Ninth Circuit Increases Duty of Insurers To Settle Third-Party Claims

In each insurance policy, California law implies a covenant of good faith and fair dealing. This implied covenant applies to insurers and requires them to settle within the policy limits where there is substantial likelihood of recovery in excess of those limits. On June 11, 2012, the Ninth Circuit Court of Appeals extended that duty and issued a decision in Yan Fang Du v. Allstate Insurance Company, holding that an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. (Yan Fang Du v. Allstate Insurance Company, et al.,681 F.3d 1118)

On June 17, 2005 Joon Kim was involved in a motor vehicle accident when his car collided with a vehicle containing four parties including appellant: Yan Du, Li Wang, Wan Feng and Shio Feng. At the time, Kim maintained insurance limits through Deerbrook Insurance of $100,000 per person, $300,000 per accident. Following initiation of a claim, Deerbrook evaluated the case on February 15, 2006, wherein they were aware it concerned serious injury of Du and that liability for the accident was accepted. On June 9, 2006, a global settlement demand of $300,000 was made for all four parties wherein the four claimants’ medical costs totaled $142,501.92. In response, Deerbrook’s adjuster advised that insufficient information was known regarding the three claimants other than Du and proposed settlement of Du’s claim for $100,000; this was rejected. On October 31, 2006, Du filed suit and a jury returned a verdict for $4,126,714.46. Kim then assigned his bad faith claim against Deerbrook to Du and Du filed against Allstate and Deerbrook. Du alleged Deerbrook breached the covenant of good faith and fair dealing when it failed to affirmatively settle the doctor’s claim within the policy limit after Kim’s liability for a judgment in excess of the policy became clear on February 15, 2006. At trial the District Court rejected a jury instruction proposed by Du instructing that Deerbrook had an affirmative duty to settle and that their failure to do so may be considered as breach of the covenant of good faith and fair dealing. Judgment was entered for Deerbrook and Du appealed arguing the excluded instruction was proper.

On appeal Du argued that once liability is reasonably clear and damages are established in excess of the policy, an insurer has a duty to effectuate settlement even in the absence of a demand. The Ninth Circuit affirmed the District Court’s ruling on the facts but not the law, holding that while Du’s proposed jury instruction was consistent with the law, it was improper due to a lack of evidence showing that Deerbrook could have extended an earlier settlement offer to Du in the absence of crucial claim information. However, the Court rejected the requirement that a settlement demand was a prerequisite for bad faith liability. As a result, insurers will be required to act more affirmatively in resolution of claims where potential excess liability exists.


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