- Reid v. Mercury Ins. Co. (October 7, 2013) - - Cal.App.4th - - , 2013 W.L. 5517979
- October 18, 2013
- Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office
Mercury Insurance Company issued an automobile insurance policy to Huang with limits of $100,000 per person/$300,000 per accident. Huang collided with a car driven by Reid, which collided with a third vehicle. The police report concluded Huang caused the accident by running a red light. Reid was severely injured and her passenger and the driver and passenger in the third car were also injured. All four made claims to Mercury for their injuries. Mercury immediately acknowledged liability for the accident.
Reid's son (authorized to act on her behalf) asked Mercury to disclose Huang's policy limits; Mercury responded it could not without Huang's permission. Mercury requested a recorded interview and authorization for medical records. About a month after the accident, Reid's son hired a lawyer who wrote to Mercury requesting a disclosure of applicable policy limits and asking whether Huang had an umbrella policy, but did not make a settlement demand. Two weeks later, Mercury wrote to Reid's attorney and asked for a statement from Reid, to inspect Reid's vehicle, and for a medical authorization; Mercury obtained Huang's permission to disclose her policy limits, and the letter did so and confirmed Huang had no excess insurance coverage. Reid still did not make a policy limits demand because there was "no point." Four months after the accident, Reid sued Mercury. Six months after the accident, Mercury again wrote to Reid, stating Mercury was "still pending" a recorded interview and medical records. Seven months after the accident, Reid provided her medical records to Mercury which then offered its $100,000 policy limit but Reid rejected the offer.
The case against Huang proceeded to a bench trial, and judgment was entered against Huang for $5.9 million. During the lawsuit, Huang filed bankruptcy and the bankruptcy trustee assigned any potential rights against Mercury to Reid. Reid then sued Mercury for bad faith. On a motion for summary judgment, the trial court found that Mercury was not liable for bad faith failure to settle because Reid never made a settlement demand or otherwise told Mercury that Reid would accept policy limits in full settlement. Reid appealed.
THE APPELLATE COURT'S RULING
The appellate court affirmed, holding that, "[a]n insurer's duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured," and that "[f]or 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." The court also held that "[a]n 'opportunity to settle' does not arise simply because there is a significant risk of an excess judgment." In addition, the court held that it would "not construe a bare request to know the policy limit as an opportunity to settle."
The court distinguished several cases describing circumstances where no formal settlement demand within policy limits is necessary for bad faith liability to attach on the ground that "all the cases involve circumstances where the claimant has conveyed to the insurer an interest in settlement, and the insurer has rejected or ignored the opportunity to negotiate a settlement."
The court also rejected Reid's attempt to predicate a duty to make a settlement offer on Insurance Code § 790.03(h)(5), which proscribes "[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear." The court held that "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."
Reid also argued that Mercury "discouraged" settlement by sending "persistent letters asking for medical records and a recorded interview." The court found these were "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."
EFFECTS OF THE RULING
If Reid v. Mercury becomes final or is affirmed by the Supreme Court, its holdings will make it more difficult for a claimant's attorney to "set up" an insurer for a bad faith claim. However, the case underscores the need for insurer diligence in (1) obtaining the insured's written permission to disclose policy limits information, (2) sending timely status reports to the claimant as required by 10 C.C.R. 2695.3(c)(1) "specify[ing] any additional information the insurer requires in order to make a determination," and (3) replying to substantive responses which may signal an interest in settlement or that settlement within policy limits may "feasibly be negotiated."