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Insurers May Avoid Bad Faith Exposure if There is No Settlement Demand

In Reid v. Mercury Insurance Co., (2013 WL 5517979; 2013 DJDAR 13436) (Oct. 7, 2013), the California Court of Appeals held that an insurer was not acting in bad faith for failing to settle within the policy limits, where there was no settlement demand from the claimant or any other indication that the claimant wanted to settle the claim for the policy limits.

In Reid, Mercury Insurance issued an automobile insurance policy to its policyholder (“Huang”) providing limits of $100,000 per person and $300,000 per accident. In June 2007, Huang caused a multi-car accident in which the claimant sustained catastrophic injuries. The police report concluded Huang caused the accident by running a red light. Mercury immediately acknowledged liability for the accident.

After the accident, the claimantís son (“Reid”) and his attorney asked Mercury to disclose the policy limits. Mercury initially responded that it needed to consult with the policyholder before disclosing the limits. Mercury asked Reid for an interview of the injured party and authorizations to obtain medical records. During these conversations, Reid never made a policy limits settlement demand on Mercury. Further, neither Reid nor his attorney ever communicated to Mercury that they wanted to settle the motherís claim for the policy limits.

Reid ultimately filed suit against Huang which proceeded to a bench trial, and judgment was entered against Huang for $5.9 million. During the lawsuit, Huang filed for bankruptcy and the bankruptcy trustee assigned any potential rights against Mercury to Reid. Reid then sued Mercury for bad faith. The trial court granted Mercuryís motion for summary judgment, finding that Mercury was not liable for bad faith failure to settle because Reid had never made a settlement demand or otherwise told Mercury that Reid would accept policy limits in full settlement. Reid appealed.

The Appellate Courtís Ruling

The appellate court affirmed, holding that, “[a]n insurerís duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured,” and that “[f]or bad faith liability to attach to an insurerís failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, 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 the insurer knew that settlement within policy limits could feasibly be negotiated.” [emphasis added] The court also held that “[a]n ‘opportunity to settle’ does not arise simply because there is a significant risk of an excess judgment.” In addition, the court held that it would “not construe a bare request to know the policy limit as an opportunity to settle.”

However, if a claimant tells an insurer it wants to settle the claim for the policy limits, even in the absence of a formal settlement demand, an insurer should consider initiating settlement discussions to protect the interests of its insured(s) as well as itsown interests.

Confusion Over Du v. Allstate Ins. Co. Resolved

Last year, the Ninth Circuit Court of Appeal, applying its view of California law, held that insurers have an affirmative duty to initiate settlement discussions and can be held liable for bad faith failure to settle, even in the absence of a within-limits demand. Du v. Allstate Ins. Co., 681 F.3d 1118, (9th Cir. 2012). However, a short time later, the Ninth Circuit issued an amended opinion in which the court retracted that portion of its prior decision. (Du v. Allstate Ins. Co. (9th Cir. 2012) 697 F.3d 753.)

Reid clarifies the confusion from the Ninth Circuitís ruling in Du v. Allstate Insurance Co. which said California insurers must proactively work toward a settlement when itís clear that the policyholder is liable, even if claimants have not made a settlement demand. The Reid Court found that 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, even if liability in excess of the policy limits is reasonably certain.

In a separate but related issue, insurers should be mindful of the recent decision of Aguilar v Gostischef (2013 DJDAR 13678), where the court held that an insurerís failure to disclose applicable policy limits to a claimant could be considered in evaluating whether plaintiffís CCP 998 in excess of the policy limits was in “good faith”. In Auguilar the court found that the insurer was obligated to pay more than $1 million in costs to man who lost his leg in car accident after it had rejected his pre-trial demand above policy limits. The court noted that the insurer (Farmers) had repeatedly ignored pre-suit requests for disclosure of the policy limits, making the plaintiffís CCP 998 offer for $700,000 a “good faith” offer, even though it was far in excess of the policy limits of $100,000.

If you have questions, please contact Leighton Koberlein, an associate in the Fresno office, at 559.449.2600 or .