New Ruling on Bad Faith Liability

The California Court of Appeal (Second Appellate District) issued the decision Reid v. Mercury Insurance Company on October 7, 2013, in which it held that there is no “bad faith” liability for an insurer in failing to initiate a settlement or offer limits, even when there is clear liability and excess exposure, unless (1) there is a limits demand made by the caimant or (2) the claimant clearly conveys to the insurer an interest in discussing settlement but the insurer ignores the opportunity to the insured’s detriment.

In this case, the insured‟s liability was clear almost immediately after the collision. The insurer’s claims manager had decided, within a little over six weeks, that while the insurer needed medical records, the insurer must tender the policy limits to the third party claimant “as soon as we have enough [information] available to do so.” No settlement demand was made by the claimant, who filed suit against the insured three and one-half months after the collision. The medical records were not forthcoming from the claimant until seven months after the collision, and another three months passed before the insurer offered its policy limits. Under these circumstances, the trial court found the insurer not liable to its insured for bad faith failure to settle and granted the insurer‟s motion for summary judgment.

The Appeals Court upheld the decision that an insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured, and 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.