The California Court of Appeal in Reid v. Mercury Insurance Company [(2013) 220 Cal.App.4th 262 (rehearing denied November 6, 2013)] found no California authority “standing for the proposition that there is a duty to settle when there is a claim that is vastly in excess of the policy limits regardless of whether a settlement demand has been made,” and ruled that there is no bad faith liability for failing to initiate settlement discussions or to offer the policy limit upon determining that its insured’s liability in excess of policy limits has become clear.
The insured in the Reid case failed to stop at a red light and collided with claimant's car, injuring the claimant and others. The insurer did not deny coverage or the insured’s responsibility for the accident, but did not disclose the policy limits when first asked, though it did request the claimant’s medical records. Claimant filed suit against the insured before providing the medical records, but without making a settlement demand. The insurer offered its policy limits three months after it received the medical records. The claimant refused the offer and obtained a judgment in excess of the policy limits, then filed a bad faith suit as the insured’s assignee.
The Court in Reid held that the insurer did not have a duty under either California Insurance Code § 790.03 (the Unfair Claims Practices Act) or prior case law to initiate settlement discussions or offer its policy limits as soon as the insured’s liability in excess of policy limits had become clear. A bare request for policy limit information was not treated as a demand.
“[An] ‘opportunity to settle’ does not arise simply because there is a significant risk of an excess judgment,” according to the Reid Court. No evidence allowed an inference that plaintiff conveyed to defendant any interest in settlement, at policy limits or otherwise, at any time before defendant offered its policy limits. The Court concluded that there was no evidence of a bad faith failure to settle.
The Reid Court compared its conclusion with a Ninth Circuit Court of Appeals case, Du v. Allstate Ins. Co. (9th Cir. 2012) 697 F.3d 753. The issue in Du was whether the duty to settle described in the standard California jury instruction on the subject (CACI 2337) can be breached absent a settlement demand from the thirty-party claimant. In Du, the insurer made a policy limits offer about a year after the accident, which plaintiff rejected. The substance of plaintiff’s bad faith claim was that the case would have been settled within policy limits had the insurer initiated earlier settlement negotiations. The Ninth Circuit found there was no evidence that the insurer should or could have made an earlier settlement offer to the plaintiff, because the insurer lacked corroborating proof of the extent of the plaintiff’s injuries and medical expenses. The plaintiff’s own expert conceded that the insurer could not base a settlement offer solely on the representations of claimant and claimant’s lawyer.
As in the Reid case, the insurer in Du had no proof of the injuries of three other individuals injured in the accident prior to its offer of policy limits, and paying the plaintiff the limits could have left the insured underprotected if the other three claims exceeded the remaining limits.
California has refused to extend bad faith liability to situations where the insured’s liability is clear, but there has been no demand within the policy limit that would, if accepted, absolve the insured from all exposure in the case.