California Court of Appeals says Insurers Do Not Have a Duty to Initiate Settlement

The issue involved in this case was the duty of an insurer to settle a third party claim within the policy limits when liability was clear and there was a substantial likelihood of a recovery in excess of the policy limits. Specifically, the question decided was whether an insurer must initiate settlement negotiations or offer its policy limits where the third party claimant has not made a demand or settlement offer. The trial court found that the insurer was not liable to the insured for a bad faith failure to settle and the California Court of Appeals affirmed.

The policy in this case was an auto liability policy with $100,000/$300,000 limits. After trial a verdict against the insured in the amount of $5.9 million was entered. The facts showed that the liability of the insured was clear almost immediately after the collision. The plaintiff however, never made a settlement demand and never told the insurer that she would accept the policy limits in full settlement. Here there was a request for disclosure of the policy limits, but the court stated that “[w]e will not construe a bare request to know the policy limit as an opportunity to settle.”

The Court of Appeals held that “[a]n insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured. 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, we find there is no liability for bad faith failure to settle.

Click below for a copy of the decision.
Reid v. Mercury Ins. Co.
October 7, 2013

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