A Duty (to Settle) Too Far
Sometimes, courts should leave well enough alone – and this especially applies to the law that has been developed over decades as to a liability insurer’s duty to settle third-party claims.
In the overwhelming majority of liability claims, the third party’s claim is resolved relatively quickly and usually within the policy limits. In those instances when an insurer rejects a reasonable settlement offer, and the liability of the insured is reasonably clear, the insurer’s rejection of such an offer (and its exposing its insured to an excess of policy limits verdict) may be found to constitute a breach of the covenant of good faith and fair dealing, otherwise known as bad faith. The basic requirement to trigger such a duty to settle is a demand by the injured party.
A recent decision by the Ninth Circuit Court of Appeals seeks to change the rules. Not only has the above duty-to-settle tenet worked quite effectively for years, but the rule change envisioned by the Ninth Circuit would open the floodgates to higher insurance premiums not to mention more (and wholly unnecessary) bad faith litigation. Indeed, such a rule change would make settlement less likely, contrary to the accepted public policy in favor of settlement and protecting insureds from personal liability.
In Du v. Allstate Insurance Company, 681 F.3d 1118 (9th Cir. June 11, 2012), a three-judge panel of the Ninth Circuit concluded 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.” (Emphasis added.)
No California decision has ever extended the duty to settle to cases where there is no demand presented by the injured party. Indeed, an array of California Supreme Court and Court of Appeal decisions over more than 50 years has established that “an insurer may be held liable for a judgment against the insured in excess of its policy limits where it has breached its implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within the policy limits.” See, e.g., Commercial Union Assurance Companies. v. Safeway Stores, Inc., 26 Cal.3d 912, 916-17 (1980).
Ironically, after announcing its new rule in Du, the Ninth Circuit went on to conclude that, in the context of that case, there was no evidence that the insurer “should or could have made an earlier settlement offer” to the injured party and therefore the trial court did not err in refusing a proposed jury instruction requiring the insurer to “effectuate” a settlement within policy limits after liability has become reasonably clear.
As noted above, the system works well. Once a third party determines that his or her claim is one that he or she is willing to compromise for an amount within the policy limits, the demand is made to the insurer. At that point, the insurer must consider the demand, and, if liability is reasonably clear, either accept the demand or risk exposure to uncapping the policy limits. The present rule places the insurer on notice that making the conscious decision not to settle may have severe consequences.
In contrast, without any demand by the third party, the insurer may have little, if anything, by which to base a demand. In fact, that was the case in Du, where the injured third party had failed to provide any medical documentation to the insurer so that it could assess the seriousness of the injury and determine whether this claim was one that required the payment of the policy limits. Yet, despite the lack of cooperation from the injured party in Du, when a policy limits offer was made by the insurer, the third party rejected the offer as “too little too late.” The third party then proceeded to trial, obtained a huge excess of policy limits liability verdict and brought a bad faith claim against the insurer. Fortunately, as stated above, the Du paradigm did not fall within the rule announced by the appellate court.
The Ninth Circuit’s pronouncement in Du that a liability insurer must “effectuate” or initiate a settlement within policy limits after liability has become reasonably clear is bad law and makes no sense in the real world. As a federal court decision seeking to apply California state law, but based on no actual state court authority, one would hope that the Du aberration is ignored by future courts. Better yet, when next confronted with a bad faith failure to settle case, perhaps the California Supreme Court or one the panels of the California Court of Appeal will relegate Du to the graveyard of appellate decisions dead on arrival.