[author: David Blinn]
Yan Fang Du, et al. v. Allstate Insurance Company, et al.
United States Court of Appeals, Ninth Circuit (June 11, 2012)
California courts are unclear on whether an insurer may be liable for bad faith unreasonable failure to settle a claim when no demand was ever made by the plaintiff. In this case, the Ninth Circuit Court of Appeals 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.
In June of 2005, Yang Fang Du and three others were in a car struck by Allstate’s insured, Joon Hak Kim. Liability was clearly adverse to Kim. Allstate’s policy provided liability coverage of $100,000 per person and $300,000 aggregate for all persons injured. Over several months, Allstate was in contact with numerous lawyers who at different times were representing Du. No information was provided about the nature or extent of the four persons’ injuries until June of 2006, when Du’s attorney submitted a global demand of $300,000 for all four plaintiffs, indicating that Du’s bills were in excess of $108,000, and that the other three plaintiffs had medical bills from $6,600 to $13,808. The carrier indicated that it needed more information on the other three plaintiffs’ injuries to evaluate the global settlement demand, and suggested settling Du’s claim individually. The attorney rejected this suggestion, and demanded the entire $300,000 be paid. In August of 2006, the attorney rejected the offer of $100,000 individually for Du as “too little too late.”
Du subsequently filed suit against Kim in October of 2006, and obtained a verdict of $4,126,714. Allstate paid the $100,000 limits. Kim assigned any claims he had against Allstate to Du in exchange for a covenant not to execute. Du then filed suit against Allstate for bad faith breach of the implied covenant of good faith and fair dealing in refusing to settle Du’s claim within Kim’s policy limits. At trial, Du proposed a jury instruction (CACI 2337) which stated that in determining whether the carrier was in bad faith, the jury could 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 Court refused to give this instruction, and instead gave modified instructions under CACI 2334 and 2337, stating that there was no duty for a carrier to initiate settlement negotiations, but that it could only be found liable if it had “failed to accept a reasonable settlement demand.” The jury found that the insurer had not breached the covenant of good faith, and Du appealed.
The District Court of Appeal affirmed. However, it first 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 Court disagreed with Allstate’s argument that Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858 had already established that under California law, there was no affirmative duty. The Court pointed out that in Merritt¸ the amount of the workers’ compensation lien exceeded the policy limits, “and thus refusal to find bad faith therefore rested not on a categorical rule that there is no legal duty to initiate settlement, but on the facts of that case: any settlement overtures would have been futile.”
The District Court also pointed out that under Insurance Code Section 790.03(h), an insurer had a duty “to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” Further, the Judicial Council had created California Jury Instruction 2337 implementing the language of § 790.03(h) for determination of whether a carrier had acted unreasonably or without proper cause. The Court noted that there was nothing in § 790.03(h) or in Instruction 2337 requiring that a bad faith claim be predicated on an insurer’s refusal of a reasonable settlement demand.
As a secondary issue, the Court limited the application of the “Genuine Dispute” Doctrine to insulate an insurer from bad faith liability to first-party insurance cases, holding that the “Genuine Dispute” Doctrine does not apply to insulate an insurer from bad faith liability in the context of third party claims.
After making these determinations of California law, the District Court affirmed the trial court’s decision, holding that despite the fact that the carrier was under a duty to make a settlement demand, it here met that duty by initiating settlement negotiations in June and July of 2006, after it was first provided with information as to the extent of the claim and the nature of plaintiff’s injuries by plaintiff’s counsel. The Court held that there was no evidence Allstate should have or could have made an offer any earlier, even though liability had been clear for quite some time.
The District Court affirmed the judgment.
The District Court ruled that an insurer has an affirmative duty to make an offer where liability is reasonably clear, even if plaintiff has not made a demand. While this is not necessarily the same decision that would be ruled on by California Courts (and indeed is contrary to the decision in Merritt), carriers should consider this ruling when determining whether to initiate settlement negotiations themselves in cases of clear liability, particularly where a claim may potentially be venued in federal court.
For a copy of the complete decision see: http://www.ca9.uscourts.gov/datastore/opinions/2012/06/11/10-56422.pdf