Ninth Circuit Expands Insurers’ Duty to Settle

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.)

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About Brian Jones

I represent clients in all aspects of business litigation, but focus my practice on complex litigation and arbitration matters in life, property and casualty, disability, and professional lines insurance and reinsurance. I also represent clients in disputes regarding ERISA, lending, receiverships, securities, commercial leases, real estate disputes, construction, and employment matters. I am the co-chair of the Bose McKinney & Evans Insurance Group. I was named a "Rising Star" in Business Litigation by Super Lawyers in Indiana in 2013 and 2012, and I was also named a 2010 “Rising Star” in Business Litigation in Texas. I am a member of the State Bars of Indiana and Texas, the Defense Research Institute, a former member of the Pro Bono College of the State Bar of Texas, and am licensed to practice before all state courts in Indiana and Texas, as well as all federal courts in Indiana, the Northern, Western, and Southern Districts of Texas, the Northern District of Illinois, and the United States Court of Appeals for the Fifth Circuit. I received my bachelor’s degree, cum laude, in political science and my master’s degree in teaching from Trinity University, where I was elected to Phi Beta Kappa. I received my doctor of jurisprudence degree from the University of Texas School of Law, where I was the Director of Communications for the Legal Research Board and a member of the Phi Delta Phi Honor Society. Before attending law school, I taught high school geography, government and economics in San Antonio, Texas.
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