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California Court Limits Insurer Duty to Settle Within Policy Limits

Bad Faith, Blogs

In a recent decision, the California Court of Appeals held insurers do not have an affirmative duty to initiate settlement discussions and will not be found to have acted in bad faith where the claimant has not made a settlement demand, or otherwise conveyed an interest in settlement. Reid v. Mercury Ins. Co., 220 Cal.App.4th 262 (2013)

In Reid, Zhi Yu Huang (“Huang”), caused an automobile collision that resulted in serious injuries to a third party claimant, Shirley Reid (“Reid”). Huang was insured by Mercury Insurance Co. (“Mercury”) under an automobile policy with bodily injury policy limits of $100,000.00 per person and $300,000.00 per accident. 

Shortly after the accident, Mercurycontacted Reid’s insurer to inform it that Mercury was accepting liability for the accident. Reid never made a settlement demand and filed suit against Huang. Seven months after filing suit, Reid provided her medical records to Mercury and Mercury offered to tender its $100,000.00 policy limits to Reid as a settlement. Reid rejected the settlement, and following a bench trial was awarded $5.9 million against Huang who declared bankruptcy during litigation.

Reid was assigned Huang’s rights as an insured and subsequently brought suit against Mercury alleging that it breached the covenant of good faith and fair dealing by failing to settle the claim within a reasonable time, exposing its insured to an excess judgment. Mercury moved for summary judgment on the ground that Reid could not prove bad faith, because she never offered to settle within policy limits. The trial court granted summary judgment for Mercury, and Reid appealed.

The Court of Appeal affirmed the lower court decision, holding that bad faith liability cannot be founded solely on an insurer’s failure to initiate settlement discussions or offer its policy limits. The Court recognized that some California courts have imposed bad faith liability for refusal to settle, even without a formal demand. However, the Court in Reid, noted that in the other cases, the claimant had conveyed an interest in settlement, and apart from such circumstances, the Court concluded 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, as soon as an insured’s liability in excess of policy limits has become clear.” 

A complete copy of Reid v. Mercury can be read here