The Tenth Circuit, applying Oklahoma law, recently became the latest court to rule on this frequently-disputed issue. The court ruled that, while a primary insurer has an affirmative duty to initiate settlement negotiations when an insured’s liability is clear and injuries of a claimant are so severe that a judgment in excess of policy limits is likely, this affirmative duty does not apply to excess insurers. SRM, Inc. v. Great Am. Ins. Co., No. 14-6160, 2015 WL 5011719, at *3 (10th Cir. Aug. 25, 2015). The Court held that this standard does not apply to an excess insurer because it does not have a duty to “investigate, initiate settlement negotiations, or proactively tender its policy limits in the face of an unambiguous policy to the contrary and absent any settlement demand from the plaintiffs or proposed settlement agreement from the primary insurer.” Id. at *6.
This question has been the subject of much litigation, with inconsistent results across the country. For example, in May 2015, the Louisiana Supreme Court was presented with a certified question of “Whether an insurer can be liable to its insured for a bad faith failure to settle under La. R.S. 22:1973(A) [codifying the duty of good faith and fair dealing] in the absence of a ‘firm’ settlement offer.” In response, the Supreme Court held, “an insurer can be found liable for a bad-faith failure-to-settle claim under La. R.S. 22:1973(A), notwithstanding that the insurer never received a firm settlement offer.” Kelly v. State Farm Fire & Cas. Co., 2014-1921 (La. 5/5/15), 169 So. 3d 328, 341. There have been similar rulings in Georgia, New Jersey, New Mexico, Oklahoma, Oregon, Tennessee and Wisconsin.
Conversely, California courts have held that an insurer cannot be liable for bad faith failure to settle without a settlement demand or some other manifestation that the injured party is interested in settlement. Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262, 266, 162 Cal. Rptr. 3d 894, 897 (2013), as modified on denial of reh'g (Nov. 6, 2013), review denied (Jan. 21, 2014). Courts have ruled likewise in Illinois, Missouri, New York and Texas.
Knowing the applicable state law is of course beneficial to bad faith litigators, but the exposure presented in the first list of states above (and, perhaps more dangerous, states that have not yet ruled) suggests that, regardless of the jurisdiction, it is rarely safe to simply wait for a demand in claims involving likely exposure above limits.