Although California courts have yet to directly address this issue, the Ninth Circuit, in a recently decided case construing California law, held “an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand." Du v. Allstate, 681 F. 3d 1118, 1123 (9th Cir. 2012). According to the Ninth Circuit, an insurer that fails to comply with this standard may be found to have violated its duty of good faith and fair dealing, notwithstanding a good faith belief that the claim is not covered under the insured’s liability policy and that a judgment may be obtained against the insured in excess of the policy limits.
In Du, the policyholder, Joon Hak Kim, assigned to Yang Du, his bad faith claim against his insurers Allstate Insurance Company and subsidiary Deerbrook Insurance Company (“ the Insurer”). After obtaining a judgment of over $4 million against the insured, Du sued the Insurer for bad faith alleging the Insurer failed to effectuate a settlement on behalf of the policyholder after it became reasonably clear that the policyholder’s liability exceeded the policy limit. Concluding that an insurer has no obligation to initiate settlement talks before a demand from a third party claimant and that there was no factual foundation for the instruction because settlement overtures were made “sufficiently early” in the litigation, the trial court rejected Du’s proposed jury instruction which was based on CACI 2337- Violation of Insurance Regulation or Industry Practice. Du appealed.
Although the Ninth Circuit decided that the trial court erred in ruling that an insurer has no obligation to proactively initiate settlement talks without a demand from a claimant, the Ninth Circuit concluded that the trial court did not abuse its discretion in rejecting Du’s proposed jury instruction. The Court determined that there was no evidentiary basis to establish that the Insurer could have made an earlier settlement offer because notwithstanding the Insurer’s repeated requests for information corroborating the claimant’s alleged injuries and alleged medical expenses, that information was only provided to the Insurer after settlement negotiations had commenced.
While the Du holding begs the question of when “liability is reasonably clear” (as those of us in the coverage world know, under certain circumstances, “reasonably clear” can be pretty murky), the debate will rage as to whether in Du the Ninth Circuit has construed or created California law by deciding an insurer must effectuate a settlement when liability has become reasonably clear.