In some cases, Courts have equated a fairly or reasonably debatable claim to Coverage with a fairly or reasonably debatable defense to a Bad Faith Claim that a Liability Insurance Company allegedly Failed to Settle a Third Party's Claim against the Insured because settlement in the underlying liability case was reasonably or fairly debatable. See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 5:16 (West Publishing Co. 3d Edition 2011).
In that narrow context, a Federal Court in California apparently expanded California's "Fairly and Reasonably Debatable Defense", from Coverage to the merits of the underlying liability claim. Download Vaid-Raizada v. Lexington Nat'l Ins. Co. (C.D. Cal., Order Denying Motion to Correct or Clarify, Filed August 12, 2009) PUBLIC ACCESS, also published as Vaid-Raizada v. Lexington National Insurance Co., 2009 WL 2486467 *3 (C.D. Cal. August 12, 2009)(authorized password required to access Westlaw).
As the Federal Judge interpreted California Insurance Law in that case, ““tort recovery for breach of the implied duty to settle does not require Plaintiff to prove that Defendant's coverage position was unreasonable; rather, it requires Plaintiff to prove that Defendant refused a reasonable settlement offer.” Vaid-Raizada v. Lexington Nat'l Ins. Co., 2009 WL 2486467 *3 (C.D. Cal. August 12, 2009). [Emphasis by the Court.]
Parenthetically, this holding may or may not be a reliable interpretation of California Insurance Law. See Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498, 530, 115 Cal. Rptr. 3d 42, 70 (Cal. 1st DCA, Div. 4, 2010), review denied (unreported) (Cal. Nov. 23, 2010). "But it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement."
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