An insurer’s decision on whether to provide a defense and settle claims made against an insured often comes early in the claim before facts have been fully developed through discovery. Questions regarding the applicability of exclusions are often unresolved at this juncture. However, the debate about coverage does not eliminate the insurer’s obligation to act in good faith in handling claims against the insured.
Evanston Ins. Co. v. Enterprise Plan B, Inc. 2026 WL 2109871 (N.D. Cal. July 6, 2026) Part II
Background
Evanston originates from a car wreck, a denial of coverage by Evanston, and a resulting $78 million judgment against Evanston’s insured. The full factual background is set out in the October 2025 Bad Faith Update (LINK HERE) and through the Court’s previous order at 2025 WL 2838814.
The abbreviated version is that James Brown, plumbing contractor hired by Enterprise Plan B (“Enterprise”), caused a car wreck in his personal truck on his way to a home being remodeled by Enterprise. The wreck severely injured Alex Borja. Borja asserted claims against Enterprise under a theory that Brown was acting as the agent (but not an employee) of Enterprise.
Enterprise had procured a policy of insurance from Evanston with liability limits of $1 million. Enterprise tendered Borja’s claims to Evanston. Evanston denied coverage and refused to provide a defense based primarily on the presence of an “Auto” exclusion. The Auto exclusion precluded coverage for injuries arising from the use of an auto that was owned or operated by an insured. Evanston took the position that Brown was an employee of Enterprise and thus an insured and that the “Auto” exclusion would apply.
Enterprise and Borja essentially arbitrated Borja claims and a $78 million judgment was entered in Borja’s favor. Enterprise assigned its extra-contractual claims against Evanston to Borja after the judgment was final.
After the entry of the judgment, Evanston filed a declaratory judgment arguing it had no duty to defend or indemnify Enterprise based in part on the Auto Exclusion. Borja countered by seeking a declaratory judgment that Enterprise owed a defense and indemnity obligation and acted in bad faith in refusing to provide a defense to Enterprise and failing to settle the claims against Enterprise.
On cross-motions for summary judgment, the Court determined that there were genuine issues of material fact on whether the “Auto” exclusion was applicable to Borja’s claims against
Enterprise. The key question was whether Enterprise exercised sufficient control over Brown such that Brown would be considered an employee. Each party set forth enough evidence to create a genuine issue of fact and the Court could not determine Evanston’s obligation to indemnify Enterprise for the judgment. However, since the Borja’s claims were conceivably covered, Evanston did have a duty to defend Enterprise and failed to do so.
Enterprise II
While Enterprise I dealt with coverage arguments, Enterprise II dealt with the legal viability of the extra-contractual claims assigned to Borja. During this portion of the litigation, Evanston took the position that Borja’s claims for bad faith based on Evanston’s denial of a defense to Enterprise and Evanston’s failure to accept a previous demand for the policy limits failed as a matter of law.
Evanston based its argument on the finding in Evanston I that there were genuine issues of material facts as to whether the Brown was an employee of Enterprise and thus whether the “Auto” exclusion was applicable. According to Evanston, this meant that even if a jury ultimately determined that Brown was not an employee, its denial of coverage and decision not to settle for the policy limits was reasonable. The district court disagreed.
As it related to the failure to settle, Evanston never argued that Borja’s policy limits demand was unreasonable. Instead, Evanston’s decision to reject the offer was based solely on its belief that coverage was excluded by the policy. The court noted that in determining whether to settle a claim, an insurer must take into account the interests of the insured and when the claim poses a risk beyond the policy limits, good faith may require the insurer to settle the claims against the insured. Since Evanston’s decision not to respond to the demand was based only on its belief that it had no indemnity obligation and there was no evidence it even considered Enterprise’s interests, Evanston could be liable for bad faith.
Similarly, the District Court found that the court’s previous ruling that genuine issues of fact existed concerning the applicability of the “Auto” exclusion did not preclude a bad faith refusal to defend claim. The court reiterated that the duty to defend exists when there is any potential for coverage. The fact that genuine disputes of fact exist as to the applicability of coverage actually supported the bad faith refusal to defend claim. In doing so, the District Court recognized that the duty to defend is much broader than the duty to indemnify. The existence of such uncertainty on coverage showed that there was a potential for coverage and that as such Evanston should have provided a defense. At a minimum, the jury should resolve whether Evanston acted unreasonably in denying Enterprise a defense.
Like Enterprise I, Enterprise II did not set out a specific penalty for Evanston’s decision to abandon its insured. However, the downside for Evanston is significant and ultimately may include liability for the entirety of the $78 million judgment. Enterprise II stands for the position that extra-contractual liability can be imposed even when an insurer lacks all facts necessary to
fully resolve a coverage decision. A coverage dispute is no excuse for improper claims handling or unreasonably failing to provide a defense.
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