California Court Holds No Affirmative Duty to Settle Based Solely on the Likelihood of an Excess Judgment

By Ryan C. Tuley, William D. Burger, Jr., and Christina Y. Ahn

On October 7, 2013, the California Court of Appeal, in Reid v. Mercury Insurance Company [enhanced version available to lexis.com subscribers], held that an insurer does not have an affirmative duty to settle based solely on the likelihood of an excess judgment against the insured. In the absence of a settlement demand or any other manifestation the injured party is interested in settlement, there is no liability for bad faith failure to settle when the insurer has not foreclosed the possibility of settlement.

In Reid, the plaintiff was in a car accident with the insured and, after obtaining a verdict well in excess of the applicable policy limits, was assigned any potential rights the insured had against the insurer. The plaintiff then filed a lawsuit against the insurer alleging that the insurer breached the covenant of good faith and fair dealing by failing to settle the underlying case. Specifically, the plaintiff alleged that the insurer not only failed to make a reasonable offer within a reasonable time, but rejected and discouraged any efforts at settlement. The plaintiff further alleged that the insurer failed to make a prompt and thorough investigation, failed to communicate and respond to communications in a timely manner, and insisted on receiving information and materials that were already provided and known or were immaterial and unnecessary to the insurer’s evaluation. The Plaintiff alleged that these actions resulted in the underlying excess judgment, and sought recovery of $6.9 million from the carrier.

The Reid Court held that bad faith liability cannot be founded solely upon an insurer’s failure to initiate settlement discussions or offer its policy limits. Because there was no settlement offer from plaintiff, and no evidence from which any reasonable juror could infer that the insurer knew or should have known the plaintiff was interested in settlement, the Court held that, as a matter of law, the insurer had not acted in bad faith. In reaching this conclusion, the Reid Court held that a simple request by the claimant for the amount of the policy limits potentially available cannot be construed as an opportunity to settle. The Court also rejected the plaintiff’s characterization of the insurer’s conduct as “affirmatively refus[ing] to settle” or otherwise rejecting “opportunities to settle” or discouraging settlement overtures.

The Court found that 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, even if liability in excess of the policy limits is reasonably certain.

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