Unless a third-party claimant makes a settlement demand against an insured or otherwise expresses some interest in settling with the insured, an insurer has no affirmative duty to offer its policy limits in settlement, and thus the insurer cannot be held liable for bad faith failure to settle within the policy limits. ( Reid v. Mercury Ins. Co. (2013) WL 5517979)
Facts
Mercury Insurance Company (Mercury) insured Zhi Yu Huang (Huang) under an automobile policy with bodily injury liability limits of $100,000 each person and $300,000 each accident. While the policy was in force, Huang ran a red light and caused a multi-vehicle accident in which Shirley Reid (Reid) suffered catastrophic injuries and three other persons suffered less serious injuries.
A month after the accident, Reid was still in intensive care. Reid’s son asked Mercury to disclose Huang’s policy limits, but Mercury stated it could not do so because it did not yet have Huang’s permission.
Six weeks after the accident, Mercury’s claims manager determined that Mercury should tender Huang’s $100,000 policy limit to Reid “as soon as we have enough information available to do so.” During this same frame, Mercury’s adjuster told Reid’s lawyer that Mercury needed Reid’s recorded statement and her medical records. Mercury did inform Reid’s lawyer that Huang’s policy had a limit of $100,000. However, even though Reid’s lawyer now knew what Huang’s policy limit was, Reid never offered to settle her claim against Huang in exchange for Mercury’s policy limit.
Instead, three-and-a-half months after the accident, Reid filed a personal injury lawsuit against Huang. A short time later, Mercury’s claim manager gave Mercury’s adjuster authority to settle Reid’s claim for the $100,000 policy limit. However, Mercury’s adjuster did not immediately offer the policy limit in settlement of Huang’s alleged liability to Reid.
Seven months after the accident, Reid’s lawyer sent copies of Reid’s medical records to Mercury. Approximately three months later, Mercury’s adjuster wrote to Reid’s counsel, stating that Mercury “has agreed to tender its $100,000 policy limit to [Reid] in order to resolve this matter in its entirety.” However, Reid rejected Mercury’s settlement offer.
Thereafter, Reid proceeded to trial against Huang and obtained a $5.9 million judgment against Huang. Huang declared bankruptcy, and the bankruptcy trustee assigned to Reid any potential rights Huang might have against Mercury.
Reid then sued Mercury for bad faith failure to settle. Reid alleged that as a consequence of Mercury’s failure to settle, Huang was exposed to and suffered an excess judgment. Mercury moved for summary judgment on the ground that Reid could not prove bad faith “because [Reid] never made a demand for settlement within the policy limits.” The trial court granted Mercury’s motion for summary judgment. Reid appealed.
Holding
The Court of Appeal affirmed. According to the appellate court, an insurer does not have a duty to settle simply because there is a likelihood of an excess judgment against the insured. Rather, when the claimant does not make a settlement demand against the insured or otherwise manifest an interest in settling with the insured, and when the insurer does not do anything to foreclose the possibility of settlement, the insurer does not have an affirmative duty to pursue settlement and thus cannot be liable for bad faith failure to settle.
Here, it was undisputed that Reid had never offered to settle her claims against Huang for Mercury’s policy limit or any other amount. Although within six weeks after the accident Reid (through her lawyer) knew what Huang’s policy limit was, Reid inexplicably never made any settlement demand against Huang.
Further, according to the appellate court, Reid never communicated any interest in settling with Huang. The mere fact that Reid had asked what Huang’s policy limit was did not sufficiently manifest an interest in settlement that would impose an affirmative duty on Mercury to offer the policy limit.
Last, there was no evidence that Mercury affirmatively refused to settle Huang’s liability to Reid. While Reid argued that Mercury had “discouraged” Reid from making a settlement demand, there was no evidence to support that claim.
Under such circumstances, Mercury could not be liable for bad faith failure to settle. Thus, Mercury was not liable for that portion of the $5.9 million judgment that exceeded the Mercury policy’s $100,000 limit.
Comment
Last year, the Ninth Circuit Court of Appeals suggested that an insurer has an affirmative duty to initiate settlement discussions, and can be liable for bad faith failure to settle even absent a settlement demand within limits. ( Du v. Allstate Ins. Co. (9th Cir. 2012) 681 F.3d 1118.) However, 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.)
Now, in Reid , the California Court of Appeal has held that bad faith liability cannot be founded solely upon an insurer’s failure to initiate settlement discussions or offer its policy limit . Rather, under Reid, that an insurer can be liable for bad faith failure to settle only where the insurer fails to settle within policy limits following either a formal demand by the claimant or some other indication that the claimant would accept a settlement within limits.