Publications

Our November 2013 Alert reported on a California appellate court decision holding that an insurer was not liable for bad faith failure to settle where the underlying plaintiff had not made a settlement demand or otherwise indicated an interest in settling, even though there was a significant risk of judgment that would exceed policy limits.  Reid v. Mercury Ins. Co., 162 Cal. Rptr. 3d 894 (Cal. Ct. App. 2013).   A California federal court recently distinguished Reid and ruled that that the absence of a policy-limits settlement demand from an underlying plaintiff is not fatal to a bad faith failure-to-settle claim against an insurer.  Aspen Specialty Ins. Co. v. Willis Allen Real Estate, 2015 WL 3765008 (S.D. Cal. June 15, 2015).

Homeowners sued Willis Allen, a real estate company, after a landslide resulted in significant damage to their property.  Aspen agreed to defend Willis Allen pursuant to a liability policy.  After participating in settlement negotiations and mediation, Willis Allen determined that the claims could be resolved for substantially less than policy limits.  However, Willis Allen claimed that Aspen thwarted settlement efforts by making “lowball” settlement offers.  A settlement was eventually reached, but it exhausted policy limits.  Willis Allen sued Aspen, alleging bad faith based on Aspen’s “gamesmanship” and refusal to give policy-limits settlement authority despite the potential liability exposure.  Citing Reid, Aspen moved to dismiss on the basis that there was no policy-limits settlement demand in the underlying litigation.  Aspen argued that absent a policy-limits demand, it had no affirmative duty to settle.  The court disagreed and refused to dismiss the claim.

The court held that Reid does not stand for the proposition that an injured party must make a settlement demand or express an interest in settlement in order to trigger an insurer’s duty to pursue good faith settlement discussions.  Rather, the court explained that “[a]ll that’s required is some circumstance showing that [the insurer] knew settlement within policy limits was feasible.”  The court concluded that this standard was met because Willis Allen allegedly informed Aspen that the underlying claims could likely be resolved for substantially less than policy limits.  Accepting that allegation as true, the court held that dismissal was not warranted.   As reported in our May 2015 Alert, the Louisiana Supreme Court also recently held that an insurer may be liable for bad faith failure to settle even if the insurer did not receive a firm settlement offer.