Can an insured recover contract damages for bad faith failure to settle a claim against the insured within the policy limits?

In Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, the court held that an insured may recover contract damages for the insurer's bad faith failure to settle a claim against the insured within policy limits in the full amount of the resulting judgment against the insured. And it explained that such a recovery does not obtain more than the insured "could have gained by full performance" of the insurance contracteven when the judgment far exceeds the insurance contract's policy limit. (Id. at p. 661.) That is because the policy benefits owed to the insured include more than just the obligation to pay money. "The policy limits restrict only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured; they do not restrict the damages recoverable by the insured for a breach of contract by the insurer." (Id. at p. 659.) The monetary amount required to compensate the insured for breach of the insurer's nonmonetary obligations may exceed the maximum that would have been payable in the absence of a breach. "If [the insurer] had performed its contract, it would have settled the action against [the insured], thereby protecting him from all liability. The allowance of a recovery in excess of the policy limits will not give the insured any additional advantage but merely place[s] him in the same position as if the contract had been performed." (Id. at p. 661.)

Thus the contract damages awarded in excess of the policy limit are imposed "not for a bad faith breach of contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing" a benefit owed to the insured under the policy. (Crisci v. Security Ins. Co. (1967) 66

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