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
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