By Collins Collins Muir + Stewart LLP
The insured driver ran a red light. She hit a vehicle in front of her and seriously injured its driver, sending her to an intensive care unit. That vehicle’s passenger was also injured. The impact was so substantial that the car which was initially hit was also pushed into a car in front of it, injuring its two occupants as well. The insured has a $100,000/$300,000 policy. At what point is the obligation of the insurer to extend policy limits triggered and why?
The Second District Court of Appeal, Division Eight, recently gave a partial answer to this question in Paul Reid v. Mercury Insurance Company (2013) 220 Cal.App.4th 262. The Court held that there was no duty: (1) to initiate settlement discussions or (2) to immediately tender the policy limits once the company knew there was excess exposure to their insured that compromised the insured’s personal assets. The case, which has an interesting fact pattern, revisits landmark decisions of the past and applies these principles today.
The Underlying Case
On June 24, 2007, Zhi Yu Huang ran a red light and struck a vehicle operated by Shirley Reid. Reid was seriously injured and taken to the hospital where her life hung in the balance in intensive care. Reid’s passenger was also injured. The Reid vehicle had also been pushed into another car, injuring both that driver and her passenger. Shortly after the accident, a Reid family member inquired about the policy limits from Mercury Insurance Company and was told the limits could not be disclosed without the insured’s consent. (Four weeks later, the limits were disclosed after the insured gave consent.) The initial assessment by Mercury showed that within six weeks of the accident that it was an excess exposure claim, yet it initially did not formally accept liability because Mercury was collecting information on the other claimants and medical records. It sought to take a statement from Reid, who unfortunately was intubated in the hospital and unable to communicate.
As Mercury had neither provided the limits information, nor accepted liability for the accident, the attorney representing Reid felt it was futile to demand the policy limits in a formal letter since Mercury wanted to take his client’s statement while she had a tube down her throat. Frustrated by the lack of disclosure, the attorney filed suit. Approximately six months after filing suit, the carrier finally offered the policy limits of $100,000, which was rejected by Plaintiff Reid. The case went to trial in 2009. After a bench trial and judgment of $5.9 million against Huang, who had gone through a bankruptcy, the bankruptcy trustee assigned her rights against Mercury. A bad faith suit with the Mercury insured’s assignment followed.
The Bad Faith Suit Against Mercury
On summary judgment, Mercury argued that it did not have a duty to extend the policy limits in the absence of a formal demand. In opposition, Plaintiff argued that a demand would have been futile and pointed to the internal recognition in claim notes and correspondence to the insured within a month of the accident that acknowledged it was likely an excess case in which Reid might wish to engage separate counsel to protect her assets. Plaintiff Reid argued that there was a duty both implied in law and by the Unfair Claims Practices Act in Insurance Code section 790.03 to offer the policy limits to resolve the case at the outset. Reid’s son, who was acting on his mother’s behalf following the accident, argued that had the limits been offered, they “definitely” would have been accepted. Reid had $250,000 in underinsured motorist coverage on her own policy, and he would have accepted the policy limits (having verified the insured had minimal assets) in order to trigger the uninsured motorist limits. Reid’s son admitted that he had not demanded the limits or communicated to Mercury that if they were offered, he would have accepted them.
The trial court granted Mercury’s motion, and a timely appeal followed. The Court of Appeal held that bad faith liability cannot be founded solely upon an insurer’s failure to initiate settlement discussions or to offer the policy limit in the absence of a demand from the claimant, or even any indication from the claimant that he or she would accept the limits if offered. Accordingly, Mercury was not liable for bad faith failure to settle.
The Court of Appeal acknowledged that there was a common law duty of good faith and fair dealing that applied based on the landmark case of Communale v. Traders & General Insurance Company (1958) 50 Cal.2d 654, 659. The Court also noted that this duty is breached when there is a failure to accept reasonable offers of settlement. Crisci v. Security Insurance Company (1967) 66 Cal.2d 425, 430. While noting some federal authority that held there is no need for a formal settlement demand if the insurer knows that the injured claimant has expressed an interest in settlement, the Court distinguished the facts of this case from the federal authority because of Plaintiff Reid’s failure to make a policy limits demand and failure to initiate settlement discussions. The Court disregarded Insurance Code section 790.03 as a basis for a private right of action under Moradi-Shalal v. Fireman’s Fund Insurance Companies (1988) 46 Cal.3rd 287, 304.
The Court of Appeal noted that despite the carrier’s knowledge of the exposure and advice to its insured that she might need to retain personal counsel to defend against such excess exposure, these facts without more did not trigger an obligation on the part of the insured to initiate settlement discussions. Further, in the absence of a demand that formally requested policy limits, it was at best speculation unsupported by evidence that such an offer would have been accepted if it had been extended shortly after the accident. The Court therefore held that as long as the carrier does not impede settlement discussions, it is under no duty either to initiate settlement discussions or to tender the limits in the absence of a demand to do so.
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