Bibeka Shrestha, Law360 – October 8, 2013
A California appeals court on Monday limited insurers’ exposure to bad faith claims by holding that carriers are not required to proactively settle a claim just because it’s clear that the stakes are higher than what their policy offers in coverage.
The published ruling marks a victory for Mercury Insurance Co. in a coverage fight over a $5.9 million judgment awarded to a now-deceased victim of a serious car accident caused by a Mercury policyholder. According to the decision, an insurance company is not obligated to initiate settlement negotiations merely because there’s a good chance that the claim could surpass policy limits.
When a victim has not made a settlement demand or shown that he or she is interested in settling with the insurer, the insurance carrier cannot have acted in bad faith by failing to settle, even if there’s a significant risk of a judgment that surpasses policy limits, the appeals court said.
“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,” the decision said. “Nor will this court make such a rule of law, for which neither precedent nor sound policy considerations have been offered.”
The decision comes nearly a year after the Ninth Circuit backpedaled from its well-publicized ruling in Du. v. Allstate Insurance Co., which held that insurers in California have a duty to initiate settlement discussions when their policyholder’s liability is clear.
California courts have commonly held that insurance companies have a duty to settle when they unreasonably reject a settlement offer within policy limits. The Ninth Circuit raised eyebrows by initially ruling in June 2012 that insurers’ duty to settle more broadly requires carriers to try to settle a claim when an insured’s liability is clear — even when the injured party has not made a settlement demand.
The Ninth Circuit later amended its opinion so it did not reach the duty-to-settle question, something the California appeals court noted in Monday’s opinion.
The case before the state appeals court involved an automobile insurance policy that Mercury issued to Zhi Yu Huang, providing $100,000 per person and $300,000 per accident.
According to the ruling, Huang drove past a red light and crashed into Shirley Reid’s car, which then collided with a third car driven by Chinelo Ogbogu. Reid, who suffered severe injuries, the other driver and two passengers made claims to Huang for their injuries.
Shirley Reid’s son, Paul Reid, told his lawyer he wanted to quickly settle with Mercury so he could access the $250,000 in underinsured motorist coverage provided by his mother’s State Farm policy, according to the ruling.
Mercury said it needed complete medical records for all victims, a recorded interview and other information before it could settle.
Paul Reid then sued Huang and won a $5.9 million judgment more than two years later, forcing Huang into bankruptcy and obtaining her rights against Mercury. Paul Reid brought suit against Mercury for more than $6.9 million, accusing the insurer of acting in bad faith. He claimed that Mercury discouraged any efforts at settlement, refused to investigate the claim promptly and insisted on receiving information that was already known or immaterial to settling the claim.
The appeals court stressed that Reid had made no settlement offer to the insurer, and Mercury had no way of knowing that Reid desired a deal.
For an insurer to act in bad faith by failing to settle, there must be evidence that the injured party has shown interest in settling or that there were circumstances making clear to the insurer that a settlement could be negotiated, the ruling said. Without this kind of evidence, plaintiffs cannot show that an insurer acted in bad faith by ignoring an “opportunity to settle,” according to the decision.
Reid’s “bare request” for the amount of coverage provided under Huang’s policy was not an “opportunity to settle” that Mercury rejected in bad faith, the court held. Moreover, a significant risk of an excess judgment also does not give rise to an “opportunity to settle,” the ruling said.
Courts have held that an insurer can be liable for a bad faith failure to settle without a formal settlement offer under some circumstances, but none of those cases suggested that an insurer must initiate settlement discussions when there’s no sign that an injured party is inclined to settle within policy limits, the ruling said.
John Hager, a Hager Dowling Lim & Slack PC attorney who represents Mercury, told Law360 that the ruling was significant in California.
“The plaintiffs’ bar would like to impose a higher duty on insurers whenever they can, so it’s important here that the court has drawn a line, so to speak, around the duty,” Hager said. “It doesn’t necessarily insulate them from liability because they can’t reject opportunities to settle, but they don’t have to initiate [settlements] themselves.”
The case is Paul Reid v. Mercury Insurance Co., case number B241154, in the Court of Appeal for the State of California, Second Appellate District.
via Calif. Court Limits Bad Faith Claims Against Insurers – Law360.