Insurer Did Not Act in Bad Faith by Conditioning Its Acceptance of Policy Limit Demand on Release of Insured

Originally published in California Insurance Newsletter - Vol. 10, 2016

09.01.2016

Grayson v. Allstate Ins. Co., 2016 U.S. App. LEXIS 8946 (9th Cir. May 16, 2016)

Categories: Bad Faith Refusal of Settlement Demand – Absence of Complete Release – Absence of Reasonable Opportunity to Settle

In Grayson v. Allstate Ins. Co., the Ninth Circuit Court of Appeals held that an insurer did not act in bad faith by responding to a policy limit settlement demand with a request that the claimant sign a broad release of its insured.

Grayson arises out of an automobile accident in which the insured driver struck a motorcyclist, causing the motorcyclist severe injuries. The injured motorcyclist’s attorney sent a policy limit demand to the driver’s insurer. The insurer’s claim representative, recognizing that the insured was likely at fault and that the claim would exceed the $15,000 policy limit, responded by stating that she was “authorized to accept” the demand, and that the insurer would promptly make payment upon execution of the insurer’s standard release. But the claimant treated the response as a rejection and counteroffer, refused the insurer’s immediate attempt to provide a less objectionable release accompanied by a letter explaining it was the insurer’s “intent simply to accept [the] settlement,” and proceeded to trial, obtaining a substantial judgment against the insured.

The insured then assigned his rights against the insurer in exchange for a covenant not to execute, and the claimant sued the insurer for bad faith failure to settle. On summary judgment, the trial court held that (1) the claimant’s settlement offer was unreasonable, because it did not include a release, and (2) even if the settlement offer was reasonable, the insurer did not act in bad faith, because it did not unreasonably refuse to settle.

The Ninth Circuit Court agreed, holding that the insurer “did not refuse to settle, much less unreasonably or unwarrantedly refuse.” The court further found that “[i]ncluding the proposed release with the acceptance letter did not constitute bad faith or a breach of the covenant of good faith and fair dealing because, had [the insurer] failed to attach a release, it may have breached its duty to its insured.” In addition, the court pointed out that the insurer promptly provided the claimant with a revised release and made repeated offers to settle on terms consistent with the original offer. Thus, the court found the claimant never presented the insurer with a reasonable opportunity to settle, and without such an opportunity, there could be no bad faith.

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