In Reid v. Mercury Insurance Co., __ Cal. Rptr. 3d ___, 2013 WL 5517979 (Cal. Ct. App. Oct. 7, 2013), the California Court of Appeals held that an insurer cannot be found liable for bad faith failure to settle within the policy limits absent a settlement demand from the claimant, or some other indication that the claimant desires to settle the claim for the policy limits. In Reid, Mercury issued to its policyholder (“Huang”) an automobile insurance policy 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. After the accident, the claimant’s son (“Reid”) and his attorney made inquiries with Mercury as to the policy limits, although Mercury initially responded by stating that it needed to consult with its policyholder before it could disclose the limits. Mercury also requested from Reid an interview of the injured party, as well as authorizations to obtain medical records. However, during these conversations, Reid never made a policy limits settlement demand on Mercury, nor did Reid or his attorney ever convey that they wanted to settle the mother’s claim for the policy limits. Reid ultimately filed suit against Huang and obtained a $5.9 million verdict against her. After obtaining Huang’s rights against Mercury, Reid filed suit against Mercury alleging bad faith failure to settle. The trial court granted summary judgment to Mercury, finding that even for claims that are clearly in excess of the policy limits, an insurer has no duty to settle where it has not received a settlement offer from the claimant.
On appeal, the California Appellate Court affirmed, holding that an insurer’s duty to settle or initiate settlement discussions does not arise simply because there is the likelihood of an excess judgment against the insured. The Appellate Court agreed with the trial court that neither Reid nor his attorney ever conveyed to Mercury that they would accept the policy limits to settle the claim. Likewise, the court found that Mercury never took any actions during its interactions with Reid which would have foreclosed the possibility of settlement. Interestingly, the court found that a bare request to know the policy limits does not constitute an “opportunity to settle.” After reviewing the case law, the court found that California law does not require an insurer to initiate settlement discussions without first receiving an indication that the injured party is prepared to settle within the policy limits. As such, because Mercury never received a settlement demand or clear indication of an intent to settle from the claimant, it did not act in bad faith.
The California Appellate Court’s decision demonstrates that an insurer will not be held liable for bad faith failure to settle a claim within the policy limits absent a settlement offer from the insured, or some other clear indication that the claimant desires to settle the matter for the policy limits. However, if a claimant conveys to an insurer that it wants to settle the claim for the policy limits, even in the absence of a formal settlement offer, an insurer may want to initiate settlement discussions to protect its interests.
The Insurance Law Blog previously covered the issue of an insurer’s duty to settle. In June 2012, we reported on the Ninth Circuit’s holding in Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012), amended and superseded, 697 F.3d 753 (9th Cir. 2012).