Insurance Recovery and Counseling - Ninth Circuit Expands Duty to Settle
Requires Insurers to Settle Where Liability is Reasonably Clear, Even in Absence of Settlement Demand
Expanding on the growing recognition of insurers' duty to settle claims against their insureds, the United States Court of Appeals for the Ninth Circuit recently held that, under California law, "an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand." Du v. Allstate Ins. Co., No. 2:08-cv-06301-GW-PJW (9th Cir. Jun. 11, 2012).
The facts of Du are hardly unusual. Allstate issued an auto insurance policy with liability limits of $100,000 per claim and $300,000 per accident to Joon Hak Kim. Four people were injured in an accident caused by Kim, and Allstate recognized that Kim would be liable. Allstate tried to obtain medical and other claim information regarding the potential claimants, and after about a year finally received sufficient information regarding plaintiff Yang Fang Du. Du's attorney then made a demand of $300,000 to settle all four potential claims. Allstate responded that there was insufficient information regarding the other plaintiffs' injuries, suggested settling Du's claim separately, and offered the per claim limit of $100,000. Du's counsel rejected the offer and filed a personal injury lawsuit against Kim. The jury found in favor of Du and awarded him a verdict of $4,126,714.46. Allstate paid the $100,000 per claim limit, and Kim assigned a bad faith claim to Du in exchange for a covenant not to execute.
Du then commenced a lawsuit against Allstate, alleging it breached the implied covenant of good faith and fair dealing by failing to affirmatively settle Du's claim within Kim's policy limit once it became clear that Kim would be liable for an amount in excess of that limit. At trial the court rejected Du's proposed jury instruction that would have allowed the jury to consider whether Allstate "did not attempt in good faith to reach a prompt, fair, and equitable settlement of Yan Fang Du's claim after liability [of its insured Kim] had become reasonably clear." The jury found in favor of Allstate. On appeal, the Ninth Circuit held that, under California law, "an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand."
The 9th Circuit's decision in Du v. Allstate may prove to be an important expansion of the duty to settle. As the opinion explains, California courts had long "applied the duty to settle to situations in which the insurer unreasonably rejects a settlement offer within policy limits." See, e.g., Kransco v. Am. Empire Surplus Lines Ins. Co., 2 P.3d 1 (Cal. 2000); Crisci v. Sec. Ins. Co. of New Haven, Conn., 426 P.2d 173, 176 (Cal. 1967). Other states recognize a similar duty. See, e.g., Cotton States Mut. Ins. Co. v. Brightman , 276 Ga. 683, 686 (2003) (creating a "safe harbor" from bad faith liability contingent on the insurance company meeting the portion of the demand over which it has control, "thus doing what it can to effectuate the settlement of the claims against its insured.");Haddick v. Valor Insurance, 198 Ill.2d 409 (2002) (an insurance provider's duty to settle arises "once a third-party claimant has made a demand for settlement of a claim within policy limits and, at the time of the demand, there is a reasonable probability of recovery in excess of policy limits and a reasonable probability of finding of liability against its insured"); Yeomans v. Allstate Ins. Co., 130 N.J. Super. 48, 51, 324 A.2d 906, 908 (App. Div. 1974) ("insurer has an affirmative duty to negotiate in an attempt to bring the demand within policy limits or within an amount that can be realized by a combination of the policy limit and what the insured is willing and able to contribute.");Young v. Am. Cas. Co. of Reading, Pa., 416 F.2d 906 (2d Cir. 1969) ("where the insurer failed to make any response to the injured person's demand and to notify insureds of the possibility of settlement, bad faith could be found without proof that settlement within policy limits was possible or that insureds were willing and able to pay any excess to effect settlement"). However, Du holds that the duty "more broadly requires an insurer to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand."
It remains to be seen whether California state courts will follow Du and whether courts in other jurisdictions similarly expand the duty to settle. For now, policyholders in California and elsewhere can cite Du in efforts to persuade their insurers to initiate and even conclude settlements within policy limits without waiting for plaintiffs to make a demand. Because an insurer's failure to do so may expose it to bad faith liability beyond its policy limits, Du may prove to be a powerful tool for policyholders to protect their interests when they face liability in excess of their insurance coverage.