Risk Radar
HOT TOPICS TO WATCH IN THE COMING MONTHS
By Michael J. Stoner
California
Reid v. First Mercury Company (2013) WL
5517979
In 2012 the 9th Circuit issued an opinion that held
that an insurance company commits bad faith if
it fails to initiate settlement discussions, or offer
policy limits, once the insured’s liability in excess of
policy limits became reasonably clear. Du v. Allstate
Ins. Co., 681 F.3d 1118 (9th Cir. 2012), amended by,
Du.v. Allstate Ins. Co., 697 F.3d 753 (9th Cir. 2012).
The 9th Circuit backtracked from this opinion
when it amended its decision in Du. The amended
decision removed any discussion regarding an
insurance company’s duty to initiate settlement discussions, largely because the facts in Du did not implicate the issue. The amended decision explained
that the insurance company in Du did, in fact,
broach settlement with the claimant at a reasonable
point in the case.
But the amendment to the Du opinion did not
affirmatively overrule its statements regarding
an insurance company’s bad faith for failure to
initiate settlement discussion. As such, the issue
was murky at best following Du. Last October the
California Court of Appeal explicitly addressed
the issue of whether an insurance company is liable for bad faith by failing to initiate settlement
discussions in the absence of a demand or settlement offer by the claimant. The Reid case held that
the implied covenant of good faith and fair dealing does not require the insurance company to initiate settlement discussions. The court explained
that “[a]n insurance company’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 other manifestation the
injured party is interested in settlement, when the
insurance company has done nothing to foreclose
the possibility of settlement, we find there is no
bad faith failure to settle.”
20 Enforce: The Insurance Policy Enforcement Journal
Policyholders should be alert to ensure that
insurance companies do not interpret Reid too
broadly. Reid does not require a formal settlement
demand by the plaintiff for bad faith liability to
attach. Rather, there need only be “some evidence
either that the injured party has communicated
to the insurance company an interest in settlement, or some other circumstance demonstrating the insurance company knew that settlement
within policy limits could feasibly be negotiated.”
But without any indicia of an interest in settling,
the insurance company cannot be taxed with the
excess judgment rule.
Following Reid, plaintiff attorneys seeking to
trigger the excess judgment rule must affirmatively communicate some interest in settlement
to the insurance company. Furthermore, under
Reid, a “bare request to know the policy limit”
does not create an “opportunity to settle” or constitute “an initiation of settlement.” Plaintiff attorneys seeking to blow the top off an i