January 30, 2014 Top Story

No Bad Faith When Insurer Fails to Initiate Settlement

Absent a settlement offer within policy limits, insurers have no duty to settle

Caitlin Haney

In the absence of a demand or settlement offer from a third-party claimant, insurers do not have an obligation to initiate settlement discussions with that third party. The obligation does not arise even when there is a possibility of a judgment above policy limits. Paul Reid v. Mercury Insurance Company.

The Underlying Claim 

In Paul Reid, a motorist insured by Mercury Insurance Company caused a multiple vehicle collision. The insured’s liability was clear. Before resolving the claim, the insurer’s adjuster told the injured claimant that more information was required, including the injured party’s medical records.

The injured party requested the policy limits from the insurance company. In response, the insurer’s claim adjuster indicated that the information could not be disclosed. The injured party was in contact with the policyholder’s adjuster over the course of three months, yet at no point did the injured party send the insurer a demand later or otherwise communicate an interest to settle within the policy limits.

The injured party filed an action against the policyholder for the injuries caused by the accident. Thereafter, the defendant offered to settle the case for the limit of the policy. The plaintiff rejected the settlement offer and subsequently obtained a judgment in excess of the policy limits. During the lawsuit, the policyholder declared bankruptcy, and the bankruptcy trustee assigned any potential rights the policyholder had against Mercury Insurance Company to the plaintiff.

The plaintiff then filed suit in the Superior Court for the County of Los Angeles against the insurer, alleging bad faith failure to settle and breach of contract. Thereafter, the insurance company moved for summary judgment on the basis that the plaintiff never made a settlement offer to the insurer within the policy limits. The trial court agreed, finding that the evidence did not show that the plaintiff made a settlement offer or otherwise conveyed to Mercury Insurance Company that it would accept the policy limits as full settlement. The plaintiff appealed to the California Court of Appeal, arguing that the insurer acted in bad faith for not offering to settle with the plaintiff.    

No Bad Faith for Failing to Initiate Settlement Discussions

The appellate court found that the likelihood of an excess judgment against the insured does not trigger the insurer’s duty to settle. The court of appeal indicated that when the claimant fails to make a settlement demand or provide other clear manifestation of her interest in settling, and the insurer does nothing to foreclose the possibility of settlement, there is no bad faith liability on behalf of the insurer. In reaching this decision, the appellate court relied both on case law and California Insurance Code § 790.03.

This case indicates that “it is not enough that a claimant ask for the policy limits to demonstrate to the insurance company its interest in settling for the policy limits,” says Ronald L. Kammer, Coral Gables, FL, former cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee. Kammer believes this is the right result because “the first thing any plaintiff would want to know is the insured’s policy limit,” so it does not indicate anything other than that the plaintiff is investigating the claim.

Extent of Insurer’s Duty to Investigate Settlement Unclear

The opinion also “reiterates the well-established principle that an insurer’s duty to settle exists even in the absence of a settlement offer when a claimant manifests an interest in settling a claim,” notes Sherilyn Pastor, Newark, NJ, cochair of the Section of Litigation’s Insurance Coverage Litigation Committee. “Although an insurer may not have a duty to settle in all circumstances, the insurer nonetheless remains obligated to settle even when the claimant has not made a formal settlement demand,” says Pastor. Following this decision, trial courts will need to evaluate whether there was “sufficient exchanges between the injured party and the insurance company to lead the insurance company to believe that the injured party wants to settle,” notes Kammer.

Some believe that the appellate court’s failure to establish a bright line rule may increase bad faith litigation claims. “Litigation in order to determine whether there was a proper overture between the insurance company and the injured party to settle the case” is likely to continue, predicts Kammer. This could have been avoided had the appellate court decided to “draw a line in the sand” regarding how long the insurer has to investigate a claim before making a settlement offer, argues Kammer.

Clients’ Intentions Must Be Clearly Documented

According to Section of Litigation leaders, it is important for parties to clearly communicate their intentions and work diligently to settle claims when liability is clear. This includes conducting necessary investigation before paying out on a claim. Therefore, when the plaintiff communicates an intent to settle, the “insurance company should immediately request any information needed to close the case,” advises Kammer. This does not mean, however, that insurance companies are “required to rely solely on plaintiff’s counsel’s representation before trying to settle claims,” notes Kammer.

“Policyholders should remain mindful of their insurers’ obligation to settle” by communicating with their insurance companies, advises Pastor. This means policyholders “should remind their insurers of their obligation and insist in writing that their insurers comply with it,” suggests Pastor.

Caitlin Haney is a contributing editor for Litigation News.

Keywords: insurance, bad faith, duty to settle

Related Resources

  • Paul Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (Oct. 7, 2013).

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