The Ninth Circuit held that California law requires insurance companies to work proactively toward a settlement when liability is clear, even if the underlying claimants have not made a settlement demand. Yan Fang Du v. Allstate Ins. Co., 2012 WL 2086584 (9th Cir. June 11, 2012).
A party injured in an automobile accident sued the policyholder, seeking to recover damages for his injuries. The claimant obtained a judgment against the policyholder for approximately $4.1 million. Thereafter, the policyholder assigned his claims against Allstate, his insurance company, to the claimant. The claimant sued Allstate, alleging that it had breached the implied covenant of good faith and fair dealing by failing to settle the claims after it became clear that liability would likely exceed policy limits. At trial, the claimant asked the court to instruct the jury that Allstate’s failure to attempt to reach prompt settlement was relevant to a finding of bad faith. The court rejected the instruction, reasoning that “an insurer has no duty to initiate settlement discussions in the absence of a settlement demand from the third-party claimant” and that bad faith could be found only if Allstate failed to accept a reasonable settlement demand. The jury ultimately found in Allstate’s favor.
On appeal, the Ninth Circuit held that the district court erred in ruling that a breach of the duty of good faith and fair dealing could not be premised on an insurer’s failure to effectuate settlement in the absence of a settlement demand. The court stated that “under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” However, the court held that the evidentiary record did not support a finding of bad faith, and thus that the district court did not abuse its discretion in ruling that there was no foundation for the claimant’s proposed jury instruction. In particular, the Ninth Circuit noted that Allstate had engaged in timely settlement negotiations and that any delays with respect to settlement negotiations were partially attributable to claimant’s lack of cooperation.