Revising California’s Jury Instructions on Bad Faith Failure to Settle: Should a Settlement Demand Be Necessary?

November 3, 2016

Insurance LawThis is the last in a series of posts on October 25, October 27, and November 1, examining the implications of recent revisions to the Judicial Council of California Civil Jury Instructions (CACI) on insurance bad faith. This post explores whether CACI No. 2334’s requirement of a formal settlement demand should be abandoned.

If the reasonableness of the insurer’s conduct is a relevant consideration for the jury, a formal settlement demand arguably should not be an element of the plaintiff’s case. There are circumstances—such as where the insured’s liability is clear and the claimant’s injuries so serious that a judgment in excess of policy limits is likely—that a reasonable insurer would initiate settlement negotiations and not sit back and wait for a demand from plaintiff’s counsel. CACI 2334, however, unambiguously conditions an insurer’s duty to settle on the claimant making a settlement demand, which is consistent with the weight of California authority. Although case law imposing an affirmative duty to initiate settlement negotiations whenever the insurer’s investigation reveals a likelihood of liability in excess of policy limits exists outside California, the California cases clearly supporting a duty to initiate are either no longer citable or not directly on point.

Reid v. Mercury Insurance Company

The California’s Second Appellate District’s decision in Reid v. Mercury Insurance Company provides the strongest support in California for the policyholder position on the duty to initiate settlement negotiations. The Reid opinion rejects the position that bad faith liability can be based solely on an insurer’s failure to initiate settlement negotiations, but also backs away from language in previous California decisions stating that a formal demand from the claimant is a prerequisite to an insurer’s duty to settle. Under Reid, the insurer’s liability for an excess judgment depends on proof either that the claimant conveyed to the insurer an “interest” in discussing settlement, or that the insurer did something to foreclose the possibility of settlement.

At least as applied by the Reid court, this approach is likely to benefit insurers more often than policyholders or their assignees. Although an expression of “interest” in settling is enough to trigger the insurer’s duty to negotiate, the expression must be substantive; the claimant must communicate to the insurer that settlement may “feasibly be negotiated”—which is not much different substantively from a settlement demand. The Reid court found that the claimant’s inquiries about the amount of the insured’s policy limits did not qualify as an expression of “interest” in discussing settlement. Moreover, the Reid court found that the insurer’s repeated insistence on taking a recorded statement from the claimant and refusal to discuss settlement without that statement despite knowing that the claimant was in intensive care did not give rise to a triable issue of fact regarding whether the insurer foreclosed the possibility of settlement.

Alternatives to CACI No. 2334’s Formal Demand Requirement

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 of 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. and Crisci v. Security Insurance Co. 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.

Given the theoretical justification for imposing a duty to initiate, plaintiffs might consider challenging the formal settlement demand requirement in CACI 2334 and proposing an alternative instruction similar to that recently proposed by Dennis J. Wall:

The lack of a formal offer to settle does not preclude a finding of bad faith. Bad faith may be inferred from a delay in settlement negotiations which is willful and without reasonable cause. Where liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.

Mr. Wall’s proposed special instruction was based on the language of what is perhaps the leading case to recognize a duty to initiate settlement negotiations, Powell v. Prudential Property & Casualty Insurance Co.

Titles by John DiMugno