For decades, California courts have mandated that an insurer is obligated to accept a “reasonable” settlement demand within policy limits on behalf of its insured. If it fails to do so, it is liable for the entire judgment, including amounts in excess of the policy limits. Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 659. Subsequent cases have addressed whether an insurer can escape excess liability if its decision-making process, as opposed to the settlement itself, was “reasonable”. California law is clear that even an honest mistake as to whether the claim is covered does not absolve an insurer from excess liability. Johansen v. Calif. State Auto Association Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-16. However, courts have also considered whether an insured must show the insurer acted “unreasonably” in assessing the value of the claim. In Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425, 431, the California Supreme Court held that the very fact of an excess judgment created an inference that the insurer was liable for the excess judgment. Other cases, however, looked at whether the insurance company properly investigated all facts relating to liability and damages. See, e.g., Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 707.
In McDaniel v. Gov’t Employees Ins. Co. (GEICO) (9th Cir. March 7, 2017) 207 U.S. App. LEXIS 4029, the Ninth Circuit decided that an “honest” mistake as to a settlement deadline did not justify the imposition of excess liability on the insurer. In that case, the plaintiff in a wrongful death action made a policy-limits demand of $100,000 against the defendant, GEICO’s insured, with a 15-day deadline. The deadline was extended to ten days after service of plaintiff’s response to outstanding interrogations, i.e. not a date certain. Plaintiff’s counsel served the interrogations on defense counsel, and defense counsel emailed the responses to the GEICO claims adjuster with a message noting the new deadline by which to accept the settlement offer. The claims adjuster missed the email, and missed the deadline. The settlement demand expired. Although GEICO offered to pay the full policy limits approximately three weeks later, plaintiff refused it.
The wrongful death action went to trial, resulting in a judgment of $3 million against the defendant-insured. Plaintiff took an assignment of the insured’s claim for breach of the duty to settle and sued GEICO for the entire judgment. The District Court granted summary judgment in favor of the plaintiff and denied summary judgment in favor of GEICO. The Ninth Circuit reversed and ordered the District Court to enter judgment in favor of GEICO, holding that there was no evidence that GEICO’s adjuster acted with the “required degree of culpability to have unreasonably refused to settle.”
It was not disputed that the claims adjuster had made a mistake by missing the email. The Ninth Circuit, however, found that the failure did not meet the standard for “unreasonable refusal to settle.” But no matter how innocent the omission, the consequences for the insured could have been catastrophic. Maybe the Ninth Circuit was influenced by the fact that the settlement demand was subject to an artificial deadline, and that the plaintiff rejected GEICO’s offer to cure the default. If so, it could have reached the same result by finding that the settlement deadline itself was not reasonable. Maybe it was influenced by the fact that GEICO’s insured apparently suffered no real loss because plaintiff took an assignment of the judgment. But what happens to an insured with assets and a plaintiff who won’t take an assignment? Whatever the motivation, the Court’s reasoning discourages insurers from being extra careful: 1) to make sure claims adjusters read their email in a timely fashion; 2) employ enough adjusters so such mistakes are less likely to be made; or 3) require their defense counsel to follow up on settlement deadlines.
An attorney could not get away with missing a deadline like this. Let’s hope the instances where insurers can do so are few and far between.