Following the Ninth Circuit Court of Appeal’s recent decision in Du v. Allstate Insurance Company,1 California insurers are going to have to become much more proactive in handling claims. In short, the Court held that an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.
On June 17, 2005, Du and her three passengers were injured in a car accident caused by opposing driver Joon Hak Kim (“Kim”). Kim was insured by Deerbrook Insurance Company, a subsidiary of Allstate, under a policy with limits of $100,000 for each individual and a $300,000 aggregate for any one accident. On February 15, 2006, Deerbrook acknowledged Kim’s liability. On June 9, 2006, Du’s lawyer supplied documentation of Du’s medical costs at $108,742, listed medical costs for the other three claimants, and demanded $300,000 as a global settlement. Deerbrook rejected the global demand citing the lack of documentation concerning the other three claimants. In August 2006, Deerbrook offered Du $100,000 individually, which Du rejected. In October 2006, Du filed suit against Kim, and later obtained a jury verdict of $4,126,714. Kim assigned his rights against Deerbrook to Du.
Du brought suit against Deerbrook for bad faith. 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. At trial, Du proposed the following jury instruction:
In determining whether Deerbrook breached the obligation of good faith and fair dealing owed to Kim, you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Du’s claim after liability [of its insured Kim] had become reasonably clear.
The district court rejected Du’s proposed jury instruction and found in favor of Deerbrook upon instructing the jury that bad faith could only be found if Deerbrook failed to accept a reasonable settlement demand, not for failing to initiate settlement. The Ninth Circuit affirmed the District Court’s ruling on the facts, not the law, holding that while Du’s proposed jury instruction was consistent with California law, it was 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.
The law in California is that implied in every insurance policy is the covenant of good faith and fair dealing making it the insurer’s duty to settle within policy 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. However, the Ninth Circuit rejected a narrow application of the duty to settle and expanded it such that an insurer now has a duty to effectuate settlement within policy limits 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. Thus, California insurers may no longer be able to sit back and wait for a settlement demand before taking steps to resolve the claim.
Please note that this decision is from the Ninth Circuit Court of Appeal and while it is not binding on the state courts of California it is persuasive authority.
1 Yan Fang Du v. Allstate Insurance Company, et al., ___ F.3d ___ , 2012 WL 2086584 (C.A.9 (Cal.)), 12 Cal. Daily Op. Serv. 6368