Reid v. Mercury Insurance Company

(Plaintiff Could Not Maintain Bad Faith Lawsuit Absent an Indication of Willingness to Settle Lawsuit Within Policy Limits)

In Reid v. Mercury Ins. Co., 220 Cal.App.4th 262 (October 7, 2013), the California Second District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Mercury Insurance Company (“Mercury”) regarding a bad faith lawsuit filed by the insured based on Mercury’s failure to settle such lawsuit within policy limits. Mercury argued that because it had not received a settlement demand within policy limits, it was not obligated to settle the lawsuit.

In affirming the trial court’s entry of summary judgment, the Court of Appeal acknowledged that an insurer could incur bad faith liability based on a failure to pursue settlement discussions. However, 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. Based on the absence of any evidence presented by plaintiff regarding a demand to settle within policy limits or, at least, an interest in settling for policy limits, Mercury was entitled to summary judgment with respect to plaintiff’s lawsuit.

Both the trial court and Court of Appeal acknowledged that the underlying bodily injury lawsuit giving rise to the excess verdict presented a claim of clear liability in excess of policy limits. Further, Mercury acknowledged the excess exposure in internal emails. However, it also noted that medical records needed to be obtained and reviewed before the claim could be settled. Such records were not produced until after a lawsuit had been filed against Mercury’s insured.

The Court of Appeal reasoned as follows in connection with affirming the summary judgment in favor of Mercury:

In short, 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. Nor will this court make such a rule of law, for which neither precedent nor sound policy considerations have been offered.

We find no merit in plaintiff's argument that defendant's conduct brings it within the case precedents that permit bad faith liability without a formal settlement offer from the claimant. Plaintiff’s claims that defendant "affirmatively refused to settle, rejected opportunities to settle, and discouraged settlement overtures" are entirely without support in the evidence. While plaintiff's brief consistently refers to Mr. Reid's "settlement inquiries," and to his and Mr. West's attempts "to open a settlement dialogue," and to defendant's "repeatedly" telling them it "could not even accept liability," none of those characterizations comports with the evidence.

Mr. Reid asked for disclosure of the policy limits, and defendant disclosed those limits four weeks later, after it obtained the necessary permission from the insured to do so. We will not construe a bare request to know the policy limit as an opportunity to settle. Nor could any reasonable juror construe Mr. West's July 28, 2007 letter as "an initiation of settlement" or a settlement opportunity. And Mr. Reid's willingness to settle for policy limits in July or August, as he testified, was not communicated to defendant. (Even that testimony was contradicted by his own testimony that, while he wanted to settle, he did not authorize his lawyer to do so for policy limits. Plaintiff did not even know the policy limits until defendant disclosed them (through no fault of the insurer).)

Nor could any reasonable juror find defendant "discouraged" settlement by "repeatedly" telling plaintiff it could not accept liability. The only two relevant items of evidence, a July 23 letter and a July 26 phone conversation, cannot be construed as a repeated "refusto even admit liability." Indeed, it is undisputed defendant told plaintiff's insurer on July 18 it was accepting liability, and no other communications to plaintiff suggest otherwise.

Finally, plaintiff argues the insurer's persistent letters asking for medical records and a recorded interview - in plaintiff's words, "demandrecorded statements from persons in intensive care" - operated to discourage plaintiff from making a settlement demand. No reasonable juror reviewing the evidence could reach that conclusion either. The letters are status reports of pending items, to which there is no evidence of any response by plaintiff, and cannot be the foundation for a bad faith claim.

In summary, when a claimant offers to settle an excess claim within policy limits, an opportunity to settle exists and a conflict of interest arises, because a divergence exists between the insurer's interest in paying less than the policy limits and the insured's interest in avoiding liability beyond the policy limit (Merritt, supra, 34 Cal.App.3d at p. 873.) And a conflict may also arise, without a formal settlement offer, when a claimant clearly conveys to the insurer an interest in discussing settlement but the insurer ignores the opportunity to explore settlement possibilities to the insured's detriment, or when an insurer has an arbitrary rule or engages in other conduct that prevents settlement opportunities from arising. (Boicourt, supra, 78 Ca1.App.4th at p. 1399.) But nothing like that happened here.