Over the past 10 years, policy limit settlement demands with myriad conditions have become the norm. In many instances, the conditions are imposed in the hope that the insurer will falter in its efforts to comply. Unless there was strict compliance with every condition, the claimants argued, the demand was rejected and the policy was “open.” Recently, however, California courts have begun to recognize common-sense limitations to these “gotcha” tactics. In 2021, Pinto v. Farmers Ins. Exch., 61 Cal. App. 5th 676 (2021) clarified that to be liable for a bad faith failure to settle, the insurer must have acted unreasonably. In Palma v. Mercury Ins. Co., 2022 WL 3592722, issued on August 23, 2022, the Court of Appeal expressed its distaste for gamesmanship that is designed to prevent a settlement that an insurer is attempting to consummate.

In Palma, the plaintiffs’ son was killed in a September 2012 car accident with Mercury’s insured, Frank McKenzie. The following month, the Carpenter, Zuckerman & Rowley law firm demanded the limit of McKenzie’s Mercury auto policy – $15,000. The demand was conditioned on, among other things, a declaration of no other insurance and strict compliance with all conditions. Mercury immediately hired a lawyer, Jeffrey Lim, to take the steps necessary to accept the offer. Lim met with McKenzie, who signed the requested declaration. Nine days after the demand was made and five days before it expired, Lim wrote to Carpenter, accepted the demand, enclosed the settlement check, and advised that there was no other insurance. Lim, however, failed to attach McKenzie’s declaration. All other conditions were satisfied. 

The Palmas asserted that the failure to include the declaration was a rejection of the demand and that the policy was open. They sued McKenzie, obtained a $3 million judgment, and obtained an assignment of McKenzie’s purported bad faith claim in exchange for a covenant not to execute against McKenzie personally. The Palmas and McKenzie then sued Mercury for bad faith. 

Mercury filed a motion for summary judgment, which the trial court granted. The Court of Appeal affirmed. Noting that Lim’s failure to enclose McKenzie’s declaration with the acceptance letter was at most negligence, the Court held that mere negligence is not enough to support a claim for bad faith failure to settle. The Court also had harsh words for the conduct of the Palmas and the Carpenter firm:

There is also no doubt that, had Plaintiffs or the Carpenter firm simply told Mercury they had not received McKenzie’s declaration with Lim’s acceptance letter, Mercury would have provided it by the original deadline. The issue could have been resolved with a single phone call or email in October 2012.… The firm [waited nine months] to inform Mercury that it had not received McKenzie’s declaration, by which time it was clearly preparing for litigation with an eye toward a future bad faith action. Although Mercury responded by providing the declaration and reiterating its policy limits offer, Plaintiffs pursued a legal action against McKenzie, knowing it would “destroy [ ]” his credit and subject him and his family to “extremely distressing and embarrassing” post-judgment collection proceedings. If anyone acted in bad faith, it was Plaintiffs and the Carpenter firm.