Insurance Law Alert: No Bad Faith for Failure to Settle Within Limits Absent Clear Evidence of Claimant’s Willingness to Settle

In Reid v. Mercury Insurance Company (No. B241154, filed 10/7/13), a California appeals court held that, in the absence of a settlement demand or any other indication the injured party is interested in settlement, there is no liability for bad faith failure to settle within limits as long as the insurer has done nothing to foreclose the possibility of settlement.

In Reid, Mercury’s insured was the cause of a multi-car accident that injured the plaintiff and several others. The plaintiff’s injuries were significant and Mercury advised that it was accepting liability, but that there might be a limits issue. Mercury’s adjuster believed that liability was 100 percent adverse to the insured.

The plaintiff’s son requested disclosure of Mercury’s limits, but the adjuster said it could not do so without written permission from the insured. The adjuster then wrote to all claimants saying that Mercury needed to take statements and to obtain medical records from the injured parties. The adjuster also told the insured that the claim could exceed the limits and she might wish to consult personal counsel at her own expense.

Although only four weeks had passed and the plaintiff was still in intensive care, her son hired counsel saying they were being “jerked around” by Mercury’s failure to disclose policy limits and its claim that it could not determine liability pending investigation.

Internally, Mercury’s adjuster concluded that only the plaintiff’s claim posed a potential exposure in excess of the $100,000 per person limit, and the others were all estimated to be within the balance of the $300,000 per accident limit. The adjuster recommended tendering the $100,000 limit “as soon as we have enough information available to do so.”

Plaintiff’s counsel never made a demand for settlement in any amount. In addition to his demand for disclosure of policy limits, he requested confirmation that the insured was not in the course and scope of employment and that there was no umbrella coverage available. Nine months after the accident, Mercury offered the plaintiff the $100,000 per person limit. That offer was rejected and, in a bench trial, a $5.9 million judgment was entered against the insured. She filed for bankruptcy and her rights were assigned to the plaintiff, who sued for bad faith failure to settle within limits. Mercury contended that it could not be liable for bad faith failure to settle, since there had never been a demand by the plaintiff, and the appeals court agreed, affirming summary judgment for Mercury.

Although the evidence showed no actual or specific demand, the plaintiff argued that Mercury’s adjusters “understood, when a third party claimant makes a request for policy limits information, ‘it is an attempt to determine what is available for settlement.'” She also argued that an insured may want the insurer to engage in piecemeal settlements to dispose of the more significant claims, but Mercury never considered it. However, the court held that bad faith liability cannot be founded solely upon an insurer’s failure to initiate settlement discussions or offer its policy limit.

The Reid court distinguished several prior cases describing circumstances where no formal demand for settlement within policy limits was necessary for bad faith liability to attach, noting that all involved circumstances where the claimant had conveyed to the insurer an interest in settlement, and the insurer had rejected or ignored the opportunity to negotiate a settlement. The court found those inapposite, stating:

“[W]hen a claimant offers to settle an excess claim within policy limits, an opportunity to settle exists and a conflict of interest arises, because a divergence exists between the insurer’s interest in paying less than the policy limits and the insured’s interest in avoiding liability beyond the policy limit.[] And a conflict may also arise, without a formal settlement offer, when a claimant clearly conveys to the insurer an interest in discussing settlement but the insurer ignores the opportunity to explore settlement possibilities to the insured’s detriment, or when an insurer has an arbitrary rule or engages in other conduct that prevents settlement opportunities from arising. [] But nothing like that happened here.”

“An ‘opportunity to settle’ does not arise simply because there is a significant risk of an excess judgment. And none of the evidence presented to the trial court, disputed or not, allows an inference that plaintiff at any time conveyed to defendant any interest in settlement, at policy limits or otherwise, at any time before defendant offered its policy limits. In short, there was no evidence of a bad faith failure to settle in this case. Accordingly, there was no foundation for a claim of breach of contract or breach of the insurer’s covenant of good faith and fair dealing.”

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October 8, 2013