The Nature of a Liability Insurer’s Duty to Settle: Part II

January 15, 2014

Insurance LawMy last post examined the recent decision of the California Court of Appeal in Reid v. Mercury Insurance Company, 220 Cal.App.4th 262, 162 Cal.Rptr.3d 894 (2d Dist. 2013). Reid held that a liability insurer has no duty to engage a claimant in settlement negotiations until the claimant has expressed an “interest” in settlement.

A close examination of the seminal California Supreme Court decisions recognizing a cause of action for bad faith failure to settle casts doubt on the validity the Reid’s holding that a likelihood of liability in excess of policy limits, by itself, does not  trigger a liability insurer’s duty to engage the claimant in settlement negotiations. In Comunale v. Traders & General Insurance Co., 50 Cal.2d 654 (1958), and Crisci v. Security Insurance Co., 66 Cal.2d 425, 429 (1967), the California Supreme Court based the insurer’s duty on the conflict of interest that exists between the insurer and the insured whenever there is a substantial likelihood of a judgment in excess of policy limits—a conflict that exists regardless of whether the claimant has made a settlement demand. Later California Supreme Court decisions, such as Johansen v. Cal State Auto. Ass’n. Inter–Ins. Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 292–93, 538 P.2d 744 (1975), holding that a liability insurer “must conduct itself as if it alone were liable for the entire judgment,” provide additional support for requiring liability insurers to open settlement negotiations with the claimant. After all, no rational defendant would sit back and allow a high exposure case to go to trial without at least attempting to settle simply because the plaintiff shows no interest in settling. True, the Supreme Court’s decisions often refer to a duty to accept reasonable settlement offers, but that is because cases before the court and the cases on which the court relied all involved an insurer’s rejection of a policy limits settlement demand. Nothing in the Court’s reasoning makes a settlement demand a sine qua non of a cause of action for bad faith failure to settle.

Of course, this is not to say that the absence of a formal settlement demand from the claimant is irrelevant to the insurer’s liability. Causation is an element of any tort, including the tort of bad faith failure to settle. In order to prevail, the insured must prove that the claimant would have settled if the insurer had made a policy limits settlement offer. A policy limits settlement demand from the claimant establishes the causation element of the insured’s cause of action and obviates the need to produce evidence at trial regarding the claimant’s willingness to settle for policy limits. But the absence of a settlement demand should not prevent the insured from attempting to convince the jury that the claimant would have been willing to settle for an amount within policy limits.

The summary judgment evidence before the court in Reid illustrates how a plaintiff might persuade a jury on the causation question in the absence of a settlement demand. The claimant’s son, who had authority to act on his mother’s behalf while she remained in intensive care, testified that he had run an asset check on the insured and would “definitely” have accepted a policy limits settlement offer. His testimony was bolstered by evidence that he told his mother’s attorney he wanted to settle her case against the insured “as quickly as possible” because resolution of that claim was a prerequisite to obtaining $250,000 in underinsured motorist benefits under his mother’s automobile policy. Unfortunately, the Reid court’s refusal to impose a duty on the insurer to initiate settlement negotiations prevented the claimant from putting this evidence before a jury.