MICHAEL D. MARCUS’S MEDIATION MESSAGE NO. 92
EARLY SETTLEMENT DEMANDS AND AN INSURER’S DUTY TO SETTLE
Reid v. Mercury Ins. Co. (2013) 220 Cal.App.4th 262 provides that an insurer has no duty to settle with a third party, and thus no liability to its insured for the bad faith failure to settle, until there has been a settlement demand or “any other manifestation the injured party is interested in settlement.” (Id. at p. 266.) Absent a demand, an insurer does not act in bad faith to not settle when it does not initiate settlement discussions or offer its policy limits where liability is clear.
In Reid, plaintiff was seriously hurt in a three-car collision. Even though Mercury’s claims manager quickly concluded that it should tender the policy limits to plaintiff, plaintiff’s attorney never made a policy limits demand. At a court trial two years later, plaintiff was awarded $5.9 million. After the defendant driver declared bankruptcy, the bankruptcy trustee assigned to plaintiff the defendant’s bad faith rights against Mercury. Plaintiff then sued Mercury for breach of the covenant of good faith and fair dealing and for breach of contract, essentially arguing the bad faith failure to settle. The trial court found Mercury not liable to the insured for bad faith and granted its motion for summary judgment.
The appellate court affirmed the trial court’s decision. It held that an “opportunity to settle” a third party’s excess demand within policy limits does not create a conflict between the insured and the insurer “simply because there is a significant risk of an excess judgment.” (Id. at p. 278.) “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.” (Id. at p. 272.)
Lesson to be learned from Reid: This case is relevant to more than just plaintiff’s attorneys who emphasize personal injury matters. Early settlement demands within policy limits should be considered in any case where liability is clear, insurance exists (for example, employment, medical malpractice, legal malpractice matters) and the defendant, except for insurance, has inadequate resources to cover any reasonably foreseeable judgment or settlement.
Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
Copyright Michael D. Marcus, November 2013