Why it matters: If you represent a policyholder or the plaintiff in an underlying action, make sure that a policy-limits demand is made in order to trigger the insurer’s duty to accept reasonable settlement offers and settle within limits. In this case that was not done, and the appellate court concluded that an insurer had no duty to initiate settlement discussions. Further, because the injured plaintiff had neither attempted to open such discussions nor made a policy-limits demand, there was no bad faith exposure either.

Detailed Discussion

The underlying case arose out of an automobile accident caused by the insured, who ran a red light. Within days liability was clear, and Mercury Insurance Company, which insured the at-fault driver, contacted the injured parties to accept liability and caution that a limits issue might be in play. One of the injured parties filed suit and instructed his lawyer that he wanted to settle the case as quickly as possible.

Mercury offered the policy limits ($100,000) almost one year after the accident. Reid, one of the injured parties, rejected the offer, went to trial, and was awarded a $5.9 million verdict. Seeking to recover the multimillion-dollar verdict, Reid – pursuant to an assignment of rights from the insured – sued Mercury alleging breach of the covenant of good faith and fair dealing and breach of contract for failure to make a good faith effort to settle the case.

Mercury moved for summary judgment, which the trial court granted. The Court of Appeal affirmed, holding that (1) an insurer’s duty to settle is “not precipitated solely by the likelihood of an excess judgment” and (2) absent a settlement demand or other “manifestation the injured party is interested in settlement,” there is no bad faith exposure.

The Court of Appeal first addressed the specific facts of the case and held that Reid failed to make a settlement demand and presented no evidence for a reasonable fact finder to infer that Mercury knew or should have known he was interested in a settlement. “For bad faith liability to attach to an insurer’s failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated,” the panel wrote. “In the absence of such evidence, or evidence the insurer by its conduct has actively foreclosed the possibility of settlement, there is no ‘opportunity to settle’ that an insurer may be taxed with ignoring.”

The court then turned to Insurance Code §790.03(h)(5), which defines certain practices as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance, including “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” But the Insurance Code does not define the circumstances that give rise to a breach of the provision, the court noted, “and nothing in the statute requires or suggests the conclusion that an insurer’s failure to initiate settlement negotiations, in the absence of any expression of interest in settlement from the claimant, may give rise to a bad faith claim.”

The court affirmed the trial court’s grant of summary judgment in Mercury’s favor.

To read the decision in Reid v. Mercury Insurance Co., click here.