Ninth Circuit Rules that an Insurer Has an Affirmative Duty to “Effectuate a Settlement” Once its Insured’s Liability in Excess of the Policy Limits Becomes “Reasonably Clear”
June 21, 2012
By: Bryan M. Weiss
On June 11, 2012, the United States Court of Appeal for the Ninth Circuit issued an opinion that has broad implications for insurers faced with claims against its insureds exceeding the policy limits. In those situations, the court held that an insurer, as part of its duties under the covenant of good faith and fair dealing, has a duty to “effectuate a settlement” even in the absence of a settlement demand from the claimant.
In Du v. Allstate Insurance Company, ___ F.3d ___, Deerbrook’s insured, Kim, was involved in an automobile accident with Du. All four occupants of the Du vehicle sustained injuries and submitted claims. The aggregate policy limits were $300,000, with a $100,000 per claim limit. Deerbrook acknowledged that Du’s injuries were severe and accepted its insured’s liability.
In the months following the accident, Deerbrook attempted to secure documentation from the claimants regarding their injuries, but the claimants did not cooperate. Eventually, the attorney representing all four claimants submitted a global demand of $300,000 for all four claimants. The adjuster advised that she was prepared to pay the full $100,000 limits to Du, but did not have enough information to evaluate the remaining claims. The attorney rejected that offer, demanding that all claims had to be settled at the same time. He thereafter rejected the $100,000 offer to Du as being “too little too late.”
Du then filed a lawsuit against the insured and received a jury verdict in excess of $4 million. Deerbrook paid its $100,000 limits to partially satisfy the judgment and the insured assigned his bad faith, “failure to settle” claim to Du in exchange for a covenant not to execute. Du then sued Deerbrook for bad faith, alleging that Deerbrook committed bad faith by failing to affirmatively settle Du’s claim within policy limits after its insured’s liability for a judgment in excess of those limits became clear.
At trial, the district court rejected Du’s proposed jury instruction which would have instructed the jury that it could find Deerbrook liable for bad faith if it concluded that it did not attempt in good faith to reach a prompt, fair and equitable settlement of Du’s claim after the liability of its insured had become reasonably clear. Instead, the trial court instructed that “bad faith” could only be found if Deerbrook had failed to accept a reasonable settlement demand, not for failing to affirmatively effectuate a settlement. Under those instructions, the jury found that Deerbrook did not fail to accept a reasonable settlement demand within policy limits and judgment was entered in favor of Deerbrook.
On appeal, the issue was whether or not 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?” Deerbrook argued that no such duty exists, and that instead, the duty of good faith is breached only if the insurer fails to accept a reasonable policy limits demand. Ultimately, the 9th Circuit held that “an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” It reached that result by analyzing the rationale behind the insurer’s duty to settle claims against its insured that are likely to exceed the policy limits, as well as statutes and regulations requiring insurers to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. The sum total of these considerations means that an insurer faced with an excess damages claim against its insured, when liability is clear, cannot simply wait for a policy limits demand to be made – it must instead take affirmative steps to effectuate a settlement. Thus, the District Court’s rejection of Du’s proposed jury instruction was improper.
However, under the facts of this case, the 9th Circuit held that the judgment must be affirmed because there was no factual foundation for imposing the affirmative duty to settle on Deerbrook. There was no dispute that Deerbrook, in fact, offered to settle Du’s claim for the full amount of the policy limits. Du’s argument was that the case would have been settled earlier had Deerbrook initiated earlier settlement negotiations. The court, however, reviewed the factual chronology and held that due to the lack of information about the claim, Deerbrook could not have made a settlement offer any earlier than when it did.
Lastly, the 9th Circuit also addressed the concept of the “genuine dispute” doctrine, which generally holds that an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability. Deerbrook argued that it should not be held in bad faith because its duty to settle was “unsettled.” Even though that argument ultimately had no bearing on the court’s final ruling, the court nevertheless held that the “genuine dispute” doctrine does not apply here. It noted that while that doctrine applies to first party bad faith cases, its application to third party cases is more limited. Specifically, an insurer that refuses to settle a case based on the erroneous belief that there is no coverage does so at its own risk and cannot rely on the “genuine dispute” doctrine as a defense to a bad faith/failure to settle claim.
This case has obvious implications to liability insurers in California. Once liability against the insured is clear and the damages are likely to exceed the policy limits, an insurer cannot simply wait for a policy limits demand to be made. Rather, once the insurer has sufficient information to evaluate the claim, it must take affirmative steps to effectuate a settlement. What those actual steps are remains unclear, i.e., must the insurer leave “no stone unturned” in trying to settle the case (such as scheduling a mediation) is the simple act of communicating a desire to settle and soliciting a demand enough? Regardless, what is clear from this decision is the insurer cannot simply sit back and wait for the claimant to make the first move.
The other noteworthy aspect of this decision is the comment regarding the “genuine dispute” doctrine and third party claims. It has always been the law that when an insurer rejects a policy limits demand based on an erroneous, but “good faith,” belief that there is no coverage for the damages being claimed, that “good faith” belief is not a defense – the insurer is liable for the entire excess judgment. In that regard, this court’s holding is of no great import. Nevertheless, it would seem that the doctrine still applies to other aspects of third party claims. For example, if an insurer, based on a genuine dispute as to coverage, refuses to indemnify an insured after judgment is entered, that genuine dispute may negate bad faith (Dalrymple v. United Services Auto. Assn. (1995) 40 Cal.App.4th 497, 523; Howard v. American National (2010) 187 Cal. App. 4th 498).