By Brian Martin and Nathaniel Smith, Pillsbury Winthrop Shaw Pittman LLP
Insurers frequently disclaim any duty to participate in settling a third party claim against their insureds unless and until the third party claimant makes a settlement demand for a specific amount. The Ninth Circuit Court of Appeals recently reiterated that such an assertion constitutes bad faith under California law in certain circumstances.
The court reaffirmed that an insurer's duty to settle includes a duty to initiate settlement discussions once liability of the insured has become "reasonably clear," even in the absence of a settlement demand from the claimant. Du v. Allstate Ins. Co., -- F.3d ----, 2012 U.S. App. LEXIS 11755, Case No. 10-56422 (9th Cir. June 11, 2012). "Thus, an 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." However, the court went on to hold that under the facts of the case, the district court did not err in failing to instruct the jury on this aspect of bad faith liability.
A. The Underlying Claim and Resulting Bad Faith Action.
The case arose out of a car accident in which Du suffered injuries. Du then sued the driver of the other car ("Kim"), and Kim's insurers ("Deerbrook") accepted their insured's liability. Kim's policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident. Du's personal injury case did not settle before trial and the jury returned a verdict of over $4 million. Deerbrook paid the $100,000 available under Kim's policy, and Kim assigned his bad faith claim to Du in exchange for a covenant not to sue.
At trial on the bad faith claim, Du proposed a jury instruction that stated the jury could consider whether Deerbrook "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 this proposed instruction, concluding that an insurer has no duty to initiate settlement discussions in the absence of a demand from the claimant. It further ruled that there was no factual foundation for the instruction because settlement was broached at a sufficiently early time to vitiate any claim for failure to initiate a settlement discussion. The jury was therefore asked whether Deerbrook "unreasonably or without proper cause fail[ed] to accept a reasonable settlement demand within policy limits," to which the jury answered "no." The district court entered judgment for Deerbrook, and Du appealed.
B. The Ninth Circuit Holds the Proposed Instruction Accurately Stated the Law But Was Not Warranted on the Facts.
The Ninth Circuit held that the district court interpreted the insurer's duty to settle too narrowly, but found no abuse of discretion in ruling that there was an insufficient factual foundation for Du's proposed jury instruction. It noted first that the conflict of interest between insured and insurer - which animates the duty to settle - exists regardless of whether a settlement demand is made by the injured party. The insurer's good faith duties require it to act as though it alone were liable for the entire amount of the judgment, and a rational party facing a substantial likelihood of a judgment in excess of policy limits should attempt to settle within policy limits without waiting for a demand from the other side.
The court found further support for this duty in a prior Ninth Circuit decision, Gibbs v. State Farm Mutual Insurance Co., 544 F.2d 423 (9th Cir. 1976), in which the court held the insurer "neglect[ed] its good faith duty to take affirmative action in settling the claim." (italics added). Further, the California Insurance Code specifically identifies as an "unfair claims settlement practice" an insurer's "[failure to attempt] in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become clear." Cal. Ins. Code § 790.03(h)(5). Although no longer enforceable through a private right of action, violations of section 790.03(h) can serve as evidence of bad faith.
Regarding an insurer's obligation to initiate settlement discussions where liability has become reasonably clear, the court stated that California courts "have not ruled to the contrary." What is surprising about this section of the Du opinion is that the Ninth Circuit did not discuss the California cases that, rather than merely "not rul[ing] to the contrary," in fact support the Ninth Circuit's conclusion. For example:
• "In a complex case such as the present, the duty to accept reasonable settlements, included within the implied covenant of good faith and fair dealing, [citations], would indeed be meaningless if it did not entail a duty to negotiate towards a reasonable settlement." Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 906 (2000).
• "It is true that if an insurer undertakes the duty [to settle], it is a factual question whether or not the insurer has acted in good faith and has made a reasonable effort on behalf of the insured in its negotiating toward a settlement." Garner v. Am. Mut. Liab. Ins. Co., 31 Cal. App. 3d 843, 848 (1973).
A leading practice guide notes these cases and another as "suggesting that insurers may owe a duty to initiate settlement discussions as well as respond to demands." Croskey, et al., Cal. Practice Guide: Ins. Litig. at 12:290 (emphasis original). It is therefore puzzling that the Ninth Circuit in Du did not discuss these authorities, particularly given that it cited Shade Foods in connection with its discussion of Insurance Code Section 790.03.
Ultimately, the Ninth Circuit affirmed the district court's decision to not give Du's requested jury instruction, even though that proposed instruction accurately stated the law. This result was due to sufficient support in the record that Deerbrook timely initiated settlement talks under the circumstances - Deerbrook could not make an earlier offer because it lacked corroborating proof of the extent of Du's injuries and medical expenses, and had no proof of the injuries of the other three individuals injured in the accident. Nevertheless, Du provides further support to negate an insurer's attempt to avoid its good faith obligations by arguing it has no duty to settle until a third-party claimant presents a settlement demand.
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