The insured ran a red light and crashed into Shirley Reid, who then careened into another car.  The insured is indisputably liable and Ms. Reid had injuries later valued at $5.9 million, dwarfing the insured’s $100,000 limits.  Nevertheless, the insurer failed to initiate settlement discussions or offer its limits until 10 months after the accident, at which point Ms. Reid’s attorney said it was too late, and proceeded to get a multimillion dollar judgment, and an assignment of bad faith rights against the insurer.

So, is the insurer liable for the excess verdict?

No, says the California Court of Appeal in Reid v. Mercury Ins. Co., 2013 WL 5943133 (Cal.App. 2 Dist.) (November 6, 2013).  Why?  Because the plaintiff never made a clear demand to settle the claim within the policy limits: “[a]n ‘opportunity to settle’ does not arise simply because there is a significant risk of an excess judgment.”

Notably, Mercury was not responsible for the excess amount, even though it arguably was in violation of fair claims statutes.  California Insurance Code Section 790.03(h)(5) deems it to be an “unfair and deceptive act or practice in the business of insurance” to not attempt “in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”  However, even a breach of this section would not have created bad faith liability for the excess. 

As stated in Reid:

In short, 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.

The Reid court did acknowledge that there are exceptions, and that an insurer can be liable in bad faith for excess verdicts when there was not a demand within limits when: (1) the insurer refused to communicate the policy limit amount when asked; (2) the demand was in excess of the limits and the insurer never asked the insured if it would be willing to pay the excess amount; and (3) there were multiple insurers on the risk, and the demand was within the combined limits – even if the demand exceeded the limits of any individual insurer.

This case has great practical significance, and demonstrates an unwillingness of California courts to attempt to retrospectively determine what a plaintiff and insurer may have agreed to do, when the plaintiff did not clearly communicate a demand.   

From a plaintiff’s perspective: Reid now blocks a plaintiff’s ability to enter into ambiguous settlement discussions on a case with comparatively low limits but never make a demand; hope those limits are not offered; get an excess verdict; emphatically state that they would have accepted a limits offer if it only had been offered; and then try to collect the excess from the insurer.

From an insurer’s perspective: Reid confirms that a policy limits demand is an important event in a claim that could result in the uncorking of the policy limits.  An insurer will not always be responsible for the amount of an excess judgment after declining a settlement offer within limits, but it should expect that there will be scrutiny upon whether it acted reasonably in letting such an opportunity pass.  If the insurer decides not to settle, it should make sure its reasons are well-documented, and discoverable if it may wish to rely upon them later.