After an insured’s liability has become reasonably clear, an insurer has a duty to attempt to effectuate settlement on behalf of the insured, even in the absence of a settlement demand from the claimant. ( Du v. Allstate Ins. Co. (9th Cir. 2012) __ F.3d __)
Facts
In June 2005, Joon Hak Kim caused a car accident in which Yang Feng Du and three other persons were injured. At the time of the accident, Kim was insured under a Deerbrook Insurance Company automobile policy with bodily injury liability limits of $100,000 each person / $300,000 each accident.
In the months following the accident, Deerbrook unsuccessfully tried to obtain a statement from Kim as well as medical documentation from Du and the other three injured parties. Notwithstanding the lack of cooperation by Kim and Du, by mid-February 2006, Deerbrook personnel knew that Kim was liable for the accident and knew that Du was claiming a serious injury.
In June 2006, Du and the other three injured persons, through their attorney, wrote to Deerbrook and made a global demand to settle all four claims against Kim for the policy’s “each accident” limit of $300,000. The attorney simultaneously provided Deerbrook with copies of medical bills for Du totaling almost $109,000, and indicated that the other three claimants had medical bills of approximately $6,700, $13,300 and $13,800, respectively. Deerbrook’s adjuster responded that Deerbrook did not have sufficient information about the other three claimants, but suggested settling Du’s claim separately for the policy’s “each person” limit of $100,000. The attorney rejected that suggestion and indicated that Deerbrook had to pay the full $300,000 to settle all the claims.
Shortly thereafter, in July 2006, Deerbrook offered to pay $100,000 in settlement of Kim’s alleged liability to Du. In August 2006, Du, through her attorney, rejected Deerbrook’s settlement offer to Du as “too little, too late.”
Du later filed a personal injury action against Kim, and Du eventually obtained a $4.1 million judgment against Kim. Deerbrook paid the $100,000 available under Kim’s policy in partial satisfaction of the judgment. Kim then assigned his bad faith claim to Du in exchange for Du’s agreement not to execute on Kim’s personal assets.
Later, Du, as Kim’s assignee, filed suit against Deerbrook in federal district court in an attempt to collect the portion of the judgment in excess of the policy limit. Du essentially alleged that Deerbrook had acted in bad faith by failing to attempt settlement of Kim’s liability to Du even after Kim’s liability for a judgment in excess of the policy limits became reasonably clear in February 2006.
At trial of the bad faith case, Du offered a jury instruction which stated that in determining whether Deerbrook had acted unreasonably toward Kim, the jury could consider whether Deerbrook failed to attempt settlement of Kim’s liability after Kim’s liability had become reasonably clear. The district court refused the proffered instruction on the grounds that (1) an insurer has no duty to initiate settlement discussions absent a settlement demand from the claimant, and (2) in any event, there was no evidentiary basis for such an instruction in this particular case. The district court instead instructed the jury that it could find that Deerbrook had acted in bad faith toward Kim only if Deerbrook had failed to accept a reasonable settlement demand by Du.
The jury returned a defense verdict in favor of Deerbrook. Du appealed, claiming that the district court had erred in refusing Du’s jury instruction on an insurer’s duty to settle.
Holding
The Ninth Circuit Court of Appeals affirmed the defense judgment in favor of Deerbrook.
However, in affirming the judgment, the Ninth Circuit, purporting to apply California law, held that once an insured’s liability becomes reasonably clear, an insurer has an affirmative duty to attempt to settle on behalf of the insured within the policy limits – even absent a settlement demand by the claimant. The Ninth Circuit reasoned that there is a conflict of interest between the insurer and the insured whenever there is a significant risk of an excess judgment against the insured, and this conflict exists “regardless of whether a settlement demand is made by the injured party.” Further, while the California state courts have never specifically addressed the question, the Ninth Circuit has previously interpreted California law as imposing an affirmative duty on an insurer to attempt settlement even without a settlement demand by the claimant. Last, California Insurance Code section 790.03(h) specifically defines “unfair claims settlement practices” as including “not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” Thus, the Ninth Circuit agreed that Du’s proposed jury instruction accurately stated California law, i.e., once an insured’s liability becomes clear, an insurer has an obligation to attempt settlement on behalf of an insured, even without a demand by the claimant.
The federal appellate court then concluded that, while Du’s proposed jury instruction accurately stated California law, there was no evidentiary support for the instruction in this particular case . The appellate court emphasized that while Deerbrook had repeatedly asked Du’s counsel for documentation regarding Du’s injuries and medical expenses, Du’s counsel did not provide Deerbrook with any such documentation until June 2006. Very shortly thereafter, in June and July 2006, Deerbrook offered the $100,000 policy limit to Du, which Du rejected. The appellate court thus concluded that, while Deerbrook did have a duty to initiate settlement talks with Du, Deerbrook did so in a timely fashion. Accordingly, since there was no evidence supporting Du’s proposed instruction, the district court did not abuse its discretion in refusing to give the instruction.
Comment
California courts have commonly dealt with “duty to settle” issues in situations in which the insurer has allegedly rejected a reasonable settlement offer within policy limits. At issue in this case was whether the duty to settle more broadly requires an insurer to attempt settlement when liability is reasonably clear, even in the absence of a settlement demand . The federal appellate court here held that the duty to settle includes a duty to proactively attempt settlement so as to avoid exposing the insured to a judgment in excess of the policy limits.
The Ninth Circuit’s decision in this case is technically not binding on California state courts, which have previously made statements suggesting that a settlement demand within policy limits is a requirement in order to impose liability on an insurer for a judgment in excess of the policy limits. (See, e.g., Coe v. State Farm Mutual Automobile Ins. Co . (1977) 66 Cal.App.3d 981, 989 and Merritt v. Reserve Ins. Co . (1973) 34 Cal.App.3d 858, 873.) In its ruling in this case, the Ninth Circuit dismissed these prior statements by the California courts as mere ” dicta . ” Whether California state courts ultimately agree with the Ninth Circuit on this issue remains to be seen.
In the meantime, in cases where the insured’s liability is reasonably clear and there is a risk of a judgment in excess of the policy limits, a cautious insurer may want to consider affirmatively attempting settlement, even if the claimant has not made any settlement demand. Failure to do so may result in a subsequent claim that the insurer is liable for the full amount of any judgment entered against the insured – including amounts in excess of the policy limit.