Talk of bad faith among coverage folks often centers around whether an insurer’s interpretation of a policy could constitute bad faith. However, given how high the burden is for an insured to prove bad faith, it is usually very difficult to do so. Even if the insurer were wrong, even really wrong, there was likely enough of a basis to support the insurer’s position that it will not satisfy the bad faith standard (absent some wrongful motive behind the decision).
In truth, most bad faith cases involve an insurer’s failure to settle and are not tied to coverage issues. Specifically, there is a demand that the insurer settle within limits, and it fails to do so, despite liability being clear and a substantial likelihood of a recovery in excess of policy limits. So the case now goes to trial and there is a verdict in excess of the policy’s limits. In this situation, the insurer is likely facing exposure for the portion of the judgment that exceeds the policy limits. This rule, or some variation of it, exists in just about all states.
A close cousin to this situation – and one without an abundance of case law addressing it – is whether an insurer is liable for an excess verdict, after it did not settle the case, but there was no demand that it do so. To put it another way, must the insurer, in the absence of any demand from the third party claimant, initiate settlement negotiations or offer its policy limits, and, if so, how quickly must it do so, to avoid a claim of bad faith failure to settle. This was the issue before the California Court of Appeal in Reid v. Mercury Insurance Company, No. B241154, 220 Cal. App. 4th 262 (Cal. Ct. App. November 6, 2013) [enhanced version available to lexis.com subscribers].
The facts in Reid are detailed but most can be overlooked to make the points about the case. Mercury Insurance Company insured Zhi Yu Huang under an automobile policy with bodily injury policy limits of $100,000 per person and $300,000 per accident. Ms. Huang was involved in a multivehicle collision. The injury to another party was quite serious and liability was clear as the police report showed that Huang failed to stop at a red light and collided with a car driven by Shirley Reid.
There was a lot of discussion between the insurer and Reid’s lawyer concerning the investigation of the claim. Ultimately, Reid sued Huang and a bench trial was held. Judgment was entered against Ms. Huang for more than $5.9 million. Ms. Huang declared bankruptcy and the bankruptcy trustee later assigned to Reid any potential rights Ms. Huang had against Mercury.
There was a significant fact issue whether Reid ever made a demand to settle. It was determined that she did not. For purposes of this analysis, assume that other cases will not have this disputed issue and it will be reasonably clear that no demand was made to settle. That’s a reasonable assumption.
The court concluded that there was no settlement offer from Reid and no evidence from which any reasonable juror could infer that Mercury knew or should have known Reid was interested in settlement. Under this circumstance, the court held that the insurer was not liable for bad faith failure to settle. “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. 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.” Further, an “opportunity to settle” does not arise simply because there is a significant risk of an excess judgment.
It is important to note that a policy limits offer was ultimately made by the insurer to the plaintiff -- ten months after the accident. It was rejected. In that situation the court described the bad faith claim as one in which the case would have been settled within policy limits had the insurer initiated earlier settlement negotiations. As a practical matter, this is likely to be the situation where Reid has the most applicability. It is not unusual for an insurer, at the conclusion of its investigation, to make a policy limits offer. But because of the time that it takes to complete that investigation, the claimant rejects the offer, even if it may not have if made earlier. Reid does not punish an insurer for the settlement impact of the time it takes to complete a coverage investigation.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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