179825 & 182737 (Cal. Ct. App. Sept. 27, 2007), an unreported decision, a California appeals court recently affirmed a multimillion-dollar verdict against an insurer that failed to settle the underlying suit for the $100,000 policy limit.

After an insured landlord shot and killed a tenant, the landlord pleaded not guilty, arguing that he had acted in self-defense and suffered from organic brain damage, which prevented him from forming the intent to kill. The victim’s live-in girlfriend sued the landlord, who sought defense and indemnification under his homeowner’s policy.

The policy did not cover any loss that was a “foreseeable result” or “the intended result” of an “intentional or criminal act.” The insurer agreed to defend the landlord under a reservation of rights. The insurer advised the girlfriend’s attorney that the loss would be covered if the landlord’s act was negligent but not if it was deemed intentional. In this and subsequent conversations, the insurer did not rely on the “criminal act” verbiage of the exclusion, but referred only to an “intentional,” versus a negligent or accidental, act.

The insurer assigned defense counsel, who negotiated an agreement whereby the landlord would plead guilty to involuntary manslaughter, which would be classified as negligence and, according to the insurer’s statements, would trigger coverage under the policy. The girlfriend agreed to accept the $100,000 policy limit in full settlement of her claims. The landlord pled guilty to involuntary manslaughter, contingent on the insurer’s paying the policy limit to the girlfriend. The insurer then denied coverage on the ground that the tenant’s death “was the foreseeable result of the [landlord’s] criminal act.”

More than a year later, after the plea agreement had fallen apart, the insurer offered to settle the claim for between $50,000 and $60,000. Demanding the $100,000 policy limit, the girlfriend rejected the offer, then tried her case to a jury and won a $5.6 million award.

The girlfriend and the landlord sued the insurer, which won summary judgment based upon the policy’s business exclusion. Summary judgment was reversed on appeal and, on remand, the girlfriend won summary judgment for the full award by arguing that the insurer had forfeited its right to assert any policy exclusions and had breached its duty of good faith and fair dealing.

The insurer then appealed, contending that the business exclusion barred coverage and that, in any event, the maximum damages awarded to the girlfriend should have been $100,000. The appeals court affirmed on the basis that the insurer had forfeited its rights under the policy and was “judicially estopped” from challenging the girlfriend’s claims against the policy because doing so would be contrary to or inconsistent with the insurer’s position asserted in a prior proceeding. The appeals court also rejected the insurer’s contention that the girlfriend’s recovery should be limited to $100,000. The court explained that an insurer who fails to accept a reasonable settlement offer within policy limits because it believes that the policy does not provide coverage “assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits.”