Key Decisions

November 2013 – Opportunity to Settle a Requirement For Excess Verdict

(filed under: Key Decisions Archive | November 20, 2013)

Opportunity to Settle a Requirement For Excess Verdict

Reid v. Mercury Insurance Company
(Cal. Ct. of App., 2d Dist.), filed October 7, 2013, published October 7, 2013


Zhi Yu Huang negligently caused a automobile collision involving several automobiles. The collision resulted in four claims against Huang.

Mercury Insurance Company insured Huang. The limits were $100,000 per person to a maximum of $300,000 per occurrence.

It quickly became clear that Huang was liable and at least one of the claimants, Paul Reid, had injuries that easily exceeded the applicable policy limits. Reid never demanded payment of the policy limits in settlement of his claims. Nor did he indicate that the claim could be settled within the policy limits.

Mercury never initiated settlement discussions with Reid.

Reid sued Huang and obtained a verdict of $5.9 million. Huang declared bankruptcy. The bankruptcy trustee assigned Huang’s rights against Mercury to Reid. Reid sued Mercury for breach of the implied covenant of good faith and fair dealing based on its failure to settle within the policy limits.

The trial court granted a summary judgment for Mercury, based on the fact that Reid had never demanded Huang’s policy limits in settlement of his claim or indicated he would settle for those limits.


The Court of Appeal affirmed.

The court held that:

An insurer’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 any other manifestation the injured party is interested in settlement, when the insurer has done nothing to foreclose the possibility of settlement, we find there is no liability for bad faith failure to settle.

Although an insurer can be liable for failing to settle when it unreasonably fails to accept a settlement demand within the policy limits when there is a likelihood of a verdict in excess of those limits, and can be liable if it engages in conduct that forecloses the possibility of such a demand, debate continues as to whether an insurer must initiate settlement discussions or face potential liability for failing to do so.

The court distinguished Boicourt v. Amex Assurance Co., 78 Cal.App.4th 1390 (2000), where there was evidence that the insurer foreclosed the possibility of a demand within limits by refusing to disclose the policy limits or even ask the insured for permission to do so.

The court rejected Reid’s argument that Mercury had foreclosed a settlement demand by advising that it was still investigating the claim, had not yet determined liability and required complete medical records. It ruled that Mercury’s actions could not be construed as foreclosing a settlement demand. The court noted that unlike the insurer in Boicourt, Mercury, with Huang’s permission, disclosed the applicable policy limits.


According to the court, Reid retained an attorney who corresponded with Mercury, but did not make a settlement demand. Reid’s attorney believed Mercury would not settle for the policy limits.

Small nuances in the handling of large claims can make big differences in the final outcome. That is why many insurers offer the policy limits once excess liability appears likely.