Ninth Circuit Bad Faith Ruling is Bad News for Insurers

Du v. Allstate Ins. Co.
(9th Cir. (Cal.) June 11, 2012)

The Ninth Circuit ruled last week that an insurer’s covenant of good faith and fair dealing requires an insurer to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand.

The action arose when Joon Hak Kim’s vehicle collided with another vehicle, injuring all four passengers in the second vehicle, including Yan Fang Du. Kim was insured by Deerbrook Insurance Company, a subsidiary of Allstate Insurance Company, with policy limits of $100,000 for each individual claim and $300,000 for any one accident. Over the course of several months, Deerbrook attempted to obtain medical documentation from Du and a statement from Kim, but was unsuccessful. In February 2006, Deerbrook evaluated the claim and was aware Du’s serious injury claim and accepted Kim’s liability.

No settlement demands or offers were made until June 2006, when Du’s lawyer submitted a $300,000 global demand for all four plaintiffs. Deerbrook told Du’s lawyer that there was insufficient information about any plaintiff except for Du and suggested settling Du’s claim separately for $100,000. In August 2006, Du rejected Deerbrook’s offer. In October 2006, Du filed a personal injury lawsuit against Kim and received a jury verdict in excess of $4 million. Kim then assigned his bad faith claim to Du in exchange for a covenant not to execute.

Du then filed suit against Allstate and Deerbrook, alleging that Deerbrook breached the implied covenant of good faith and fair dealing when it failed to affirmatively settle her claim within Kim’s policy limits even after Kim’s liability for a judgment in excess of policy limits became clear in February 2006. The district court rejected Du’s request to instruct the jury that it could consider Deerbrook’s failure to effectuate a settlement in determining whether Deerbrook breached the implied covenant. Du appealed.

The issue before the Ninth Circuit was whether an insurer has a duty, after liability of the insured has become reasonably clear, to attempt to effectuate a settlement in the absence of a demand from the claimant. The court held that it does, finding that the covenant of good faith and fair dealing requires an insurer to effectuate settlement when liability is reasonably clear. The court ruled, however, that the district court did not abuse its discretion in ruling that there was no foundation for Du’s proposed jury instruction because the issue of settlement was broached at a sufficiently early time in the litigation that it vitiated any claim based on a failure to initiate settlement discussions.

For a copy of the decision, click here.

Thomas F. Segalla  and  Carrie P. Appler

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