KRANSCO, Plaintiff and Appellant; INTERNATIONAL INSURANCE COMPANY et al., Plaintiffs and Respondents, v. AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY, Defendant and Appellant, 23 Cal. 4th 390

Opinion BAXTER, J. —Can a liability insurer assert the insured’s “comparative bad faith” as an affirmative defense in a bad faith action brought against it for breach of the covenant of good faith and fair dealing? In this case a liability insurer breached its duty of good faith and fair dealing owed its insured manufacturer by unreasonably failing to settle an injured third party’s action against the insured within policy limits, thereby exposing the insured to a verdict awarding the injured party compensatory and punitive damages far in excess of policy limits.

On appeal the insurer did not contest the jury’s finding of bad faith, but argued the insured’s comparative bad faith and comparative negligence as a litigant in the underlying third party action was a contributing legal cause of the verdict and should reduce its liability for tort damages in the bad faith action. The trial court initially accepted this argument, instructing the jury to determine if the insured itself breached its reciprocal duty of good faith and fair dealing toward the insurer or acted negligently in failing to exercise ordinary care as a litigant in the underlying third party action.

The jury found the insured’s conduct did contribute to the amount of the verdict in excess of policy limits and set the insured’s comparative fault at 90 percent. The trial court thereafter decided it had erred in instructing the jury on comparative bad faith and comparative negligence and entered judgment notwithstanding the verdict in favor of the insured for the full amount of the insured’s damages, without reduction for the insured’s comparative fault as allocated by the jury. (Code Civ. Proc., § 629.) Both the insurer and insured appealed on a number of grounds.

As relevant here, the insurer sought reinstatement of the jury’s verdict allocating fault and liability for damages. The Court of Appeal affirmed the judgment in its entirety. For reasons to be explained, we conclude a liability insurer cannot assert the comparative bad faith of its insured in the underlying third party litigation as an affirmative defense in a bad faith action brought against it. I. Facts A.

The Wisconsin Products Liability Litigation In June 1987, 35-year-old Michael Hubert jumped headfirst onto his Wisconsin neighbor’s backyard water slide toy known as a Slip ’N Slide and broke his neck, rendering him a partial quadriplegic. Hubert brought a personal injury action in Wisconsin against Kransco, the California corporation that manufactured the Slip ’N Slide toy (the Hubert action).

Kransco tendered defense of the action to its Ohio-based primary liability carrier, American Empire Surplus Lines Insurance Company (AES), which had agreed to defend Kransco against personal injury actions in any state and indemnify it for all sums it became legally obligated to pay as damages up to $1 million, less Kransco’s $100,000 self-insured retention.

Kransco also had three layers of excess insurance above its AES primary insurance coverage: International Insurance Company (International) provided $2 million in excess of the $1 million primary coverage, Agricultural Excess and Surplus Insurance Company (Agricultural) provided the next layer of $1 million in excess of the $3 million, and Transco Syndicate No. 1 Ltd. (Transco) provided the last layer of excess insurance: $1 million in excess of the $4 million. In all, Kransco had $5 million in available liability coverage over and above its $100,000 self-insured retention.

During the discovery phase of the Hubert action, in response to an interrogatory by Hubert, Kransco denied knowledge of prior Slip ’N Slide accidents that had resulted in cervical injuries to adults. Kransco later amended its response to admit knowledge of two such accidents. One accident had resulted in the user’s death, the other had left the user a quadriplegic and resulted in a $1.5 million settlement against the corporation from which Kransco had purchased the rights to manufacture the Slip ’N Slide. Kransco’s amended response itself contained inaccurate information about the date of one of these accidents.

Hubert’s action against Kransco was tried to a Wisconsin jury in April 1991. During the trial, Hubert offered to settle the action for $750,000, almost a million dollars less than his pretrial demand. Kransco approved settlement at that amount and tendered its $100,000 self-insured retention. Primary insurer AES, however, would contribute only $250,000 toward a settlement. AES rejected Hubert’s $750,000 settlement offer and, given Kransco’s willingness to contribute $100,000, and excess insurer International’s willingness to contribute another $100,000, made a counteroffer of $450,000, which Hubert rejected.

The jury ultimately returned verdicts awarding Hubert roughly $2.3 million in compensatory damages and $10 million in punitive damages. In June 1991, while postverdict motions were pending in the Wisconsin trial court to reduce the unprecedented punitive damages award, Kransco settled with Hubert. Kransco and its insurers paid Hubert $7.5 million. Of this amount, AES contributed its policy limits of $900,000 while objecting to the settlement as unreasonable because it thought the verdict likely would have been judicially reduced or set aside.

Excess insurers International and Agricultural contributed their policy limits of $2 million and $1 million, respectively, and excess insurer Transco contributed $500,000, half its policy limit. Kransco paid the remaining $3.1 million from its own funds. At Hubert’s insistence, Kransco stipulated to entry of judgment against it in the full amount of the jury verdict plus interest (approximately $12.5 million) but Hubert agreed not to execute on the judgment.

Additionally, under the terms of the settlement Kransco agreed to prosecute a bad faith action against AES and to split equally with Hubert any net proceeds from the litigation (after deduction of litigation expenses and reimbursement of the subrogated excess insurers’ cash settlement payments). B.

The California Bad Faith Litigation Kransco initiated this bad faith action against AES in January 1992, alleging AES had breached the implied covenant of good faith and fair dealing by rejecting Hubert’s offer to settle his lawsuit against Kransco for a sum within the AES policy limits despite a substantial risk of a verdict greatly in excess of those limits. Among other claims, Kransco sought recovery of $11.6 million, the amount by which the Hubert judgment exceeded the AES policy limits and Kransco’s self-insured retention. AES answered with a general denial and the assertion of various affirmative defenses.

As one affirmative defense, AES alleged that Kransco had “failed to exercise ordinary care for its own safety” and that “such failure on its part proximately contributed to and was the sole proximate cause of all the loss and damage complained of by [Kransco], if any there were.” AES further alleged that “any recovery by [Kransco] is barred or limited by the unreasonable conduct and comparative bad faith actions of [Kransco] and/or its duly authorized agents and representatives with respect to the matters alleged in its First Amended Complaint herein.” At the trial of the bad faith action, AES argued that Kransco was itself largely at fault for the excess verdict (i.e., the large Hubert compensatory and punitive damages award) as a consequence of its having given false interrogatory answers during pretrial discovery in the Wisconsin products liability action.

The Court of Appeal characterized the claim and relevant supporting facts as follows: “Kransco submitted an incorrect interrogatory answer in the underlying Hubert action and AES contends that this act constituted breach of the covenant of good faith and fair dealing or negligence in handling the Hubert action. Early in the case, Hubert served an interrogatory asking Kransco if it knew of any similar injury accidents predating his own injury in 1987. Kransco replied, in July 1990, that it had no notice of any adult cervical injuries from backyard water toys before 1987.

The interrogatory answer was wrong. “A Kransco product development vice-president knew of two adult cervical injuries on the Slip ’N Slide that had occurred when the water slide was made by another toy manufacturer before Kransco acquired that manufacturer’s assets and reintroduced the toy in 1983. One of those injuries resulted in quadriplegia, the other in death. Kransco’s general counsel neglected to ask the product development vice-president about prior injuries before answering the interrogatory.

Kransco’s counsel in the Hubert action learned of the vice-president’s knowledge of prior injuries when preparing him for his December 1990 deposition, and immediately informed Hubert’s counsel of the error.

Kransco amended its interrogatory answer several months before trial to disclose this information, although the amendment itself was inaccurate because it stated that one of the accidents occurred approximately 30 years earlier when it was really closer to 20 years earlier. “AES was fully informed of the previous Slip ’N Slide injuries well before trial and receipt of Hubert’s settlement offer, but complains that the excess verdict is attributable in substantial part to Kransco’s pretrial discovery blunders which were exploited by Hubert’s counsel at trial.

Hubert’s counsel argued to the jury that Kransco’s original and amended interrogatory responses were an untruth followed by a half-truth and suggested that there may be other Slip ’N Slide accidents never disclosed. Of course, the extended argument to the jury included a great many points unrelated to Kransco’s interrogatory answers, including the central claim that Kransco should never have reintroduced an injury-producing toy discontinued by its predecessor and did so without adequate warnings of danger in callous pursuit of $5 million annual gross profit.

But AES maintains that the accusation of lying leveled against Kransco was explosive to a jury considering punitive damages, and invokes principles of comparative bad faith and comparative negligence to demand that Kransco’s damages be reduced in proportion to its posited fault in causing the excess verdict.” The trial court instructed the jury on both of AES’s comparative fault theories. Regarding comparative bad faith, the trial court instructed the jury: “I have already described the implied covenant of good faith and fair dealing that the law implies in every insurance contract.

Because that implied covenant of good faith and fair dealing applies to both the insurer and the insured, Kransco had a duty to AES not to do anything that would injure AES’s right to receive the benefits of their agreement. To do so would constitute bad faith on Kransco’s part.

HQ Comparative bad faith does not relieve AES of its obligations or bar a recovery by Kransco against AES, but the total amount of damages to which Kransco would otherwise be entitled shall be reduced in proportion to the amount of comparative fault attributable to Kransco, Kransco’s attorneys, or Kransco’s agent.” Regarding comparative negligence, the trial court instructed the jury: “Comparative negligence is the failure, if any, on the part of Kransco to exercise ordinary care, which when combined with AES’s breach, if any, of its obligations of good faith and fair dealing contributed to cause Kransco’s injury.

HQ The negligence referred to here is not any lack of care or breach of any legal duty owed by Kransco to Michael Hubert or other Hubert plaintiffs involved in the 1991 Wisconsin trial. It is the negligence, if any, of Kransco in the preparation and trial of the Hubert v. Kransco case, and then only if it was a legal cause of the plaintiffs verdict in the amount returned and entered.

HQ Comparative negligence, if any, on the part of Kransco does not bar a recovery against AES, but the total amount of damages to which Kransco would otherwise be entitled shall be reduced in proportion to the amount of fault attributable to Kransco.” Upon evidence not challenged by AES on appeal, the jury returned a special verdict finding AES had breached its duty of good faith and fair dealing toward Kransco in its handling of Hubert’s personal injury claim.

However, the jury also found Kransco had breached the duty of good faith and fair dealing owed to AES or had failed to exercise ordinary care for its own safety, or both, in its handling of Hubert’s claim before the verdict. The jury assessed compensatory damages at over $13.6 million, apportioning fault for these damages at 90 percent to Kransco and 10 percent to AES. The jury further found Kransco did not act unreasonably in agreeing to the postverdict settlement with Hubert. Kransco moved for judgment notwithstanding the verdict (Code Civ.

Proc., § 629) or, in the alternative, for new trial (id., § 657) on the ground, among others, that the trial court had erred in instructing on both theories of comparative fault: comparative bad faith and comparative negligence.

The trial court reconsidered and agreed, concluding comparative negligence was wholly inapplicable to the case and that its instruction on comparative fault should have been limited to “whether Kransco contributed to AES’s failure to settle by impairing its assessment of the risk of a substantial likelihood of an excess judgment.” The court found the jury’s verdicts finding comparative fault were unsupported by the evidence because “AES presented no substantial evidence that Kransco’s failure promptly to convey to AES its knowledge of prior cervical injuries contributed to AES’s failure to recognize the substantial likelihood of excess judgment.” Accordingly, judgment was entered in favor of Kransco for the full amount of damages as calculated by the jury, plus prejudgment interest and costs.

C. The Appeal Both parties appealed on a number of grounds. The Court of Appeal affirmed the judgment in its entirety. Of relevance here, the court held that in an insured’s action against its insurer for breach of the implied covenant of good faith and fair dealing, the insured’s comparative bad faith is not an affirmative defense. The court further held that on the facts of this case comparative negligence was not an available defense. II. Discussion A.

AES Breached the Covenant of Good Faith and Fair Dealing by Unreasonably Failing to Settle the Underlying Action on Kransco’s Behalf Within Policy Limits It has long been recognized in California that “[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (Comunale v. Traders & General Ins.

Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883].) This principle applies equally to insurance policies, which are a category of contracts. (Ibid.) Because the covenant is a contract term, in most cases compensation for its breach is limited to contract rather than tort remedies. (Foley v.

Interactive Data Corp. (1988) 47 Cal.3d 654, 684 [254 Cal.Rptr. 211, 765 P.2d 373] (Foley).) But “[a]n exception to this general rule has developed in the context of insurance contracts where, for a variety of policy reasons, courts have held that [an insurer’s] breach of the implied covenant will provide the basis for an action in tort.” (Ibid.) The availability of tort remedies in the limited context of an insurer’s breach of the covenant advances the social policy of safeguarding an insured in an inferior bargaining position who contracts for calamity protection, not commercial advantage. (Foley, supra, 47 Cal.3d at pp. 684-685; see also Egan v.

Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819-820 [169 Cal.Rptr. 691, 620 P.2d 141].) The scope of the duty of good faith and fair dealing depends upon the purposes of the particular contract because the covenant “is aimed at making effective the agreement’s promises.” (Foley, supra, 47 Cal.3d at p. 683; Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 818.) In the context of an insurance policy, “[t]he terms and conditions of the policy define the duties and performance to which the insured is entitled.” (Western Polymer Technology, Inc. v. Reliance Ins.

Co. (1995) 32 Cal.App.4th 14, 24 [38 Cal.Rptr.2d 78].) “One of the most important benefits of a maximum limit insurance policy is the assurance that the company will provide the insured with defense and indemnification for the purpose of protecting him from liability. Accordingly, the insured has the legitimate right to expect that the method of settlement within policy limits will be employed in order to give him such protection.” (Commercial Union Assurance Companies v.

Safeway Stores, Inc. (1980) 26 Cal.3d 912, 918 [164 Cal.Rptr. 709, 610 P.2d 1038].) Consistent with these principles, a liability insurance policy’s express promise to defend and indemnify the insured against injury claims implies a duty to settle third party claims in an appropriate case. (Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at p. 917; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 430 [58 Cal.Rptr. 13, 426 P.2d 173]; Comunale v. Traders & General Ins.

Co., supra, 50 Cal.2d at p. 659.) “More specifically, the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits. [Citations.] HQ The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble—on which only the insured might lose.” (Murphy v. Allstate Ins.

Co. (1976) 17 Cal.3d 937, 941 [132 Cal.Rptr. 424, 553 P.2d 584].) An insurer that breaches its implied duty of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits may be held liable for the full amount of the judgment against the insured in excess of its policy limits. (Commercial Union Assurance Companies v.

Safeway Stores, Inc., supra, 26 Cal.3d at pp. 916-917.) Here, the jury concluded AES breached its duty of good faith and fair dealing owed Kransco by rejecting Hubert’s $750,000 settlement offer, which was within the $900,000 policy limits, despite a substantial likelihood of recovery in excess of those limits. AES did not challenge that conclusion on appeal, but instead argued it should not be liable for the full amount of the judgment because Kransco’s own litigation misconduct or comparative fault contributed to the excess verdict.

Specifically, AES claims the Wisconsin jury in the underlying Hubert action assessed $10 million in punitive damages to punish Kransco for its false and incorrect interrogatory responses made during pretrial discovery. . B. Comparative Bad Faith as an Affirmative Defense in a Third Party Insurance Bad Faith Action Should AES be permitted to assert Kransco’s comparative bad faith as an affirmative defense in the bad faith action brought against it by Kransco for breach of the covenant of good faith and fair dealing?

More specifically to the facts at hand, may an insurer that breaches the covenant of good faith and fair dealing, by failing to settle a third party action within policy limits when there is a substantial risk of an excess judgment, later fault the insured’s litigation misconduct for contributing to the amount of the verdict in excess of policy limits?

In entering judgment notwithstanding the verdict, and in affirming that judgment on appeal, the trial court and Court of Appeal correctly answered “no.” To be sure, the “duty of good faith and fair dealing in an insurance policy is a two-way street, running from the insured to his insurer as well as vice versa.” (Commercial Union Assurance Companies v.

Safeway Stores, Inc., supra, 26 Cal.3d at p. 918.) But the scope of the insured’s duty of good faith and fair dealing, and the remedies available to the insurer for a breach of that duty, are fundamentally and conceptually distinct from the insurer’s reciprocal duty, and the remedies available to the insured for breach of that duty, under the insurance policy. As this court has explained, it is an insurer’s breach of the covenant of good faith that is governed by tort principles, at least as concerns the availability of tort damages. (Gruenberg v. Aetna Ins.

Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032] (Gruenberg).) In contrast, an insured’s breach of the covenant is not a tort. (See California Fair Plan Assn. v. Politi (1990) 220 Cal.App.3d 1612, 1618 [270 Cal.Rptr. 243].) An insurer’s tort liability is predicated upon special factors inapplicable to the insured. (Foley, supra, 47 Cal.3d at pp. 684-685 [insurer tort liability based on special relationship with insured]; California Fair Plan Assn. v.

Politi, supra, 220 Cal.App.3d at pp. 1618-1619 [same].) We suggested in Gruenberg, supra, 9 Cal.3d 566, that an insurer’s breach of the covenant of good faith and fair dealing is not directly comparable with the insured’s contractual breach, concluding that the insured’s alleged contractual breach of the policy’s cooperation clause by failing to submit to an examination and produce requested documents did not excuse the insurer’s duty of good faith and fair dealing. (Id. at pp. 576-578.) We observed that “the insurer’s duty is unconditional and independent of the performance of [the insured’s] contractual obligations.” (Id. at p. 578, italics added.) Applying comparative fault principles (see Li v.

Yellow Cab Co. (1975) 13 Cal.3d 804 [119 Cal.Rptr. 858, 532 P.2d 1226, 78 A.L.R.3d 393]) by recognizing a comparative bad faith defense in a third party insurance bad faith action would set the insurer’s tortious breach of the covenant against the insured’s contractual breach of the covenant, even though contractual breaches are generally excluded from comparative fault allocations. (See 12 West’s U. Laws Ann.

(1996) U. Comparative Fault Act, com. to § 1, p. 128 [comparative fault inapplicable to “actions that are fully contractual in their gravamen”].) This distinction between tort and contract liabilities convinced one state supreme court to reject comparative bad faith as a defense in a bad faith action against an insurer (“the [insurer’s] tort cannot be offset comparatively by the [insureds’] contract breach”) and characterize the differing legal concepts as “apples and oranges.” (Stephens v. Safeco Ins. Co. of America (1993) 258 Mont. 142 [852 P.2d 565, 568-569]; see also First Bank v.

Fidelity and Deposit Ins. (1996) 1996 Okla. 105 [928 P.2d 298, 306-309] (First Bank) [rejecting comparative bad faith defense for an insured’s misperformance of its contractual duties in a bad faith action against the insurer for refusal to defend].) In First Bank, supra, 928 P.2d 298, the Oklahoma Supreme Court noted its reliance on this court’s jurisprudence (Crisci v. Security Ins. Co., supra, 66 Cal.2d 425; Comunale v. Traders & General Ins.

Co., supra, 50 Cal.2d 654) in adopting as the law in Oklahoma California’s treatment of an insurer’s bad faith refusal to settle a claim as a tort. (First Bank, supra, 928 P.2d at p. 306.) The First Bank court, however, rejected the rationale of a subsequent California Court of Appeal decision—California Casualty Gen. Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 283 [218 Cal.Rptr. 817] (California Casualty)—which for the first time held that in a bad faith action the insurer could interpose as a defense the tort concept of comparative fault, in an entirely new form known as comparative bad faith.

In the Court of Appeal and now in this court, AES places principal reliance on California Casualty. Although California Casualty involved a bad faith action by an insured against her insurer for breach of the covenant of good faith and fair dealing, it did not, as in this case, involve a claim of bad faith refusal to settle a third party action within policy limits on the insured’s behalf.

The insured in California Casualty asserted her automobile insurer in bad faith had failed to pay a claim she had suffered under the uninsured motorist provisions of her automobile policy. (California Casualty, supra, 173 Cal.App.3d at pp. 276-277.) The insurer in turn sought to assert as an affirmative defense that the insured and her attorney “ ‘[were] guilty of bad faith conduct in the prosecuting, handling and management of [her] uninsured motorist claim.’ ” (Id. at p. 277.) The California Casualty court set the insurer’s breach of the covenant of good faith and fair dealing against the insured’s breach in applying principles of comparative fault, and held that an insurer sued by its insured for failure to pay her claim for uninsured motorist coverage may allege the insured’s comparative bad faith as an affirmative defense. (California Casualty, supra, 173 Cal.App.3d at pp. 276-284.) The court ruled that the insured’s undue delay in submitting information necessary to process her claim, which contributed to the insurer’s failure to pay the claim, may reduce the insured’s recovery for damages resulting from the insurer’s bad faith nonpayment. (Id. at p. 283.) Responsibility and liability for damages were to be allocated between insurer and insured in proportion to the amount of bad faith attributable to each party. (Ibid.; cf.

Li v. Yellow Cab Co., supra, 13 Cal.3d at p. 829 [adopting and explaining comparative negligence standards].) The California Casualty court’s recognition of a comparative bad faith defense sounding in tort does not withstand scrutiny in light of the authorities discussed above distinguishing an insurer’s tortious breach of the covenant from an insured’s contractual breach.

The court reasoned that the comparative fault tort doctrine should apply to insurance bad faith cases because breach of the covenant is a tort: “While the duty of good faith and fair dealing arises out of a contractual relationship between the parties, breach of the duty and ensuing damages are governed by tort principles.” (California Casualty, supra, 173 Cal.App.3d at p. 283.) What the California Casualty court overlooked, however, is that it is an insurer’s breach of the covenant of good faith and fair dealing that is governed by tort principles. (Gruenberg, supra, 9 Cal.3d at p. 574.) An insured’s breach of the covenant is not a tort, and hence does not give rise to tort damages recoverable by the insurer. (California Fair Plan Assn. v.

Politi, supra, 220 Cal.App.3d at p. 1618.) As the Court of Appeal below recognized, the California Casualty court’s holding is grounded on the faulty premise that the obligations of insurer and insured—and thus their bad faith—are comparable. They are not. The parties are bound by a reciprocal obligation of good faith and fair dealing, but the particular duties differ given the differing performance due under the contract of insurance.

A fundamental disparity exists between the insured, which performs its basic duty of paying the policy premium at the outset, and the insurer, which, depending on a number of factors, may or may not have to perform its basic duties of defense and indemnification under the policy. (See Foley, supra, 47 Cal.3d at p. 693 [noting the “insurer’s and insured’s interest are financially at odds”].) An insured is thus not on equal footing with its insurer—the relationship between insured and insurer is inherently unequal, the inequality resting on contractual asymmetry.

An insurer’s tort liability for breach of the covenant is thus predicated upon special policy factors inapplicable to the insured. (Foley, supra, 47 Cal.3d at pp. 684-685.) The scope of the insured’s duty of good faith and fair dealing in turn is confined by the express contractual provisions of the policy. (Western Polymer Technology, Inc. v. Reliance Ins. Co., supra, 32 Cal.App.4th at p. 24.) An insured’s reciprocal duty of good faith and fair dealing does not always necessitate reciprocal conduct. (See, e.g., Commercial Union Assurance Companies v.

Safeway Stores, Inc., supra, 26 Cal.3d at pp. 917-921 [insurer may be obligated to accept a settlement offer to protect its insured from personal liability but insured is not similarly obligated].) Because an insured’s breach of the covenant does not sound in tort, the insured’s contractual breach of an express policy provision cannot be raised by the insurer as a defense in a bad faith action brought against it by the insured.

It would be illogical to allow the insurer in such a suit to instead interpose as a defense the insured’s contractual breach of an implied policy provision (i.e., the covenant of good faith and fair dealing) based on those same express policy terms. The recent decision in Agricultural Ins. Co. v. Superior Court (1999) 70 Cal.App.4th 385 [82 Cal.Rptr.2d 594] (Agricultural) is in accord. Agricultural involved a bad faith action arising out of an insurance claim for earthquake damage.

After the insurer paid the claim in part, controversies arose, ultimately leading to the insured’s suit for breach of contract and bad faith. The trial court stayed the action to allow the insurer to complete its investigation. The insurer did, and then cross-complained, contending that the insured’s claim was in significant part falsified. The insurer pleaded various contract theories, and also the tort theories of fraud and so-called reverse bad faith, i.e., tortious breach of the covenant of good faith and fair dealing by the insured.

The insured demurred to the tort theories, and the trial court sustained the demurrers without leave to amend. (Id. at p. 389.) In denying in part the insurer’s petition for a writ of mandate to set aside the trial court’s order sustaining the demurrer to the reverse bad faith cross-claim, the Agricultural court explained: “An insurer has no claim against its insured in tort for breach of the covenant of good faith and fair dealing. A breach of this covenant is, at base, a breach of contract.

A relationship including specialized circumstances of reliance and dependence is necessary to transmute such a contractual breach into a tort. Such circumstances do not exist in the context of an insured’s responsibilities toward its insurer, or in the reciprocal context of an insurer’s legitimate expectations from its insured. Although a false claim by an insured might trigger adverse contractual or penal consequences, the obligations undertaken by an insured in entering into an insurance contract are simply not of the same character as the obligations undertaken by an insurer.

Hence an insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of ‘insurance bad faith.’ The trial court therefore correctly sustained the insured’s demurrer to the insurer’s ‘reverse bad faith’ claim . . . .” (Agricultural, supra, 70 Cal.App.4th at pp. 389-390.) In granting in part the insurer’s petition for mandamus relief to set aside the trial court’s order sustaining the demurrer to the fraud cross-claim, the Agricultural court explained: “Although an insured does not bear the type of obligations which can give rise to a claim for tortious breach of covenant, an insured—no different than everyone else—has a duty not to defraud.

Firstly, an insured must not defraud in the procurement of the policy. Secondly, an insured must not defraud in making a claim on the policy. When an insured makes a claim to its insurer, the insurer’s duty to investigate is triggered. If, because of the insured’s false factual assertions, the insurer incurs expenses that would otherwise not have been necessary, justifiable detrimental reliance can be pleaded by the insurer. Although a mere inflated opinion of a claim’s value is not fraud, deliberately false factual assertions can be fraud.

There is a significant distinction between a mere aggressive claims position and an outright factual fraud. Hence the insurer’s petition will be granted to the extent of directing the trial court to vacate its order sustaining without leave to amend as to the fraud cause of action . . . .” (Agricultural, supra, 70 Cal.App.4th at p. 390.) We agree with the analysis and holding in Agricultural, and disagree with the California Casualty court’s extension of tort comparative fault principles to an insured’s contractual breach of the covenant of good faith and fair dealing.

By allowing an insurer to assert a defense of comparative bad faith, California Casualty’s holding misleadingly equates an insured’s contractual breach of the reciprocal covenant of good faith and fair dealing with an insurer’s tortious breach of the covenant. The holding is confusing and inconsistent insofar as it acknowledges an insured’s breach of the covenant is not actionable in tort, but nonetheless can give rise to tort consequences because the insurer may assert it as a defense in a bad faith action to lessen responsibility for its own tortious conduct.

The Chief Justice disagrees, observing that in Knight v. Jewett (1992) 3 Cal.4th 296 [11 Cal.Rptr.2d 2, 834 P.2d 696], at pages 314-315, this court explained that the comparative fault doctrine is a flexible, commonsense concept, under which a jury properly may consider and evaluate the relative responsibility of various parties for an injury in order to arrive at an equitable apportionment or allocation of loss. (Cone. & dis. opn. of George, C.

J., post, at pp. 414-415.) In the context of comprehensive general liability coverage, however, the insured is purchasing insurance in exchange for the payment of premiums precisely to avoid financial liability for its own negligent or fault-based conduct causing injury to others, and to further insure against the inherent risks of litigation that can result in a larger verdict against it, up to the amount of its policy limits.

Hence, when an insured sues its liability insurer for breach of its express promise to defend and indemnify the insured against injury claims, and for breach of the concomitant duty to reasonably settle third party claims within policy limits under the covenant of good faith and fair dealing, commonsense notions of relative responsibility of the parties for proximate causation of an injury, equitable allocation of loss, and indeed responsibility for less-than-perfect litigation conduct that leads to an inflated verdict, have limited, if any, application.

We agree with the Court of Appeal below that the jury should not have been instructed at all with principles of comparative bad faith, and accordingly reject AES’s argument that it was error to affirm the trial court’s judgment notwithstanding the verdict entered in Kransco’s favor. We observe that rejection of comparative bad faith in this context does not leave the insurer without remedies for an insured’s breach of the covenant of good faith and fair dealing.

Evidence of an insured’s misconduct may factually disprove the insurer’s liability for bad faith by showing the insurer acted reasonably under the circumstances. (Blake v. Aetna Life Ins. Co. (1979) 99 Cal.App.3d 901, 918-924 [160 Cal.Rptr. 528] [no insurer liability]; see also Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305 [32 Cal.Rptr. 827, 384 P.2d 155] [breach of cooperation clause]; Pryor, Comparative Fault and Insurance Bad Faith (1994) 72 Tex.

L.Rev. 1505, 1522-1525 [discussing contract defenses].) The insured’s breach of the covenant of good faith and fair dealing is also separately actionable as a contract claim. (California Fair Plan Assn. v. Politi, supra, 220 Cal.App.3d at pp. 1614, 1618.) Some forms of misconduct by an insured will void coverage altogether under the insurance policy. (See Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 182 [243 Cal.Rptr. 639] [material misrepresentation of policy application].) Of course, without coverage there can be no liability for bad faith on the part of the insurer. (Waller v.

Truck Ins. Exchange (1995) 11 Cal.4th 1, 36 [44 Cal.Rptr.2d 370, 900 P.2d 619].) And, as explained in Agricultural, supra, 70 Cal.App.4th at page 390, an insured’s fraudulent misconduct is separately actionable and can give rise to tort damages. These remedies adequately serve to protect an insurer from the insured’s misconduct without creating the logical inconsistencies and troublesome complexities of a defense of comparative bad faith.

The focus of AES’s defense, at trial of the bad faith action, on appeal, and in the briefing on review in this court, has been to show that Kransco’s assertedly negligent litigation conduct in the underlying Hubert action, specifically the tendering of the two false interrogatory responses during pretrial discovery, was the chief proximate cause of the huge Hubert punitive damages award handed down by an inflamed Wisconsin jury, allegedly incensed by Kransco’s litigation misconduct. As a factual matter, there are a number of flaws in AES’s argument.

First, Kransco’s general counsel, Stuart Schneck, who prepared and submitted the false interrogatory responses on Kransco’s behalf, testified in the California bad faith action but was not a witness in the underlying Wisconsin products liability action.

Hence, the Wisconsin jury was not presented with direct evidence that Schneck had been advised of the prior Slip ’N Slide accidents before answering the interrogatories, a circumstance bearing directly on the question whether competent admissible evidence (as opposed to the arguments of Hubert’s counsel, which were not evidence) supports an inference that the false interrogatory responses were a legal proximate cause of the Wisconsin jury’s excess verdict.

Second, in finding Kransco liable and awarding damages in the Hubert action, the Wisconsin jury may have relied exclusively upon the insured’s manufacture and marketing of a defective product and the damages caused by the product. Both the compensatory and punitive damage awards properly were based only on the insured’s production and sale of the Slip ’N Slide toy, not upon the insured’s erroneous discovery response.

Although the plaintiff’s counsel in the Wisconsin action may have taken advantage of the insured’s erroneous discovery response to embellish its argument that the insured had acted maliciously in continuing to market and to profit from a toy that it knew had caused serious injuries in the past, the damage award did not reflect any damage or loss caused by the false or erroneous discovery response, and indeed there is no indication that Hubert suffered any damage as a result of the insured’s incorrect interrogatory responses.

Presumed to have followed the law, the Wisconsin jury determined its award on the basis of Kransco’s underlying conduct that caused the plaintiff’s injury—the marketing of a dangerous product—conduct that was covered under Kransco’s policy of insurance with AES. As a factual matter, AES has not demonstrated that Kransco’s litigation misconduct was a proximate cause of the Wisconsin jury’s excess verdict and huge punitive damages award.

Third, the record establishes that AES was made fully aware of the false interrogatory responses prior to its rejection of Hubert’s $750,000 settlement offer, and that Kransco and its counsel approved the settlement terms and tendered Kransco’s $100,000 self-insured retention. AES was thus in sole control of the decision whether to accept the Hubert settlement offer, well within policy limits, and rejected that offer with full knowledge that Kransco had furnished two false interrogatory responses during pretrial discovery.

Hence, Kransco’s litigation misconduct was not a factual cause of AES’s decision to reject Hubert’s midtrial settlement offer, the rejection of which ultimately led to submission of the case to the Wisconsin jury and the ensuing excess verdict and unprecedented punitive damages award. As a matter of law, AES’s assertion that Kransco’s two false interrogatory responses alone begot the Wisconsin jury’s record-breaking punitive damages award in the Hubert action is likewise flawed.

Generally, punitive damages may be awarded only if it is proven that the defendant engaged in conduct intended to cause injury or engaged in despicable conduct with a conscious disregard of the rights or safety of others. (See, e.g., Civ. Code, § 3294, subds. (a), (c).) It is questionable whether Kransco’s two false interrogatory responses, exploited in the eyes of the Wisconsin jury largely through Hubert’s counsel’s impassioned arguments, could themselves validly be deemed a legal proximate cause of the jury’s punitive damages award and verdict, as AES would have us conclude.

Most importantly however, and as recognized by the Court of Appeal below, to have any meaning, the express promise of a liability insurer to defend and indemnify the insured against injury claims, and the implied duty to reasonably and in good faith settle third party claims within policy limits in an appropriate case, must extend to insureds that are less than perfect litigants. An insured’s known weaknesses as a litigant should inform the insurer’s assessment of the likelihood of an excess judgment, not diminish the insurer’s obligation to reasonably accept settlement offers within policy limits. (See Kinder v.

Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 898, 903 [42 Cal.Rptr. 394] [insured’s weakness as a trial witness due to contradictory pretrial statements and low intelligence provided additional reason to settle case].) An insurer legitimately expects its insured’s cooperation in defending third party injury claims, but cooperation does not demand flawless discovery responses. We again emphasize that a liability insurer is not without redress for an insured’s litigation misconduct, be it negligent or intentional.

Evidence of the insured’s misconduct or breach of its express obligations under the terms of the insurance policy (i.e., breach of the cooperation clause) may support a number of contract defenses to a bad faith action, by voiding coverage, factually disproving the insurer’s bad faith by showing the insurer acted reasonably under the circumstances, or forming the basis for a separate contract claim, and an insured’s intentionally fraudulent conduct may give rise to tort damages. (Ante, at p. 408.) An insurer may not, however, assert an insured’s comparative bad faith as an affirmative defense to partially absolve itself of its own tort liability for breach of the covenant of good faith and fair dealing.

C. Comparative Negligence AES also argued on appeal that the jury was properly instructed to compare Kransco’s negligence in the preparation and trial of the underlying Hubert action (i.e., the pretrial tendering of incorrect interrogatory responses) with AES’s bad faith failure to reasonably settle the Hubert action within policy limits, and to allocate fault and liability for the Wisconsin jury’s excess verdict among the insured and insurer. The argument rested entirely upon the holding in Patrick v. Maryland Casualty Co., supra, 217 Cal.App.3d 1566 (Patrick).

In Patrick, the insured sued his first party insurer for bad faith delay in paying his homeowners insurance claim for a storm-damaged roof. (Id. at pp. 1568-1569.) The insured included as damages his personal injuries suffered when he fell off the roof after tiring of the insurer’s delay and undertaking the repairs himself. (Id. at pp. 1569-1570.) The Patrick court found that the insured’s negligence in walking backward on a roof while dragging a heavy sheet of plywood warranted jury instructions on comparative fault and held that the trial court erred in refusing the insurer’s requested instructions on the issue. (Id. at pp. 1570-1575.) The court rejected the insured’s argument that his negligence should not be compared with the bad faith of the insurer. (Id. at p. 1572.) Both the trial court (on Kransco’s motion for judgment notwithstanding the verdict) and the Court of Appeal concluded Patrick and its application of the doctrine of comparative negligence to a first party insurance case was wholly inapplicable here.

Although AES’s briefing in this court for the most part addresses as the issue on review whether principles of comparative fault and comparative bad faith were properly invoked below to allocate liability for the excess verdict in the underlying Hubert action, AES cites and appears to rely on the holding in Patrick in arguing that the jury instructions on comparative bad faith and comparative negligence were properly given in this case. Review was not granted on the matter of the propriety of the comparative negligence instructions, and accordingly that issue is not squarely before us.

In any event, we need not address Patrick s extension of comparative negligence principles to first party insurance bad faith actions because the instant third party insurance bad faith action case is factually distinguishable. (Patrick, supra, 217 Cal.App.3d at pp. 1570-1575.) Patrick concerned a first party insured’s negligent acts following an insurer’s bad faith failure to pay a claim under a homeowners policy where those negligent acts—walking backwards on a roof while dragging a heavy sheet of plywood, patently the proximate cause of the insured’s injuries when he fell from the roof—were outside the contractual relationship of the parties. (Id. at pp. 1569-1570.) Here, the contractual relationship of the parties vested AES with a continuing duty to reasonably settle the Hubert case so long as it was defending Kransco, as discussed above.

While the insurer in Patrick had no duty to protect its insured when the latter determined to make his own roof repairs, AES did have a duty to protect Kransco during the Hubert litigation. As explained, AES was duty bound under the insurance policy to protect Kransco from an excess judgment, whether that judgment be the result of Kransco’s negligence in marketing the Slip ’N Slide or its conduct as a litigant in the underlying third party personal injury action, or a combination of both.

The holding in Patrick, a first party insurance case, does not shield a third party insurer from full responsibility for its bad faith failure to settle a case even if the insured’s litigation misconduct or mishandling of the claim inflated the size of the verdict, although as noted, evidence of such misconduct may support contract defenses, cross claims or separate causes of action for breach of the terms of the insurance contract otherwise available to the insurer. (See ante, at p. 408.) III. Conclusion The judgment of the Court of Appeal is affirmed. Mosk, J., Werdegar, J., Chin, J., and Brown, J., concurred.

Hubert is six feet three inches tall and weighed 220 pounds at the time. The Slip ’N Slide is basically a piece of plastic that lies flat on the ground and becomes slippery when made wet. It was “not intended for adult use” and contains explicit warnings against adult usage as well as instructions on its proper use. Hubert never saw or attempted to read the instructions on the proper use of the toy slide.

He ran toward it from a point nearly 40 feet away and, when he reached it, dove into the air, coming down at a steep angle in what one witness described as “a jackknife.” Prior to the Hubert verdict, the largest punitive damage award ever returned in Wisconsin was $200,000. The Transco policy expressly excluded punitive damages, which are insurable in Wisconsin. The exclusion may explain Transco’s failure to contribute its policy limits. Kransco further sought $10 million in punitive damages from AES. In September 1993, the trial court granted

summary adjudication, dismissing Kransco’s punitive damages claim. Kransco also claimed that damages were incurred after the Hubert settlement when an unrelated injury action cost over $2 million in settlement and defense, which was paid by Kransco and its excess insurer Transco because otherwise-available insurance coverage had been exhausted by the Hubert claim mishandled by AES. These consequential damages were included in the Kransco judgment and affirmed on appeal.

The court went on to hold that even if comparative bad faith were available as a defense, it would be available only when the insured’s conduct interfered with the insurer’s ability to fairly evaluate a settlement offer, a situation not shown on these facts. This dictum was inconsistent with the court’s primary holding that, as a matter of law and policy, an insured’s comparative bad faith cannot set off or reduce the tort damages available to the insured when the insurer breaches the covenant of good faith and fair dealing.

Another issue raised in the Court of Appeal was whether the compensatory damages that Kransco could recover for AES’s bad faith included the amount of punitive damages awarded against Kransco in the Wisconsin litigation. Because Wisconsin law permits indemnity coverage for punitive damages, while California law does not, the Court of Appeal treated the issue as presenting a conflict of law and resolved the conflict in favor of the application of Wisconsin law, thus permitting Kransco to include the Wisconsin punitive damages within the amount of compensatory damages recoverable from AES.

We initially included this issue within our grant of review but deferred briefing on it. After we issued our opinion in PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310 [84 Cal.Rptr.2d 455, 975 P.2d 652], however, we amended our order granting review to encompass only the availability of a comparative bad faith defense. Accordingly, we express no opinion on the Court of Appeal’s resolution of the punitive damages question. In Li v.

Yellow Cab Co., supra, 13 Cal.3d 804, this court abolished the common law doctrine of contributory negligence and adopted in its stead a “general scheme of assessment of liability in proportion to fault” (id. at p. 825), i.e., a comparative negligence standard. This court has not previously decided whether an insurance company may assert a comparative fault defense in a bad faith action. An insurer raised this or a similar issue in Johansen v. California State Auto. Assn. Inter-Ins.

Bureau (1975) 15 Cal.3d 9 [123 Cal.Rptr. 288, 538 P.2d 744], but we did not resolve it because the record failed to support the contention “that the excess judgment can be attributed to [the] insured’s conduct.” (Id. at p. 20.) The Chief Justice suggests California Casualty has been “the seminal California decision that has been the controlling California authority on this issue for the past 15 years.” (Cone. & dis. opn. of George, C.

J., post, at p. 414.) California Casualty is the only published California appellate court decision to have discussed the issue and affirmatively recognized a comparative bad faith defense in the insurance bad faith arena. (But see Patrick v. Maryland Casualty Co. (1990) 217 Cal.App.3d 1566, 1572 [267 Cal.Rptr. 24] [acknowledging California Casualty’s holding in dictum as supportive of a comparative negligence defense], discussed post, atpp. 410-412; Travelers Ins. Co. v.

Lesher (1986) 187 Cal.App.3d 169, 192 [231 Cal.Rptr. 791] [“[assuming arguendo the correctness of the California Casualty court’s analysis” without discussion and rejecting its application to the case before it].) Nor has California Casualty been accepted or treated as controlling authority in sister state jurisdictions or the federal courts. We have noted that the Oklahoma Supreme Court in First Bank, supra, 928 P.2d at page 308, expressly rejected the rationale and holding of California Casualty, and that the Montana Supreme Court in Stephens v. Safeco Ins.

Co. of America, supra, 852 P.2d at pages 568-569, likewise refused to recognize a comparative bad faith defense. (Ante, at p. 403.) Similarly, in Johnson v. Farm Bureau Mut. Ins. Co. (Iowa 1995) 533 N.W.2d 203, 207-208, the Iowa Supreme Court refused to recognize the analogous tort of reverse bad faith. Appellate courts in Texas, Oregon and Florida, and district courts in the Virgin Islands and Hawaii, have likewise all refused to recognize an affirmative defense of comparative bad faith. (See Southland Lloyd’s Ins. Co. v. Tomberlain (Tex.Ct.App. 1996) 919 S.W.2d 822, 832, fn. 5; Stumpf v. Continental Cas.

Co. (1990) 102 Or.App. 302 [794 P.2d 1228]; Nationwide Property & Cas. Ins. Co. v. King (Fla.Dist.Ct.App. 1990) 568 So.2d 990, 990-991; In re Tutu Water Wells Contamination Litigation (D.V.I. 1999) 78 F.Supp.2d 436, 454-455; Wailua Associates v. Aetna Cas. and Sur. Co. (D. Hawaii 1998) 183 F.R.D. 550, 559-560.) To the extent it is inconsistent with the conclusions reached herein, California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d 274, is disapproved.

On the first day of trial in the Hubert action, the trial judge ruled that prior Slip ’N Slide accident victims would be permitted to testify on plaintiff’s behalf, one from a wheelchair. This ruling apparently did not cause AES to reevaluate its assessment of Hubert’s claim or later accept the settlement offer. The earlier accident resulting in a fatality was a matter of public record in Wisconsin, as the ensuing litigation had culminated in a reported decision. (See Drake v.

Wham-O Manufacturing Company (E.D.Wis. 1974) 373 F.Supp. 608.) As the Court of Appeal noted, there was also evidence that Hubert and his counsel were already aware of at least one of the two prior Slip ’N Slide accidents prior to Kransco’s tendering the incorrect interrogatory responses to plaintiffs. Kransco’s general counsel, Stuart Schneck, who prepared and submitted the false interrogatory responses on Kransco’s behalf, was not a witness in the underlying Wisconsin action.