Does An Insurance Company Have a Duty to Initiate Settlement ?

Merritt v. Reserve Ins. Co. (1973) arose out of a truck accident, in which a truck driver was badly injured when another truck made what appeared to have been an unsafe lane change right in front of him. (See Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at p. 863.) The plaintiff never made a settlement offer. The claimant never even "advanced any suggestion that settlement could be profitably discussed." (Id. at p. 877.) The closest the claimant came to a settlement offer was a demand for $ 400,000 in damages stated in the complaint (and increased on the day of trial to $ 650,000). (Id. at pp. 866, 877.) While the defendant trucking company's insurer's investigation had revealed a low probability of liability (see id. at pp. 864-865), the jury returned a large, excess verdict. The plaintiff gave a covenant not to execute and sued the insurer for bad faith. the appellate court reversed a judgment against the insurer. The core of the Merritt opinion is a long essay preparatory to the application of the law to the facts (see Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at pp. 867-877) exploring the nuances of an insurer's duties regarding settlement in a world where policyholders only contract for limited liability. The point of the essay is that the cause of action for bad faith is a necessary ameliorative to prevent the insurer from exposing the policyholder to unnecessary personal liability; it derives from the need to "strike a balance between conflicting interests." (See id. at p. 874.) Or, as the court said elsewhere in the opinion, bad faith law is an improvisation by the courts "to find a workable solution to the problem of conflict of interest." (Id. at p. 871.) As complete as it was, the Merritt essay never tackled the problem of a settlement overture or suggestion made by the claimant--and whether that might engender a conflict of interest; the opinion did not have to. No possibility of settlement had ever been raised by claimant in any manner prior to trial, and the supposed bad faith of the insurer was predicated on three items of misfeasance by the insurer which had nothing to do with the insurer's response to any suggestions of settlement. The three items were: (1) the insurer supposedly failed to make clear that the policyholder did not have any other insurance policies; had the insurer done so the claimant might have made a settlement offer. (Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at p. 878.) to this the court answered that any confusion on the existence of other policies was the insured's fault, not the insurer's. (Ibid.) (2) the insurer supposedly failed to "initiate settlement overtures" to the claimant. (Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at p. 878.) Interestingly enough, the court did not reject this basis of liability on the legal ground that an insurer need never "initiate settlement overtures," but on the particular facts of the case before the court: There was no evidence at all to support the conjecture that "overtures" might have been fruitful. (Ibid.) Rather, the existence of a large workers' compensation lien made settlement "impossible." (Ibid.) (3) the insurer dropped the ball in failing to notify the policyholder on the day of trial that the claimant had just increased the damages in the complaint from $ 400,000 to $ 650,000. But that "lapse," said the Merritt court, had nothing to do with any loss of an opportunity to settle within policy limits. It only made settlement less likely. (See Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at p. 879.) The essay was a gloss on the situation where the claimant does make an offer of settlement prior to judgment. (See Merritt v. Reserve Ins. Co., supra, 34 Cal. App. 3d at pp. 874-875, where the court makes constant reference to what happens when an insurer "receives" a settlement offer.) Thus there was no reason for the Merritt court to gratuitously stick in the word "only" when, at the end of its discussion, it said that a "conflict of interest" could "only" develop when an offer to settle is actually made. Indeed, not having exhaustively canvassed the possibilities bearing on insurer bad faith in the liability insurance context, Merritt's use of the word "only" must be deemed to be mere dicta.