The American West has always been a land defined by its appetite for risk and the promise of reward. From the feverish days of the Gold Rush to the present era of complex legal landscapes, the spirit of boldness and innovation has shaped the region’s approach to challenges. Nowhere is this more evident than in the way California, Oregon, and Washington have developed their bad faith laws regarding refusal to settle liability claims. These states recognize the inherent conflict between an policyholder’s interest to settle and the insurers, and approach this conflict by balancing the interests of risk-taking, fairness, and a commitment to protecting policyholders from the unpredictable hazards of business.
The West Coast’s history is a tapestry woven with stories of prospectors, pioneers, and entrepreneurs willing to stake everything on a chance at success. When James W. Marshall discovered gold at Sutter’s Mill in 1848, this set off a chain reaction that would draw over 300,000 people to California, each lured by the possibility of striking it rich. The gold rushes that followed in Oregon and Washington further cemented the region’s reputation as a place where risk was not just tolerated, but celebrated and rewarded.
This cultural legacy has left an indelible mark on the legal and economic systems in these western states. The willingness to embrace uncertainty, to weigh potential losses against the hope of great gain, is mirrored in the way these states handle insurance disputes. Just as the prospectors of old had to decide whether to dig deeper or move on, today’s insurers must choose whether to settle claims within policy limits or gamble on a favorable verdict at trial. The consequences of these decisions can be as dramatic as any gold rush tale, with fortunes won or lost on the turn of a jury’s decision. But how to ensure that the risk and reward remain paired, or put another way: how to they states make sure that the gamblers are not playing with the money and reputation of others.
At the heart of the insurance relationship is a simple promise: in exchange for premiums, the insurer agrees to pay covered settlements or judgments up to a specified policy limit. This limit is negotiated at the outset, attempting to providing a measure of certainty to policyholders who do not know whether and what claims they may be facing over the next year. Yet, the policy itself rarely obligates the insurer to settle a claim before trial. Instead, it leaves room for judgment, negotiation, and, sometimes, high-stakes gambles.
For policyholders, the appeal of settling within policy limits is clear. It offers a way to avoid the risk of a catastrophic judgment that could exceed the coverage they purchased. For insurers, however, the calculus is more complex. They are experts in assessing risk and may sometimes believe that taking a case to trial will result in a lower payout—or even a complete defense verdict. The tension between these competing interests has given rise to a body of law that seeks to balance the scales, ensuring that neither side is unfairly disadvantaged by the other’s appetite for risk.
California, with its storied history of gold rushes and innovation, is often credited to be the first to recognize the need for legal protections in the insurance settlement process. In 1958, a full 110 years after the first prospectors arrived, California courts declared that every insurance policy contains an implicit duty of good faith and fair dealing. This duty requires insurers to accept reasonable settlement demands within policy limits when they have the opportunity to do so.
The logic behind this rule is as straightforward as it is compelling. If an insurer can settle a claim for less than the policy limits, it should do so—thereby shielding the policyholder from the risk of an excess judgment and fulfilling the core purpose of the insurance contract. If the insurer refuses to take the policyholder of the risk and “roll the dice” for a favorable jury verdict, it is the insurer, not the policyholder, who should bear the consequences of that choice – even (or especially) when the verdict exceeds policy limits.
This approach reflects the West Coast’s enduring belief in fairness and accountability. Just as the gold rush prospectors accepted the risks of their ventures, insurers who decline reasonable settlements are expected to shoulder the full weight of their risk decisions. If they win at trial, they reap the rewards by paying less than they would have paid under the settlement agreement; if they lose, they cannot shift the cost of that decision to they policyholders and must pay the entire judgment without trying to shift the excess loss to the insured. The law thus encourages insurers to act prudently and in good faith, while providing robust protection for policyholders.
Oregon, too, has drawn on its history of risk and reward to craft a distinctive approach to insurance settlements. Contrary to the assumptions of many insurers, Oregon does recognize a form of bad faith liability. When an insurer fails to negotiate or act reasonably in defending its insured, it can be held responsible for damages that exceed the policy limits.
But Oregon goes even further. In a nod to the collaborative spirit that characterized its own gold rush communities, the state imposes an affirmative duty on insurers to initiate settlement efforts when it would be reasonable to do so. This means that insurers cannot simply wait for a demand from the claimant; they must actively engage in negotiations and seek out opportunities to resolve claims within policy limits.
Oregon’s approach blends the risk-based logic of California’s rules with a recognition that negotiation is an integral part of the defense process. By requiring insurers to take the initiative, the state ensures that policyholders are not left exposed to unnecessary risk simply because their insurer is passive or overly optimistic about its chances at trial. In cases of egregious misconduct, Oregon even allows for punitive damages, further underscoring its commitment to fairness and accountability.
If California and Oregon have built their insurance laws on the foundation of risk and fairness, Washington has taken these principles to new heights. In 2007, the state’s voters approved the Insurance Fair Conduct Act, a sweeping statute that allows courts to award up to three times the actual damages caused by an insurer’s unreasonable failure to pay benefits.
This law is unapologetically punitive, designed to deter insurers from acting unreasonably and to provide strong incentives for fair dealing. Washington courts have interpreted the statute to apply not only to the failure to pay benefits, but also to the unreasonable refusal to settle liability claims. As a result, insurers who decline reasonable settlement offers within policy limits face the prospect of paying far more than the original claim—potentially three times as much.
While this approach has the side effect of encouraging plaintiffs to demand the maximum policy limits, it also serves a vital purpose. By placing the risk squarely on insurers who choose to “roll the dice” at trial, Washington ensures that policyholders receive the full benefit of the coverage they purchased. The law recognizes that the primary purpose of insurance is to protect individuals from liability, and it is only fitting that insurers bear the consequences when they fail to honor this commitment.
Taken together, the insurance settlement laws of California, Oregon, and Washington form a distinctive West Coast model—one that is deeply rooted in the region’s history and values and has ultimately been adopted in states across the country. These states have embraced the idea that risk and reward are inseparable--that those who take risks must be prepared to accept the consequences.
For insurers, this means that the decision to reject a policy limits settlement demand is fraught with peril. If they are right, they may save money or avoid paying a claim altogether. But if they are wrong, the penalties can be severe—ranging from liability for excess judgments to punitive damages and even treble damages in Washington. This high-stakes environment encourages insurers to act prudently, to negotiate in good faith, and to prioritize the interests of their policyholders.
For policyholders, the West Coast approach offers a measure of security. By making it clear that insurers must bear the risks of their own decisions, these states ensure that individuals are not left vulnerable to the whims of corporate risk assessment. The law stands as a bulwark against the possibility that an insurer might gamble with a policyholder’s financial future in pursuit of its own gain.
The story of insurance settlement law on the West Coast is, in many ways, a continuation of the region’s broader narrative. It is a story of boldness and innovation, of communities that value fairness and mutual protection, and of legal systems that are willing to adapt and evolve in response to new challenges.
As policymakers and courts continue to grapple with the complexities of insurance law, the lessons of the West Coast offer a compelling blueprint. By insisting on clear, robust protections for policyholders and by holding insurers accountable for the risks they choose to take, California, Oregon, and Washington have set a standard that others would do well to follow.
