California insurers are going to have to become much more proactive in seeking settlements, thanks to the Ninth Circuit’s decision in Du v. Allstate Ins. Co.
Here’s the background story: Yang Fang Du was injured in a car accident, in which Joon Hak Kim (an insured of Deerbrook, an Allstate subsidiary) was the driver at fault. In the months following the accident, Du and Kim were not forthcoming with statements and medical records repeatedly requested by Deerbrook. Eventually, Deerbrook was forced to accept Kim’s liability for the claim of serious injury by Du without crucial claim information. No settlement demands or negotiations were exchanged for nearly a year after the accident, and discussions ended almost as soon as they began because Du rejected Deerbrook’s policy limits counteroffer as “too little too late.” Du subsequently obtained a $4,126,714.46 judgment against Kim in a personal injury lawsuit, and Kim assigned Du his bad faith claim against Deerbrook and Allstate.
In the bad faith case, Du alleged Deerbrook breached the covenant of good faith and fair dealing owed Kim by failing to affirmatively settle Du’s claim within Kim’s policy limits. Du proposed that the jury be instructed that they could consider Deerbrook’s failure to attempt to settle after liability had become reasonably clear in determining bad faith. The district court rejected Du’s proposal and ruled in favor of Deerbrook.
The Ninth Circuit affirmed, holding that while Du’s proposed jury instructions were consistent with California law, they were inappropriate due to a lack of evidence showing that Deerbrook could have extended an earlier settlement offer to Du in the absence of crucial claim file information. So, Deerbrook and Allstate escaped a verdict of bad faith.
If only the story ended there…
California law implies a covenant of good faith and fair dealing in every liability policy, and that implied covenant makes it the insurer’s duty to settle within limits where liability is reasonably clear and recovery will likely be in excess of those limits. Previously, California courts applied this duty only in situations where the insurer unreasonably rejected a settlement demand within policy limits.
But the Ninth Circuit rejected a narrow application of the duty to settle and expanded it so an insurer has a duty to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand. The court dismissed the notion that a settlement demand was a prerequisite for bad faith liability and described the scope of the insurer’s duty as follows:
[A]n insurer can violate the duty of good faith and fair dealing by failing to attempt to effectuate a settlement within policy limits after liability has become reasonably clear.
Despite the Ninth Circuit’s broader interpretation of the insurer’s duty to settle, however, it ruled that Deerbrook and Allstate had initiated timely settlement talks under the circumstances, so, again, no bad faith. That was good for the insurers in this case, but might prove problematic in the future. We’ll continue to follow developments in this area.
(Special thanks to Jennifer Fujawa for her assistance with this post.)