Failure of Maneuver To Claim Bad Faith

Is There Bad Faith Refusal to Settle?

When a serious injury is incurred with a defendant who has inadequate insurance coverage to compensate the injured party, counsel for the party will often use counsel’s wits and energies to lead the insurer into actions that can later be trotted out as evidence of bad faith. If effective the plaintiff can force the insurer to pay sums in excess of its policy limits. Some lawyers are effective at such techniques; others are not.

A liability insurer’s duty to settle a third party claim is not precipitated solely by the likelihood of an excess judgment against the insured. In the absence of a settlement demand or any other manifestation the injured party is interested in settlement, when the insurer has done nothing to foreclose the possibility of settlement, the California Court of Appeal was asked to determine if there is liability for bad faith failure to settle. In Reid v. Mercury Ins. Co., B241154 (Cal.App. Dist.2 10/07/2013) the issue was resolved.


In this case, the insured’s liability was clear almost immediately after the collision. The insurer’s claims manager had decided, within a little over six weeks, that while the insurer needed medical records, the insurer must tender the policy limits to the third party claimant “as soon as we have enough [information] available to do so.” No settlement demand was made by the claimant, who filed suit against the insured three and one-half months after the collision.

Defendant Mercury Insurance Company (Mercury) insured Zhi Yu Huang under an automobile policy with bodily injury policy limits of $100,000 per person and $300,000 per accident. On June 24, 2007, Ms. Huang was involved in a multivehicle collision. The police report showed Ms. Huang failed to stop at a red light and collided with a car driven by plaintiff Shirley Reid. Plaintiff sustained major injuries and could not provide police with a statement. Four people injured in the accident made claims to Mercury for their injuries.

On July 18, 2007, Mercury called plaintiff’s insurer and Ms. Ogbogu’s insurer to tell them Mercury “was accepting liability and that there may be a ‘limits issue.’” The next day, Mercury’s adjuster, Patricia Feng, recommended Mercury accept 100 percent liability.

Mr. Reid hired a lawyer, Joseph West, because he “felt [he] was being jerked around by [Mercury]” because they would not disclose the policy limits and said “they couldn’t determine liability at that time, and that was a month after the accident.”

On January 29, 2008, Mr. West sent plaintiff’s medical records to Mercury. On May 2, 2008, Mercury wrote to Mr. West, stating it “has agreed to tender its $100,000.00 policy limit to your client in order to resolve this matter in its entirety.” Plaintiff rejected the offer.

More than two years later, after a bench trial in plaintiff’s suit against Ms. Huang, judgment was entered against Ms. Huang for more than $5.9 million. During that lawsuit, on March 11, 2009, Ms. Huang declared bankruptcy, and the bankruptcy trustee later assigned to plaintiff any potential rights Ms. Huang had against Mercury.

Plaintiff then filed this suit against Mercury for breach of the covenant of good faith and fair dealing and for breach of contract, essentially on a theory of bad faith failure to settle.


The sole basis for Mercury’s motion for summary judgment was plaintiff could not prove breach of contract or bad faith “because plaintiff never made a demand for settlement within the policy limits.”

Mercury relied on the testimony of Mr. West who claimed Mercury’s failure to offer the limits was a refusal to offer the policy limits. Mr. West was then asked, “Had you said either orally or in writing that your client would settle for the policy limit if they offered it?” and answered, “I don’t believe I ever said that, no.”

The trial court granted Mercury’s motion for summary judgment.


Bad Faith Liability Cannot Be Founded Solely Upon an Insurer’s Failure to Initiate Settlement Discussions or Offer its Policy Limit

For 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. In the absence of such evidence, or evidence the insurer by its conduct has actively foreclosed the possibility of settlement, there is no “opportunity to settle” that an insurer may be taxed with ignoring.

In this case, there was no settlement offer from plaintiff. Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.

There is no private civil cause of action “against an insurer that commits one of the various acts listed in California Insurance Code section 790.03, subdivision (h)” (Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 304), although violations of the section “‘may evidence the insurer’s breach of duty to its insured’” under the implied covenant of good faith and fair dealing. But section 790.03 does not purport to define the circumstances that give rise to a breach of the insurer’s obligation to “attempt[] in good faith to effectuate prompt, fair, and equitable settlements” and nothing in the statute requires or suggests the conclusion that an insurer’s failure to initiate settlement negotiations, in the absence of any expression of interest in settlement from the claimant, may give rise to a bad faith claim.

In short, 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. The Court of Appeal found no merit in plaintiff’s argument that Mercury’s conduct brings it within the case precedents that permit bad faith liability without a formal settlement offer from the claimant.

The court refused to construe a bare request to know the policy limit as an opportunity to settle. Mr. Reid’s willingness to settle for policy limits in July or August, as he testified, was not communicated to Mercury. No reasonable juror could find Mercury “discouraged” settlement by “repeatedly” telling plaintiff it could not accept liability. Indeed, it is undisputed Mercury told plaintiff’s insurer on July 18 it was accepting liability, and no other communications to plaintiff suggest otherwise.

In summary, when a claimant offers to settle an excess claim within policy limits, an opportunity to settle exists and a conflict of interest arises, because a divergence exists between the insurer’s interest in paying less than the policy limits and the insured’s interest in avoiding liability beyond the policy limit. A conflict may also arise, without a formal settlement offer, when a claimant clearly conveys to the insurer an interest in discussing settlement but the insurer ignores the opportunity to explore settlement possibilities to the insured’s detriment, or when an insurer has an arbitrary rule or engages in other conduct that prevents settlement opportunities from arising.  Nothing like that happened.

An “opportunity to settle” does not arise simply because there is a significant risk of an excess judgment. And none of the evidence presented to the trial court, disputed or not, allows an inference that plaintiff at any time conveyed to Mercury any interest in settlement, at policy limits or otherwise, at any time before Mercury offered its policy limits. In short, there was no evidence of a bad faith failure to settle in this case. Accordingly, there was no foundation for a claim of breach of contract or breach of the insurer’s covenant of good faith and fair dealing.


The tort of bad faith was created to deter an insurer from acting against the interest of its insured. It was not designed to make plaintiffs who inadequately insured themselves, wealthy. The plaintiff’s counsel attempted to set up Mercury for a bad faith lawsuit without making a demand for the limits – probably because he knew that if a demand was made for the policy limits Mercury would have paid it – and failed.

As I have often said in these pages the tort of bad faith has served its purpose. Most insurers treat their insureds fairly and in good faith. Most insurers pay claims they owe. Those that do not can be punished by the department of insurance as recommended by the California Supreme Court in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287. This case is a small step in preventing the abuse of the tort of bad faith.

As California Supreme Court Justice Kaus once said: “The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.” [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985) ]


© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing,

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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