In a published decision with potentially broad and significant implications for the adjudication of insurance claims handled in California, the Ninth Circuit held that insurers must promptly seek to effectuate settlement once liability has become reasonably clear, even in the absence of a settlement demand. The court also held that the genuine dispute doctrine does not apply to the duty to settle third-party claims.
In Du v. Allstate Insurance Company, (Ninth Cir., June 11, 2012) (Case No.: 10-56422), Joon Hak Kim (Kim), insured by Deerbrook, a subsidiary of Allstate Insurance Company, was involved in an auto accident in June 2005. Yan Fang Du (Du) was one of four injured occupants in the car that the insured struck. The Deerbrook policy afforded liability limits of $100,000 per occurrence and $300,000 in the aggregate.
Deerbrook evaluated the claim as a serious injury and accepted liability as of February 15, 2006. The court cited an apparent lack of cooperation by both Du and Kim to provide information that Deerbrook requested in order to evaluate the claim. No settlement demands or offers were made until June 9, 2006, when Du’s attorney, on behalf of all four injured occupants, demanded the $300,000 aggregate limit to resolve the case. Du’s medical specials were $108,742.92, while the other occupants’ medical specials ranged from $6,676 to $13,809. Deerbrook indicated it lacked information to settle the other claims but suggested it would consider settling Du’s claim separately. Du’s attorney rejected Deerbrook’s settlement offer of $100,000 to resolve Du’s claim as being “too little too late.” Ultimately, a jury awarded more than $4.1 million against Kim in favor of Du. Deerbrook paid the $100,000 occurrence limit and Kim assigned Du his rights against Deerbrook in exchange for a covenant not to execute.
Du pursued the assigned claim and sought to hold Deerbrook liable for allegedly failing to accept a reasonable settlement within the policy limits. The trial court gave a modified instruction on the duty to settle, which indicated that the insurer would be liable if it failed to accept a reasonable settlement but the insurer was not obligated to affirmatively effectuate a settlement without a demand from the insured claimant. Du appealed, asserting that the jury instruction was erroneous. Deerbrook argued that an insurer had no duty to extend an offer without a demand from the claimant or, alternatively, that the issue was unsettled in California such that the genuine dispute doctrine precluded bad faith liability.
- Does an insurer have a duty to effectuate a settlement after liability is reasonably clear, even when there is no demand from the claimant?
- Does the genuine dispute doctrine insulate an insurer from bad faith exposure in connection with the duty to settle?
As to the first issue, while no California court has squarely dealt with the question, the Ninth Circuit analyzed prior federal cases and the California Insurance Code to hold that an insurer does owe a duty to effectuate a settlement within limits once liability becomes reasonably certain. The court cited the case of Gibbs v. State Farm Mut. Ins. Co. (9th Cir. 1976) 544 F.2d. 423 for the proposition that a claimant’s informal indications afforded the insurer a reasonable opportunity to settle, which when not acted upon supported a violation of the duty to settle within policy limits.
The court also found support in California Insurance Code §790.03(h)(5), which identifies as one of the enumerated unfair claims handling practices “an insurer’s failure to attempt in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably certain.” The court acknowledged that violations of the unfair claims handling practices do not give rise to a private right of action but can serve as evidence of a breach of the covenant of good faith and fair dealing.
The Ninth Circuit rejected Deerbrook’s argument that the genuine dispute doctrine barred Kim’s claim that it failed to reasonably settle within limits, relying upon Howard v. American Nat’l Fire Ins. Co. (2010) 187 Cal.App. 4th 498, which held that the genuine dispute doctrine does not apply to claims that an insurer failed to settle within limits. The Ninth Circuit also made a blanket statement that the genuine dispute doctrine does not apply to third-party claims (although no California court to date has explicitly held such).
Ultimately, the Ninth Circuit sustained the trial court’s refusal to give Du’s proposed jury instruction on the basis that the facts did not support a finding that the insurer was in a position to make a settlement offer at any earlier point in time.
Insurers should be cognizant that even without an “official” demand within policy limits, an insured can still pursue extra-contractual damages if during the handling of the claim there was a reasonable basis, based on known facts, to demonstrate the likelihood of an excess verdict, particularly if there were indications the claimant would accept an amount within limits. The claim file should be documented with (1) reasonable and prompt attempts to secure any necessary information to evaluate the claim and (2) consideration of settlement options. Under the Ninth Circuit’s analysis, the duty to explore settlement opportunities will likely be enhanced if the policy limits exhaust through the expenditure of defense fees and costs (i.e., burning limits). Those who evaluate bad faith exposures should be aware of a trend among California courts to limit the application of the genuine dispute doctrine in third-party claims.
Adapted from, Darren Le Montree, Lexology, The California State Bar, June 14, 2012.