California Court of Appeal Clarifies Law on a Carrier’s Duty to Settle
On October 7, 2013, the California Court of Appeal made its most recent pronouncement regarding California law on a carrier’s duty to settle in Reid v. Mercury Insurance Co., 2013 Cal. App. LEXIS 798 (Oct. 7, 2013). The Reid court held that, as a general matter, even if the insured’s liability in excess of the policy limits is reasonably certain, a carrier cannot be held liable for bad faith failure to settle in the absence of a within-limits demand from the claimant.
In Reid, the claimant was involved in a car accident with the insured. The claimant’s attorney wrote a letter to the insured inquiring as to the applicable policy limits, but never issued a demand to the insured for an amount within those limits. The carrier refused to immediately accept liability on behalf of the insured, and instead repeatedly requested the claimant’s medical records and other relevant documentation. The carrier ultimately offered the claimant the $100,000 per-person limit approximately 10 months after the accident, but the offer was rejected. After obtaining a $6.9 million verdict, the claimant settled with the insured and was assigned all rights the insured had against the carrier. In a subsequent bad faith action, the claimant argued that the carrier breached its duty to settle by, among other things, failing to make a settlement offer when liability in excess of the policy limits became reasonably clear, failing to offer to settle immediately in response to claimant’s request that the carrier inform him of the applicable policy limits, and “discouraging” claimant’s settlement efforts. The trial court granted the carrier summary judgment, and the claimant appealed.
On appeal, the Reid court held that bad faith liability for failing to settle a case within the policy limits cannot be assessed against a carrier in the absence of a within-limits demand from the claimant or some “other manifestation the injured party is interested in settlement . . . .” 2013 Cal. App. Lexis 798, at *2. In applying that rule, the Reid court held that a claimant’s simple request for the amount of the applicable policy limit was not sufficient to establish the claimant’s interest in settlement. As such, without a policy limits demand by the claimant or any facts suggesting that the carrier affirmatively discouraged settlement efforts on the part of the claimant, the Reid court affirmed the trial court’s summary judgment ruling in favor of the carrier.
Reid is a significant decision and a significant victory for the insurance industry. Prior to Reid, claimants and insureds often took the position that a carrier could be held liable for bad faith based solely on the subjective position that the carrier did not “try hard enough” to settle a case that ultimately resulted in exposure in excess of the policy limits. To foster this argument, claimants who had settled with an insured after judgment and obtained an assignment often offered testimony along the lines of “we would have settled within the limits if only somebody had asked.” Certainly, the veracity of such testimony could be questioned, but the reality was that it was difficult for a carrier to challenge evidence to this effect, especially at the summary judgment stage of a bad faith action. For a very brief period of time such an argument was also supported by the issuance of Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012), in which the Ninth Circuit initially held that carriers do have a duty to attempt to settle cases where the insured’s liability in excess of the policy limits is reasonably clear. However, the Ninth Circuit reversed course and amended Du – 697 F.3d 753 – to omit the holding regarding a carrier’s affirmative duty to settle, and the Reid decision is another large step toward a reasonable and practical application of the duty to settle rule. By requiring the claimant to have clearly manifested an intent to settle within limits before judgment, Reid eliminates any viability that this argument may have once had. Indeed, in the absence of very specific circumstances discussed in Reid – such as a carrier’s failure to inform the insured of an offer in excess of policy limits, a carrier’s failure to inform an insured about an inquiry regarding the applicable policy limits, or the carrier’s outright rejection of a demand in excess of its limits but within the limits of all potentially applicable policies – Reid forecloses any possibility of bad faith liability for an insurer’s failure to settle without a within-limits demand or some other clear indication that the claimant is interested in settlement. The ruling should result in lower settlement values for bad faith cases and a higher rate of success on carrier summary judgment motions.
A question remaining after Reid is what actions by a claimant will qualify as a “manifestation [that] the injured party is interested in settlement” so as to trigger the carrier’s duty to settle in the absence of a within-limits demand. Reid holds that asking the carrier to disclose the relevant policy limits is not a sufficient manifestation of interest to trigger the carrier’s duty to settle, while the Ninth Circuit held in Gibbs v. State Farm Mutual Insurance Co., 544 F.2d 423, 427 (9th Cir. 1976) – and the Reid court acknowledged – that a statement by the claimant that “he wanted coverage only to the limits of the insurance policy” may be sufficient to trigger that duty. No bright-line rule has been set on this issue, and a formulation for such a rule may prove challenging. Accordingly, other communications and actions by claimants will likely form the basis for future litigation on the carrier’s duty to attempt to settle a case in the absence of a within-limits demand.
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