An insurer exercises an option expressly afforded by its policy, pays the policy limits, and thereby satisfies its contractual obligations. One might reasonably expect that to end the dispute. In Quilbillies, LLC v. First American Title Insurance Co., 2026 WL 2731415, Case No. No. 25-501 (9th Cir. Sept. 16, 2026), a split Ninth Circuit panel held otherwise, at least as to bad faith.
The case arose from title insurance policies issued by First American Title Insurance Company and claims made by Susan Fuller and Quilbillies, LLC. The policies gave First American Title Insurance Company several options for addressing a covered claim, including defending the insured or paying the applicable policy amounts and terminating the policies. First American Title Insurance Company chose the latter. Rather than provide a defense, the insurer paid the policy amounts and terminated the policies. Susan Fuller, Quilbillies, LLC, and William Stern, Quilbillies, LLC’s sole member, subsequently sued, asserting breach of contract, bad faith, negligence, and claims under the Washington Consumer Protection Act and Washington Insurance Fair Conduct Act.
The district court granted summary judgment to First American Title Insurance Company. On appeal, the Ninth Circuit agreed that the insurer had not breached the policies. The operative policy language expressly permitted First American Title Insurance Company to terminate the policies by paying the policy amounts, and Washington law required that unambiguous language to be enforced as written. The panel likewise affirmed summary judgment against William Stern individually because Quilbillies, LLC, not its sole member, was the insured. Corporate separateness, it turns out, survives even when inconvenient. Bad faith did not exit quite so easily.
The district court had relied upon Batdorf v. Transamerica Title Insurance Co., 702 P.2d 1211 (Wash. Ct. App. 1985), which held that a title insurer’s exercise of its policy option to pay limits terminates its subsequent obligation to defend. The Ninth Circuit majority found the district court’s reliance on Batdorf too broad. Batdorf did not address bad faith. More importantly, it did not address extra-contractual liability arising from conduct occurring before, or relating to, an insurer’s decision to pay its limits.
That distinction proved critical. Relying on Washington Supreme Court authority describing an insurer’s duty of good faith as “broad and all-encompassing,” the majority reasoned that the duty is not limited to an insurer’s contractual obligations to pay, settle, or defend. Accordingly, although First American Title Insurance Company’s payment of the policy amounts satisfied the contract, contractual performance did not necessarily resolve whether the insurer had complied with its broader duty of good faith in handling the claims.
The Ninth Circuit therefore vacated summary judgment on the bad-faith claim and remanded for further proceedings. Significantly, the district court had not reached the factual bases underlying the bad-faith theory, including First American Title Insurance Company’s having insured the adverse party in the relevant litigation. Because the district court had disposed of the remaining extra-contractual claims based on its conclusion that bad faith failed as a matter of law, the Ninth Circuit vacated and remanded those claims as well.
That result came with an important limitation. The majority did not hold that First American Title Insurance Company acted in bad faith. It held that the insurer’s contractual performance did not, by itself, eliminate the bad-faith claim on the rationale applied by the district court. The insureds survived summary judgment, but they still have bad faith to prove.
Judge Morgan Christen disagreed with the majority on that point. In a partial dissent, Judge Morgan Christen emphasized that the insureds identified no defect in First American Title Insurance Company’s handling of the claims other than its decision to pay the policy limits rather than provide a defense. But providing a defense was only one option under the policies. Paying the policy amounts and terminating the policies was another. Because First American Title Insurance Company selected an expressly authorized option and provided every contractual benefit to which the insureds were entitled, Judge Morgan Christen concluded that the decision, “without more,” could not constitute bad faith.
The panel’s division is what makes Quilbillies noteworthy. The majority and dissent did not disagree over whether First American Title Insurance Company complied with the policy. They disagreed over what follows from that compliance. The dissent would have placed greater weight on the bargain the parties actually struck: where the insurer does exactly what the policy permits and provides everything the contract requires, that conduct should not, without something more, support tort liability. The majority treated contractual performance and good faith as distinct inquiries, leaving the insurer’s conduct before and surrounding that performance open to separate scrutiny.
That distinction has practical significance for insurers. At summary judgment, establishing that the insurer acted within its contractual rights may dispose of a breach-of-contract claim, just as it did in Quilbillies. Under the majority’s reasoning, however, the same showing does not necessarily dispose of bad faith. Claim-handling conduct preceding and surrounding the exercise of those contractual rights may remain relevant to extra-contractual liability.
The decision should not be confused with a circuit split. Quilbillies reflects a split Ninth Circuit panel, not a disagreement between federal circuits. The decision is also an unpublished memorandum applying Washington law and is nonprecedential except as provided by Ninth Circuit Rule 36-3. Those limitations counsel against reading the decision too broadly.
Still, the divided panel puts the issue into unusually sharp focus: when an insurer fully performs its contractual obligations, how much room remains for a bad-faith claim based on the handling of that same claim? The Quilbillies majority concluded that contractual compliance did not necessarily end the inquiry. Judge Morgan Christen would have ended it there, at least on the record presented.
For insurers accustomed to viewing payment of policy limits as the clean exit, Quilbillies offers a less tidy proposition: paying the limits may close the contract claim. It does not necessarily close the courthouse door.