On October 7, the California Court of Appeal, Second Appellate District, held that a liability insurer, in the absence of any demand or settlement offer from a third party claimant, need not initiate settlement negotiations or offer its policy limits, even where liability is clear and there is a substantial likelihood that the third party claimant’s recovery will exceed policy limits.  A copy of the decision is available here.

The case, Paul Reid v. Mercury Insurance Co., No. B241154 (Cal. App. Div.), arose from an automobile accident that occurred after Mercury’s insured failed to stop at a red light and seriously injured the driver of another car.  The injured driver’s son, who was authorized to act for his mother, sued the insured and eventually obtained a $5.9 million verdict against her.  The insured declared bankruptcy and the injured driver’s son was assigned any potential rights the insured had against her insurer.  Suit was then brought against the insurer alleging that it acted in back faith by failing “to make a reasonable settlement offer within a reasonable time” and allegedly “reject[ing] and discourag[ing] any attempts to settle.”

The insurer successfully moved for summary judgment, with the trial court agreeing that the plaintiff could not prove bad faith because the plaintiff never made a demand for settlement within the policy limits.  This decision was affirmed on appeal:

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.

In this case, there was no settlement offer from plaintiff, and no evidence from which any reasonable juror could infer that defendant knew or should have known plaintiff was interested in settlement. Nor does plaintiff accurately characterize defendant’s conduct when he asserts that defendant “affirmatively refused to settle” or otherwise rejected “opportunities to settle” or discouraged settlement overtures. Accordingly, defendant cannot be liable for bad faith failure to settle.


… [N]othing 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. Nor will this court make such a rule of law, for which neither precedent nor sound policy considerations have been offered.

This decision is important for insurers faced with allegations that they breached their duty to settle in bad faith.