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Insurer Has Duty to Settle Even in Absence of Settlement Demand

By Caitlin Haney, Litigation News Contributing Editor – September 10, 2012

 

A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit recently held that insurers have an affirmative duty to attempt to settle cases within policy limits once liability becomes reasonably clear. This duty arises even in the absence of a settlement offer by the opposing party. However, the extent of this duty remains unsettled.


The Original Proceeding
Yan Fang Du v. Allstate Ins. Co. involved a 2005 automobile accident that injured Du and her three passengers. Deerbrook, a subsidiary of Allstate, insured Joon Hak Kim, the opposing driver who caused the accident. The policy included limits of $100,000 for each individual and a $300,000 aggregate limit for any one accident.


Deerbrook eventually acknowledged Kim’s liability. Du’s lawyer then submitted a $300,000 global demand for all four plaintiffs, with documentation of Du’s medical costs at $108,742.92. The demand also listed medical costs to the other plaintiffs at a combined total of $33,759. Deerbrook’s adjuster refused to settle the cases on the basis that there was insufficient information about the other plaintiffs to accept that settlement offer.


At trial, the district court rejected Du’s proposed jury instruction on the issue of bad faith. The proposed instruction would allow the jury to consider “whether the defendant did not attempt to reach a prompt, fair, and equitable settlement of Du’s claim after liability had become reasonably clear.” The district court reasoned that bad faith could only be found if Deerbrook failed to accept a reasonable settlement demand rather than for failing to initiate settlement discussions. Following a jury verdict, Du received a judgment against Kim in the amount of $4,126,714.46.


Kim then assigned his bad faith claim to Du. The district court entered a judgment in favor of Deerbrook on the issue of bad faith. The district court reasoned that in the original proceeding, the district court’s decision not to include Du’s jury instruction was proper because it did not comport with California law.


On appeal, the Ninth Circuit ultimately affirmed the district court’s judgment in favor of Deerbrook but on different grounds. It held that although the jury instruction was consistent with California law, Du failed to provide evidence that Deerbrook could have initiated earlier settlement even in the absence of crucial information about the other three plaintiffs. Therefore, even though the instruction created an affirmative duty on the part of the insurer to initiate settlement was proper under California law generally, it was not applicable given the facts of the case.


Interestingly, because Deerbrook previously accepted liability, the Ninth Circuit did not have to address the issue of when liability becomes “reasonably clear.”    


Decision Supported by Federal Law, Not California State Law
The Ninth Circuit relied on three basic arguments for its finding that insurers have a duty to initiate settlement once liability becomes “reasonably clear.” First, the conflict between insurers and insureds regarding settlement exists regardless of whether a settlement demand is made by the injured party. Second, the Ninth Circuit, admitting California has not directly addressed the issue, interpreted California cases to hold that the duty exists under state law to settle in the absence of a settlement demand. Finally, the court reasoned that California courts have not ruled to the contrary.


Interestingly, the Ninth Circuit relied on federal, rather than California state law, in concluding that a duty to settle exists even in the absence of a settlement offer. It relied primarily on Gibbs v. State Farm Mutual Insurance Company, in which the Ninth Circuit held that when an insurer failed to take affirmative action it neglected its duty of good faith. The Ninth Circuit then distinguished other California cases that dealt with the absence of reasonable settlement offers from the case at hand.


Practitioners disagree on the extent to which the court could have relied on existing California law had it chosen to do so. There are “California cases that implicitly hold the same thing,” states James P. Bobotek, Washington D.C., cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee’s Bad Faith Subcommittee.


Others interpret the decision to be “based on policy concerns, as well as the Ninth Circuit’s interpretation of the California Insurance Code,” says Heather Smith Michael, Atlanta, cochair of the same Bad Faith Subcommittee.


A New Majority Rule?
Despite the lack of California precedent, the view adopted by the Ninth Circuit has support from other authorities. “Although not the majority, [the rule] is not unprecedented, as courts in other states, including New Jersey, Wisconsin and Florida, have held similarly and it may be gaining in acceptance,” notes Michael. Bobotek argues that “the decision did not establish a new obligation, but simply clarified existing law.” He further notes that the California Practice Guide: Insurance Litigation had previously noted that insurer’s duty may include initiating settlement.


The Ninth Circuit’s rule may continue to be adopted by other states. “This decision highlights the need for both insurers and insureds to know the law regarding an insurer’s duty to settle, specifically whether it has an affirmative duty to settle, and act accordingly,” cautions Michael.


Extent of Obligation Remains Unsettled
As Deerbrook accepted liability, the Ninth Circuit did not address the issue of when liability becomes reasonably clear. Although the court held the duty to affirmatively explore settlement after liability has become “reasonably clear,” it failed to explain what “reasonably clear” meant, notes Michael. Also unclear is whether liability must be “reasonably clear” to the insured, the insurer, or a “reasonable person.” These uncertainties make it even more challenging for insurer-side attorneys to properly advise their clients.


Keywords: duty to settle, liability, Ninth Circuit


 
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