When Do You Settle a Policy Limits Case?

On Behalf of | Aug 1, 2012 | Publications

The Federal Ninth Circuit Court of Appeal, applying California law, has held that an insurance company may breach its implied duty of good faith and fair dealing by failing “to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” Du v. Allstate Insurance Company, et al. (2012) 681 F.3d 1118. The Court found this duty despite affirming the trial court’s refusal to give a jury instruction requested by plaintiff’s counsel to instruct the jury on the carrier’s purported refusal to accept a reasonable settlement demand within policy limits. 

In June 2005, appellant Yang Fang Du and three other occupants were injured when a car driven by Joon Hak Kim collided with their vehicle. Mr. Kim had a $100,000 per person, $300,000 per accident Deerbrook Insurance Company policy. Deerbrook, a subsidiary of Allstate Insurance Company, became aware in early 2006 that this was an adverse liability case with serious injuries. Almost one year after the accident, the attorney for all four injured plaintiffs sent Deerbrook a $300,000 policy limit demand to settle the four claims. His demand included $108,742.92 in medical bills for Ms. Du, and nearly $34,000 in medical bills for the other three passengers. Deerbrook rejected the $300,000 demand but offered $100,000 for Ms. Du’s injuries.

This suit went to trial and the jury returned a verdict in favor of Ms. Du in the amount of $4,126,714.46. Mr. Kim thereafter assigned his bad faith rights to Ms. Du in exchange for a covenant not to execute. Ms. Du then filed her bad faith case against Deerbrook, alleging that they had violated their implied duty of good faith and fair dealing by not settling Ms. Du’s claim within Mr. Kim’s policy limits. Ms. Du requested a jury instruction that did NOT include language requiring plaintiff in the underlying action to make a demand before the Deerbrook had a duty to make an offer. The court refused to give the instruction and instead gave an instruction requiring a plaintiff’s demand before the duty arose.

There exists an implied covenant of good faith and fair dealing in every liability insurance contract. Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654. This covenant includes the duty to accept a reasonable offer of settlement. PPG Indus., Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310. This implied covenant requires the insurance company to settle within policy limits when there is a substantial likelihood of recovery in excess of those limits. Kransco v. American Surplus Lines (2000) 23 Cal.4th 390. InJohansen v. California State Auto Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, the California Supreme Court held that where it is likely that the judgment against the insured will exceed the policy limits, the covenant of good faith requires the carrier to settle the claim. In essence, public policy does not allow for an insurance carrier to gamble at trial with the policy holder’s money.

The Du holding expands an insurance company’s duty to offer to settle within the policy limits where liability has become reasonably clear. It will be interesting to see if there will be a reduction in policy limits demands in light of this court’s finding that a plaintiff’s demand is no longer required where liability is reasonably clear. For insurers and their clients, it becomes all the more important to reasonably identify cases of probable liability where policy limits might be exposed, and to perform diligent and early investigations.

Archives

Serving California’s Businesses and Individuals

Years