In Reid v. Mercury Insurance Company, (2013) 220 Cal.App.4th 262, the Court of Appeal held that an insurance company may, under some circumstances, not have a duty to initiate settlement discussions to ensure settlement within policy limits.
In the case, Mercury’s insured ran a red light and stuck another vehicle, causing serious injuries to Paul Reid. Mercury disclosed the $100,000 policy limits to Mr. Reid’s attorney, but indicated it needed medical records and a statement from Mr. Reid before it could settle the case. Mr. Reid’s attorney did not formally demand the policy limits at that time because he felt it would be pointless given Mercury’s insistence on more information.
Mr. Reid filed suit against Mercury’s insured several months later. Mercury then offered the policy limits, which was declined. Mr. Reid ultimately obtained a $5.9 million verdict, and, after receiving an assignment from the insured, initiated an action against Mercury for the excess verdict.
The trial court granted Mercury’s Motion for Summary Judgment, and the Court of Appeal affirmed. The Court held that an insurer can only be liable for bad faith failure to settle within policy limits when (1) the injured party communicated an interest in settlement to the insurer; (2) the insurer knew that settlement within policy limits was feasible; or (3) the insurer’s conduct actively foreclosed the possibility of a settlement. None of these circumstances were present in this case, so the Court affirmed.
While Mercury prevailed in this case, insurers should nonetheless take care to actively attempt to resolve claims within policy limits. Given the broad factors listed by the Court, there may be a duty in some circumstances to settle even without a formal demand.
Please contact partner Chris Schmitthenner with any questions about the case.