Ninth Circuit Amends Du v. Allstate Opinion: Declines to Determine Whether an Insurer Has an Affirmative Duty to Settle under California Law
In a decision that gained much attention earlier this year, the Ninth Circuit in Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012) held 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, on October 5, 2012, the Court issued an amended opinion in the case, in which it expressly declined to resolve the legal issue of whether a breach of the good faith duty to settle can be found in the absence of a settlement demand within limits. As a result, Du may no longer be cited for this proposition. Nevertheless, some uncertainty still remains as to whether an insurer can be exposed to liability under California law for breach of the covenant of good faith and fair dealing if it fails to settle in the absence of a within limits settlement demand.
In Du, Joon Hak Kim was involved in an accident when his car collided with another vehicle, resulting in injuries to four individuals including Yan Fang Du. Kim was insured by Deerbrook Insurance Company (“Deerbrook”), a subsidiary of Allstate Insurance Company (“Allstate”). The insurance policy had a $100,000 limit of liability per individual, with an aggregate limit of liability of $300,000 for any single accident. Deerbrook eventually made a $100,000 settlement offer, which was rejected as “too little too late.” Du subsequently filed a personal injury lawsuit against Kim, and obtained a jury verdict in excess of $4 million.
In September 2008, Du, acting as Kim’s assignee, filed a bad faith suit against Allstate and Deerbrook. Du argued that the insurers breached the covenant of good faith and fair dealing by failing to affirmatively settle Du’s claim within Kim’s policy limits even after Kim’s liability for an excess judgment became clear. At trial, Du proposed the following jury instruction, modeled on California Civil Jury Instruction (“CACI”) § 2337:
In determining whether Deerbrook Insurance Company breached the obligation of good faith and fair dealing owed to Mr. Kim, you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Yan Fang Du’s claim after liability [of its insured Kim] had become reasonably clear.
The district court rejected this jury instruction for two reasons. First, the court held that an insurer did not have a duty to initiate settlement discussions in the absence of a settlement demand from the third-party claimant. Second, the court ruled that there was no factual foundation for the instruction because the issue of settlement arose at a sufficiently early time in the underlying litigation.
On appeal, the Ninth Circuit sought to answer the following question: “whether the duty to settle described in CACI 2337 can be breached absent a settlement demand from the third party claimant?” In the June 12, 2012 opinion, the Ninth Circuit answered in the affirmative, holding 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. In addition to relying on prior Ninth Circuit rulings and CACI § 790.03(h), the Court stated that the duty to settle exists because of a conflict of interest whenever there is a significant risk of a judgment in excess of policy limits and there is a reasonable opportunity to settle within policy limits. The Ninth Circuit asserted that “this conflict remains regardless [of] whether a settlement demand is made by the injured party.” The Court nevertheless affirmed the district court’s ruling on the alternative ground that the district court did not abuse its discretion in finding that there was no evidentiary basis for Du’s proposed jury instruction.
In the amended October 5, 2012 opinion, the Court summarized the arguments from each side. On the one hand, noted the Court that CACI § 2337 is based on CACU § 790.03(h)(5), which identifies as an unfair claims settlement practice “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlement of claims in which liability has become reasonably clear.” The Court pointed to several California cases which, it noted, have construed § 790.03(h)(5) as extending the duty to settle beyond mere acceptance of a reasonable settlement demand. On the other hand, the Court discussed several cases cited by the insurer suggesting that no breach of the good faith duty to settle can be found in the absence of a settlement demand within limits. Ultimately, the Court stated that it did not need to resolve this legal issue because it found that the district court did not abuse its discretion in ruling that there was no factual foundation for Du’s proposed jury instruction. Thus, the district court’s ruling was affirmed.
With the amendment to the Court’s opinion, the Du case no longer holds that the duty to settle can be breached absent a within-limits settlement demand from the third party claimant. As noted in Du, both carriers and policyholders can raise competing arguments and cite competing authority on the issue, and so it remains for future litigants and courts to decide.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.