United States: California Court Of Appeals Limits Bad Faith FailureTo Settle Claims Against Insurers

Last Updated: October 15 2013
Article by Thomas M. Contois and Jill C. Maguire

In Reid v. Mercury Insurance Company, No. B241154, --- Cal.Rptr.3d ----, 2013 WL 5517979 (Cal. App. 2 Dist. Oct. 7, 2013), the California Court of Appeals, Second Appellate District, held that, under California law, an insurer has no duty to initiate settlement negotiations or offer policy limits in the absence of a settlement demand from a third party claimant or some other evidence showing "an opportunity to settle" that the insurer ignored – even where the insured's liability is clear.

In Reid, the insured was involved in an automobile collision that resulted in serious injuries to the third party claimant, Reid. The insured's liability to Reid was clear almost immediately. Within about six weeks of the accident, a claims manager for defendant Mercury Insurance, determined that, while Mercury still needed Reid's medical records, Mercury must tender the policy limits to Reid as soon as it had sufficient information to do so. Reid, however, never made a settlement demand. Rather, Reid filed suit against the insured about three months after the collision. Seven months after the collision, Reid provided her medical records to Mercury. About ten months after the collision, Mercury offered Reid the policy limits of $100,000. Reid rejected the offer and proceeded to a bench trial against the insured, where judgment was entered in Reid's favor for $5.9 million. The insured, however, declared bankruptcy and assigned any potential rights against Mercury to Reid. Reid then filed suit against Mercury, alleging breach of the covenant of good faith and fair dealing and breach of contract, based on a theory of bad faith failure to settle, and seeking over $6.9 million in damages. The trial court granted Mercury's motion for summary judgment, and the Court of Appeals, Second Appellate District, affirmed.

On appeal, Reid argued that Mercury was duty-bound to attempt to reach settlement once the insured's liability in excess of policy limits became clear. The Court of Appeals acknowledged that some courts have found that an insurer may be liable for bad faith failure to settle even where the claimant has not made a formal settlement demand. It distinguished the Reid case from those cases, however, reasoning that in those cases the claimant had conveyed an interest in settling and the insurer had rejected or ignored the opportunity to settle. Reid, 2013 WL 5517979, at *5-7.

The Court of Appeals also rejected Reid's argument that California Insurance Code section 790.03(h)(5) provided a basis for liability. Id. at *8. That section identifies unfair and deceptive practices to include "[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear." The Reid Court first noted that California courts have made clear that that section itself does not provide a cause of action against an insurer, and then held that nothing in the section suggested that a failure to initiate settlement negotiations – in the absence of any expressed interest in settlement from the claimant – gives rise to a bad faith claim. The Court of Appeals also concluded that Reid's "bare request" to know the policy limits was not an opportunity to settle and that Mercury's repeated requests for medical information were simply "status reports of pending items" and could not "be the foundation for a bad faith claim." Id. at *9.

The Court of Appeals concluded 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, as soon as an insured's liability in excess of policy limits has become clear." Id. at *9. Rather, liability may attach when a claimant demonstrates that she made a formal settlement demand or offers some evidence showing an opportunity to settle that the insurer rejected or ignored. This ruling thus limits an insurer's liability for certain bad faith failure to settle claims.

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