Ca 79-3387 Larraburu Brothers, Inc., a Corporation, Harold E. Paul and Harold E. Paul, Jr. v. Royal Indemnity Company, a Corporation

Under California law, the covenant of good faith and fair dealing, which is implied in the contract between an insurance company and the insured, requires that the insurer take reasonable action to settle a claim within the policy limits when there is a substantial likelihood of recovery against the insured of an amount in excess of policy limits should the claimant proceed to trial. The question presented by this appeal is whether an insurance company satisfies that duty if it pays the full amount of a verdict against the insured, including the amount in excess of the policy limits, before the judgment against the insured becomes final, where the earlier failure to settle within policy limits injures the insured’s credit standing, results in economic injury by causing the insured to enter bankruptcy, and produces other consequential damage.

This is an interlocutory appeal from the granting of a summary judgment motion against three of four plaintiffs in a damage action against a liability insurance carrier. We granted permission to file this appeal pursuant to 28 U.S.C. § 1292 (b). Proceedings below were stayed by the district judge pending our determination of the appeal.…