Our July/August Alert discussed a Ninth Circuit decision requiring insurance companies to work proactively toward a settlement when liability is clear, even absent a settlement demand from underlying claimants. Yan Fang Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012). Although the court ultimately determined that the factual record did not support a finding of bad faith, the court’s pronouncement of law was significant and arguably imposed a heightened duty on insurers to effectuate settlements in certain circumstances. Last month, however, the Ninth Circuit reversed course, issuing an amended ruling which upheld the insurer’s victory on the bad faith claim without imposing an affirmative duty to settle. Yan Fang Du v. Allstate Ins. Co., 2012 WL 4748679 (9th Cir. Oct. 5, 2012). In the amended opinion, the court sidestepped the legal question of whether a duty to settle can be breached absent a settlement demand from a thirdparty claimant, and instead resolved the dispute on the basis that the facts presented did not support a bad faith jury instruction in the first place. The Ninth Circuit also backtracked on another important bad faith issue. In the prior holding, the court held that the “genuine dispute” doctrine, which shields insurance companies from bad faith claims for unsettled legal issues, did not apply to bad faith claims based on an insurer’s duty to settle third-party claims. The amended ruling, by resolving the dispute solely on factual issues, avoided deciding this issue altogether.
While the amended ruling in Yan Fang Du represents a clear victory for insurers, questions relating to an insurer’s duty to proactively seek settlement in the absence of a demand are unlikely to disappear. As the Ninth Circuit noted, California case law in this context is inconsistent, and policyholders are likely to continue asserting bad faith claims for failure to proactively seek settlements.