Every attorney knows (or should know) that an insurer has a duty to settle claims against it insured. In 1958, the California Supreme Court held that “the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case …” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659.) Since then, the debate has focused on defininingg what is an “appropriate case,” which includes the issue of whether an insurer has an affirmative duty to settle a claim absent a settlement demand from the third-party claimant. A recent Ninth Circuit case addressed this issue but was able to avoid answering the hard question of whether an insurer has an affirmative duty to settle because of the claimant’s inept failed to trigger the insurer’s duty to settle. Du v. Allstate Insurance Company (9th Cir. 2012) 697 F.3d 753. 

In Du, prior to litigation the insurer had offered one of the claimants’ the $100,000 per claimant policy limits, which claimant’s attorney rejected in his attempt to trigger the policy’s aggregate $300,000 limits for the four claimants. The underlying judgment for the most injured claimants was $4,126,714.46. The litigation against the insurer concerned the claimant’s attempt to recover the excess of policy limits judgment based on a bad faith failure to settle claim.

The facts: On June 17, 2005, the Insured’s car collided with another vehicle, and all four occupants (collectively, the “Third-Party Claimants”) of the second vehicle sustained injuries. The Insurer attempted to obtain medical documentation from the Third-Party Claimants and a statement from its Insured, but was not successful. Notwithstanding the lack of cooperation, on February 15, 2006 (eight months after the accident), the Insurer was aware that there was a claim of serious injury by and accepted its Insured’s liability.

No settlement demands or offers were made until June 2006, when one of the Third-Party Claimants’ lawyer made a $300,000 global demand for all four plaintiffs based on a total of $142,501 in medical costs: Third-Party Claimant #1 – $108,742.92; Third-Party Claimant #2 – $6,676.00; Third-Party Claimant #3 – $13,274.00; and Third-Party Claimant #4 – $13,809.00. The Insurer’s adjuster responded that there was insufficient information about Third-Party Claimants #2-4, but suggested settling Third-Party Claimant #1’s claim separately. In August 2006, the Third-Party Claimants’ lawyer rejected the Insurer’s $100,000 settlement offer to Claimant #1’s as “too little too late.”

On October 31, 2006, Third-Party Claimant #1 filed a personal injury lawsuit against the Insured, which resulted in $4,126,714.46 jury verdict against the Insured. The Insurer paid the $100,000 to partially satisfy the judgment. The Insured then assigned his bad faith claim to Third-Party Claimant #1 in exchange for a covenant not to execute the rest of the judgment.

The “bad faith” failure to settle claim: In Comunale, the California Supreme Court specifically held: “When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.” Id., at 659. The Court further held that an insured who wrongfully refuses to accept a reasonable settlement within the policy limits “in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.” Id., at 661.

Third-Party Claimant #1 alleged that the Insurer breached the implied covenant when it failed to affirmatively settle her claim within the Insured’s policy limits because the Insured’s liability for a judgment in excess of the policy limits became clear on February 15, 2006. Specifically at issue in the reported decision was the district’s court refusal to give a jury instruction based on the Judicial Council of California Civil Jury Instruction (“CACI”) 2337 (“Violation of Insurance Regulation or Industry Practice”):

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 presence or absence of this factor alone is not enough to determine whether Deerbrook Insurance Company’s conduct breached the obligation of good faith and fair dealing. You must consider Deerbrook Insurance Company’s conduct as a whole in making this determination.

The district court rejected this proposed jury instruction because it concluded that an insurer has no duty to initiate settlement discussions in the absence of a settlement demand from the third-party claimant.

The Ninth Circuit affirmed the district court’s decision because it determined that there was no “factual foundation” for the proposed jury instruction. Specifically, the district court had held “the issue of settlement was broached at a sufficiently early time” because as of June and July 2006, the Insurer had made a $100,000 policy limits offer, which was refused. The Ninth Circuit held, “[i] sum,” that there was no evidence that the Insurer should or could have made an earlier settlement offer to Third-Party Claimant #1.

Comments: What is missing from the facts why plaintiff’s attorney Marc Katzman believed that he had triggered the policy’s aggregate $300,000 limits with medical specials totaling $142,501. Presumably other “specials,” such as loss wages/income, justified the $300,000 demand, but the case does not provide the details.

The court also at least implicitly held that an insurer does not need to rely solely on the claimant’s claims package in determining whether to settle. The court noted that Third-party Claimant #1’s “injuries and medical bills were the uncorroborated and conflicting assertions by the Claimant and her counsel.” Furthermore, the Claimant’s expert conceded that the Insurer “could not base a settlement offer solely on the representations of claimant and claimant’s lawyer.” The Claimant’s expert further admitted that the Insurer could not have obtained the medical records without getting them from the Claimant’s lawyers, and record showed that the Insurer had made repeated efforts to obtain the information. So the lesson for plaintiff’s attorneys is offer to provide the insurer independent access to the claimant’s damages, or least cooperate with such requests.

Another lesson is perhaps the deadlines that claimant’s attorneys often provide on policy limits demands. In Du, the plaintiff’s attorney made the policy limits demand in June, which the insurer accepted by August. However, plaintiff’s attorney rejected the insurer’s offer, stating: “’too little too late.’” The Court’s inclusion of that quote further indicates its result orientated result.

My general opinion is that too many insurers refuse to reasonably settle claims, but instead force claimants into expensive and time consuming litigation, which generally results in settlements that should have and could have occurred without so much “wailing and gnashing of teeth.” The Du case, at least as presented by the Ninth Circuit, provides an example for insurers to cite to in refusing to early settle claims.