Insurers Can’t Wait Around for Settlement Offer If Liability Is Clear (the Ninth Circuit Addresses Bad Faith, part 1)

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[author: Richard Robinson]

When the liability of its insured is clear, must an insurer proactively attempt to settle a claim within policy limits in order to avoid bad faith liability?  Or is it sufficient to wait until a reasonable settlement offer is made?  A court of appeals panel in the Ninth Circuit recently weighed in on the issue, holding that when liability is clear, an insurer has a duty to attempt to reach a settlement, even absent a demand from the claimant. 

In Du v. Allstate Insurance Co., 12 C.D.O.S. 6368, the appellant, Yang Fang Du and three other parties were injured in a car accident involving an individual insured by Deerbrook Insurance Company (a subsidiary of Allstate).  Deerbrook quickly determined that its insured was liable for the accident, but initially had difficulty ascertaining the extent of the injuries of the four injured parties, despite repeated requests for more information.  Finally, several months into the dispute, the plaintiffs’ attorneys submitted a $300,000 global settlement offer to Deerbrook, but only provided documentation of Du’s medical costs (which totaled just over $100,000).  Deerbrook rejected the global settlement, but offered to settle Du’s claims alone for $100,000 (the policy’s limit for individual claims).  Du’s attorneys rejected this offer as “too little too late” and proceeded to file suit against Deerbrook’s insured.  Du eventually received a jury verdict of over $4 million, Deerbrook contributed its $100,000 policy limit, and Du sued Deerbrook for the balance under an assignment of rights.

In the subsequent bad faith litigation, the trial court rejected a jury instruction that would have permitted the jury to “consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of [the claim] after liability . . . had become reasonably clear.”  The district court concluded that an insurer has no duty to initiate settlement discussions in the absence of a demand from the third-party claimant, and that even if such a duty existed, settlement was broached sufficiently early in the case to vitiate any claim for a failure to initiate  negotiations.  Deerbrook prevailed at trial and Du appealed, citing the court’s refusal to include the jury instruction.

The Ninth Circuit upheld the result, but took the opportunity to “address the issue” of the insurer’s duty to initiate settlement discussions.  The court explained that the duty to act in good faith “requires an insurer to effectuate settlement when liability is reasonably clear, even in the  absence of a settlement demand.”  First, the court pointed out that the conflict of interest that “animates” an insurer’s duty to settle applies regardless of whether a settlement demand is made by the insured party.  If liability were clear, a rational party would attempt to settle a case that also carried a substantial likelihood of recovery in excess of policy limits.  The court also noted that prior Ninth Circuit case law supported a duty to initiate settlement negotiations in similar circumstances, and that California courts have not held to the contrary.  Finally, the court noted that this result was supported by California Insurance Code section 790.03(h), which explicitly identifies “[n]ot attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear” as an “unfair” practice.  The court ruled that the “proposed instruction was a fair statement of the law.”  In Du’s case, however, settlement discussions were broached early enough to foreclose the plaintiff’s claim that Deerbrook failed to make a settlement offer in time.  It was reasonable for Deerbrook towait until it had corroboration of Du’s injuries before it began settlement discussions.

The Du case is significant because it clearly indicates that an insurer cannot simply wait until the plaintiff makes a demand within limits; it must attempt to proactively settle within policy limits where liability is clear and there is a risk of exposure in excess of the policy limits.  As the court noted, this rule makes sense, because a self-interested party probably wouldn’t wait too long to initiate settlement discussions in such a situation. 

The Du case also illustrates that liability is not the only factor impacting when an insurer should initiate settlement discussions – the insurer must also have some idea of the extent of the insured’s exposure.  If the extent of the harm to the third-party plaintiff – and the resulting exposure – is unclear, then an insurer can argue that a settlement offer is untimely until it obtains proof of the plaintiffs’ injuries.  Deerbrook had been attempting to ascertain the extent of Ms. Du’s injuries, and promptly offered its policy limits once it received corroborating proof.  Of course, an insurer who passively waits for proof of the third party’s damages probably still exposes itself to bad faith liability, since a self-interested party would also seek to determine its own exposure.  Similarly, it stands to reason that when damages clearly exceed policy limits, and liability is clear, the insurer has a duty to promptly initiate settlement discussions, even if the precise extent of the injury is unclear.  As the Ninth Circuit made clear, when it doubt, an insurer must do what its insured would do in the same situation.