21st Mar 2014

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A question has long existed as to whether an insurer, in the absence of any demand or settlement offer from the third party claimant, must initiate settlement negotiations or offer its policy limits. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 265] In 2013 the Reid court, discussing a personal injury case involving policy limits of $100,000 and injured third parties, judgment exceeded $5 million, plaintiff made no policy limits demand before verdict. The court ruling in favor of the insurer set forth the following rules:

1.   Absence of settlement demand within the insured’s policy limits

An insurer’s duty to settle is not precipitated solely by 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, when the insurer has done nothing to foreclose the possibility of settlement, there is no liability for bad faith failure to settle on behalf of the insurer. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 266]

2.   Third party communicates an “interest” in settlement

In the absence of a policy limits demand by the third party, in order 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 above the 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 the policy limits could feasibly be negotiated. [Reid v. Mercury Ins., supra, 220 Cal.App.4th 262, 272 (“… at a minimum …”)]

3.   Insurer forecloses possibility of settlement

Absent a policy limits demand, where there exists evidence the insurer by its conduct has actively foreclosed the possibility of settlement, i.e. precluding an “opportunity to settle” an insurer will not be liable for bad faith. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 266]

4.   Other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated; multiple insurers involved

Where multiple insurers are involved, the absence of a formal demand within the policy limits of one of the multiple insurers does not preclude a bad faith claim against that insurer. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 274, discussing Howard v. American National Fire Ins. (2010) 187 Cal.App.4th 498, discussed at § S25 SETTLEMENT [§ S25:1 Requirement of formal offer to settle an excess claim within policy limits].

5.   Insurer knows of claimant’s interest in settlement and ignores it

Several federal court cases have said that there is no need under certain circumstances for a formal settlement demand from the claimant in order for bad faith liability to attach. These cases involve evidence that the insurer knows of the claimant’s interest in settlement and ignores it. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 275, citing Gibbs v. State Farm (9th Cir, 1976) 544 F.2d 423 (insurer apprised that plaintiff had stated on numerous occasions that “he wanted coverage only to the limits of the insured’s policy”); Continental Cas. v. United Stated Fidelity (N.D. Cal. 1981) 516 F.Supp. 384 (injured party made a demand above policy limits but the insurer made no effort to ascertain whether its insured was willing to contribute the amount of the policy limits)] See § S25 SETTLEMENT [§ S25:6 Factors for insurer to consider in order to protect insured from excess policy limits judgment].

6.   No evidence from which insurer knew or should have known plaintiff was interested in settlement

Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262 cites Du v. Allstate (9th Cir. 2012) 697 F.3d 753 in discussing the importance of “corroborating proof” of the extent of plaintiff’s injuries. The only information in Du the insurer had regarding plaintiff’s injuries was the uncorroborated and conflicting assertions by the plaintiff and her attorney. Plaintiff’s expert in the trial in Du conceded the insurer could not base a settlement offer solely on representations of claimant or claimant’s attorney when the insurer made repeated efforts to obtain the information. [ Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 277, fn. 6] See § S25 SETTLEMENT [§ S25:02 Uncorroborated claim; no duty to settle].

7.   “Discouraged settlement” efforts made by insurer

A “bare” request from a plaintiff to know the policy limits prior to filing of suit is not equated to “an opportunity to settle”. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 277-278] Statements one month after the accident by the adjuster to the plaintiff that it needed substantiation of medical specials followed shortly thereafter by “accepting liability” is not an attempt to “discourage” settlement.

8.   Conflict of interest existing

A conflict may arise without a formal settlement offer, when a claimant clearly conveys to the insurer an interest in discussing settlement, but the insurer ignores the opportunity to explore settlement possibilities to the insured’s detriment. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 278, citing Boicourt v. AMEX Assurance (2000) 78 Cal.App.4th 1390 (insurer ignores opportunity to explore settlement possibilities when insurer has an arbitrary rule or engages in other conduct that prevents settlement opportunities from arising)]

9. “Opportunity to settle” proof by inference

An “opportunity to settle” as an exception to a requirement that a third party make a policy limits demand does not arise simply because there is a significant risk of an excess judgment. For this rule to apply there must be evidence presented, allowing an inference that plaintiff had an interest in settlement before a claim of breach of contract or breach of the insurer’s covenant of good faith and fair dealing exists. [Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262, 278-279]

BOLDS references are to sections in Volumes 1, 2 and 3 of CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2013 Edition.  This 3-volume text by Mr.Cornblum is available through Thomson Reuters at 1-800-344-5008.

WESTLAW RESEARCH  – Subscribers to WestLaw can research all volumes of California Insurance Law Dictionary and Desk Reference by referencing CAINLAWDDR.

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