On October 7, 2013, the California Court of Appeal for the Second Appellate District held in Reid v. Mercury Insurance Company that an insurer that acknowledged its insured’s liability for a third party’s injuries and recognized that there was a substantial likelihood of a recovery in excess of policy limits had no liability for bad faith failure to settle in the absence of a settlement demand by the claimant or any other manifestation that the claimant was interested in settlement.
The Court of Appeal’s decision in this case provides guidance on the scope of an insurer’s duty to settle. The issue became confused when, in June 2012, the Ninth Circuit ruled in Du v. Allstate Insurance Company that an insurer had a duty to initiate settlement once liability was reasonably clear even though the injured party made no settlement demand. The Ninth Circuit retracted that portion of its ruling in October 2012. The Du rulings are discussed on this blog here and here.
The Court of Appeal’s decision puts any confusion resulting from Du to rest in stating,
In short, nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear. Nor will this court make such a rule of law, for which neither precedent nor sound policy considerations have been offered.”
This case involves a Mercury insured who failed to stop at a red light and collided with another car. The driver of the other car was seriously injured. Within a few weeks of the accident, Mercury advised the injured party’s representative that Mercury “was accepting liability and that there may be a ‘limits issue.’”
Mercury requested medical records from the injured party, which were not made available. Mercury and the injured party’s attorney exchanged correspondence on the medical records and other matters, but the injured party never made a settlement demand.
The injured party filed a lawsuit against Mercury’s insured. The lawsuit resulted in a $5.9 million judgment against the insured. The Mercury policy covering the insured had a $100,000 policy limit.
Mercury was sued for bad faith failure to settle. The lawsuit alleged that the insurer’s failure to make a settlement offer exposed the insured to a judgment in excess of policy limits.
Mercury filed a motion for summary judgment, arguing that the plaintiff could not establish a bad faith action because the injured party never made a settlement demand. The trial court granted Mercury’s motion. The Court of Appeal affirmed the trial court’s decision.
The Court of Appeal explained that in a case where the insured is exposed to a judgment in excess of policy limits, in order to establish a bad faith action against an insurer for failure to pursue settlement discussions:
there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating that the insurer knew that settlement within policy limits could feasibly be negotiated.”
The court concluded that there no evidence in this case that could support a finding Mercury knew or should have known that the injured party was interested in settlement. The court ruled, “Accordingly, defendant cannot be liable for bad faith failure to settle.”