Case Briefs

Over the next several months, Deerbrook attempted to obtain medical documentation from Du and a statement from Kim but was not successful. Notwithstanding the lack of cooperation by Du and Kim, Deerbrook evaluated the claim file and, aware that there was a claim of serious injury by Du, accepted Kim's liability. One year after the accident, Du provided documentation of her medical expenses for the first time, which totaled $108,742.92. At that time, Du's lawyer made a $300,000 global settlement demand for all four injured parties. The documentation provided for the other three individuals showed medical expenses in the amounts of $6,676, $13,274, and $13,809. Deerbrook advised Du's lawyer that insufficient information was provided regarding the other three parties, and suggested settling Du's claim separately. Du's lawyer rejected that suggestion and insisted on a $300,000 global settlement. Two months later, Deerbrook again tried to settle just Du's claim by offering $100,000, which offer was again rejected.

Thereafter, Du filed a personal injury lawsuit against Kim and obtained a judgment against him for more than $4.1 million. Kim assigned his bad faith claim to Du, and Du brought suit against Deerbrook alleging breach of the implied covenant of good faith and fair dealing.

At trial, Du requested an instruction that the jury could consider whether Deerbrook did not attempt in good faith to reach a prompt, fair and equitable settlement of Du's claim after liability was reasonably clear. The district court rejected the proposed instruction, concluding that an insurer has no duty to initiate settlement discussions in the absence of a demand from a third-party claimant. The jury was then instructed and asked to determine whether a breach occurred caused by Deerbrook's failure to accept a reasonable demand. The jury answered no, and judgment entered for Deerbrook. This appeal followed.

The central issue on appeal was whether an insurer has a duty, after liability of the insured has become reasonably clear, to effectuate a settlement in the absence of a demand from the claimant. Because the Court of Appeals felt that confusion existed regarding the scope of an insurer's duty to settle, it took the opportunity to address the issue even though it was not ultimately necessary to resolve the appeal.

On this issue, the Court of Appeals concluded that an insurer does in fact have a duty to effectuate settlement when liability is reasonably clear, even absent a demand. In resolving the issue, the court reasoned that a conflict of interest exists, regardless of whether a demand is made, when there is a significant risk of a judgment in excess of policy limits and a reasonable opportunity to settle within those limits. The court further reasoned that if an insurer conducts itself as though it alone is liable for the entire amount of the judgment, as the general duty of good faith requires, a rational party should attempt to settle if there is a substantial likelihood of an excess verdict and a reasonable opportunity to settle within limits. Acknowledging that California state courts had not squarely addressed the issue, the Court of Appeals gleaned further support from the fact that no state court had ruled to the contrary, and from the fact that the Court of Appeals had previously interpreted California law in this manner. Finally, the Court of Appeals turned to the insurance code, which has deemed a failure to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear an unfair claims settlement practice. The Court of Appeals noted that it previously interpreted the insurance code as requiring an insurer to actively investigate and attempt to settle a claim by making, and accepting, reasonable settlement offers once liability has become reasonably clear, albeit in the now obsolete context of a private
right of action under the code.

The Ninth Circuit also addressed and rejected Deerbrook's argument that the genuine dispute rule insulated it from bad faith liability because its obligations as to whether it should settle were unsettled. In so doing, the court distinguished third-party and first-party cases, concluding that the genuine dispute doctrine does not apply to the former and that a good faith belief in non-coverage does not insulate an insurer from liability for failure to settle a claim.

Finally, despite the Ninth Circuit's conclusion that an insurer has an affirmative duty to attempt to effectuate settlement even absent a demand, it nevertheless concluded that, in this particular case, there was no evidentiary basis for the requested jury instruction. The record supported Deerbrook's contention that if there was a duty to initiate settlement talks, it did so in a timely fashion in view of the circumstances. Deerbrook could not have made an earlier settlement offer because it lacked corroborating proof of Du's injuries and medical expenses. Nor did Deerbrook have earlier proof regarding the other three individuals injured in the accident. The Court of Appeals concluded that there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du and, as such, the district court did not abuse its discretion in not providing the
requested jury instruction.

The effect of this decision remains to be seen in terms of whether California state courts will agree with the Ninth Circuit's interpretation of California law, and whether the analysis regarding settlement overtures absent a demand will be considered mere dicta.

CA Supreme Court Adopts 'All-Sums-with-Stacking' Rule

In a long-running case involving the Stringfellow hazardous waste site, the California Supreme Court, applying California law, has adopted an “all-sums-with-stacking” default allocation rule for insurer liability in the context of long-tail environmental claims. See State of California v. Continental Ins. Co., 2012 Cal. LEXIS 7324 (Cal. Aug. 9, 2012).

The policyholder, the state of California, designed and supervised the construction of an industrial waste site in a canyon into which 30 million gallons of waste was deposited. The site suffered from a number of design defects, allowing contaminants to escape beneath the surface and through a barrier dam. In addition, heavy rains in 1969 and 1978 caused contaminants to overflow the dam. In separate litigation, the state was held liable for all past and future remediation costs at the site.

The state sought coverage from its various insurers, resulting in trial court rulings that: 1) the “all sums” approach applied; 2) the policyholder was not entitled to stack the limits of all triggered policies; 3) continuous damage from disposal and migration of wastes constitutes one occurrence; 4) the insurers were entitled to a setoff in the amount of $120 million for sums received by the policyholder in settlements with other insurers; 5) the policyholder had no duty to mitigate losses and its recovery could not be reduced for failure to implement remedial actions in a timely fashion; and 6) evidence of a lost policy maintained in a reinsurer's underwriting file was admissible under the ancient records exception to the hearsay rule.

On appeal, the intermediate appellate court affirmed the decision with three exceptions. First, it held that the state could “stack” policy limits across policy periods. Second, the court refused to substantively engage the issue of whether the insurers were entitled to a setoff after concluding, in light of its holding on stacking, that the total loss would be so large that the issue would be moot. Finally, it held that the trial court incorrectly admitted documents indicating the existence of a lost policy from a reinsurer's underwriting files. See State v. Continental Insurance Co., 88 Cal. Rptr. 3d 288 (Cal. Ct. App. 2009).

The California Supreme Court now has affirmed the “all-sums-with-stacking” rule. The court did not substantively address any of the other issues. The California high court began by noting that its prior decisions in Montrose Chemical Corp. v. Admiral Insurance Co., 913 P.2d 878 (Cal. 1995) and Aerojet-General Corp. v. Transport Indemnity Co., 948 P.2d 909 (Cal. 1997) supported an “all sums” approach to liability. After acknowledging that a large number of high courts in other jurisdictions had adopted a pro rata rule for indemnity allocation, the court concluded that the policies here obligated the insurers to pay “all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was 'on the loss.'” The court rejected the argument that the “during the policy period” language, which appeared in the definition of “occurrence,” limited the insurers' indemnification obligations. It stated that the “during the policy period” language did not appear in the insuring agreement section of the policies, and therefore was “neither 'logically [n]or grammatically related to the 'all sums' language in the insuring agreement.'”

Next, the court approved “stacking” of the insurance policies. It reasoned that “[t]he all-sums-with-stacking indemnity principle incorporates the Montrose continuous trigger of coverage and the Aerojet all sums rule, and 'effectively stacks the insurance coverage from different policy periods to form one giant 'uber-policy' with a coverage limit equal to the sum of all purchased insurance policies.'” It stated that these policies, which did not contain anti-stacking language, permitted stacking.

The court contended there were “numerous advantages” of the all-sums-with-stacking rule, stating that it “resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury.” The court further stated that the rule “comports with the parties' reasonable expectations” and “ascertains each insurer's liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.” The court also stated that “in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking.”

This California decision on allocation stands in contrast to leading cases from other state high courts, such as the Massachusetts Supreme Judicial Court in Boston Gas Co. v. Century Indemnity Co., 910 N.E.2d 290 (Mass. 2009), the New Jersey Supreme Court in Owens-Illinois, Inc. v. United Insurance Co., 650 A.2d 974 (N.J. 1994), and the New York Court of Appeals in Consolidated Edison Co. v. Allstate Insurance Co., 774 N.E.2d 687 (N.Y. 2002). Those courts have all found that an insurer can be held liable only for its fair share of a policyholder's liability ' the amount attributable to the time period during which the policy was in force.

Brian Oubre, of Gordon & Rees, LLP, contributed the first Case Brief. Laura Foggan, Parker J. Lavin and Edward R. Brown, of Wiley Rein LLP, contributed the second Case Brief. Foggan is a member of this newsletter's Board of Editors.

When Liability Is Reasonably Clear, Insurer Has Duty to Attempt to Effectuate Settlement

The U.S. Court of Appeals for the Ninth Circuit recently held that, under California law, an insurer has a duty to promptly effectuate settlement when liability of its insured is reasonably clear, even absent a settlement demand by the claimant. In so doing, the Court of Appeals apparently expanded upon existing California law, which previously required that an insurer accept a reasonable settlement demand within policy limits, but did not impose a duty to proactively effectuate settlement even absent a demand. Du v. Allstate Ins. Co. et al., 681 F.3d 1118, 2012 U.S. App. LEXIS 11755, 2012 WL 2086584 (9th Cir. Cal. 2012).

While Joon Hak Kim (“Kim”) was insured by Allstate subsidiary Deerbrook Insurance Company (“Deerbrook”), he caused a collision with appellant Yang Fang Du (“Du”). Du and three others in that vehicle sustained injuries. Kim's policy with Deerbrook had liability limits of $100,000/$300,000.

Over the next several months, Deerbrook attempted to obtain medical documentation from Du and a statement from Kim but was not successful. Notwithstanding the lack of cooperation by Du and Kim, Deerbrook evaluated the claim file and, aware that there was a claim of serious injury by Du, accepted Kim's liability. One year after the accident, Du provided documentation of her medical expenses for the first time, which totaled $108,742.92. At that time, Du's lawyer made a $300,000 global settlement demand for all four injured parties. The documentation provided for the other three individuals showed medical expenses in the amounts of $6,676, $13,274, and $13,809. Deerbrook advised Du's lawyer that insufficient information was provided regarding the other three parties, and suggested settling Du's claim separately. Du's lawyer rejected that suggestion and insisted on a $300,000 global settlement. Two months later, Deerbrook again tried to settle just Du's claim by offering $100,000, which offer was again rejected.

Thereafter, Du filed a personal injury lawsuit against Kim and obtained a judgment against him for more than $4.1 million. Kim assigned his bad faith claim to Du, and Du brought suit against Deerbrook alleging breach of the implied covenant of good faith and fair dealing.

At trial, Du requested an instruction that the jury could consider whether Deerbrook did not attempt in good faith to reach a prompt, fair and equitable settlement of Du's claim after liability was reasonably clear. The district court rejected the proposed instruction, concluding that an insurer has no duty to initiate settlement discussions in the absence of a demand from a third-party claimant. The jury was then instructed and asked to determine whether a breach occurred caused by Deerbrook's failure to accept a reasonable demand. The jury answered no, and judgment entered for Deerbrook. This appeal followed.

The central issue on appeal was whether an insurer has a duty, after liability of the insured has become reasonably clear, to effectuate a settlement in the absence of a demand from the claimant. Because the Court of Appeals felt that confusion existed regarding the scope of an insurer's duty to settle, it took the opportunity to address the issue even though it was not ultimately necessary to resolve the appeal.

On this issue, the Court of Appeals concluded that an insurer does in fact have a duty to effectuate settlement when liability is reasonably clear, even absent a demand. In resolving the issue, the court reasoned that a conflict of interest exists, regardless of whether a demand is made, when there is a significant risk of a judgment in excess of policy limits and a reasonable opportunity to settle within those limits. The court further reasoned that if an insurer conducts itself as though it alone is liable for the entire amount of the judgment, as the general duty of good faith requires, a rational party should attempt to settle if there is a substantial likelihood of an excess verdict and a reasonable opportunity to settle within limits. Acknowledging that California state courts had not squarely addressed the issue, the Court of Appeals gleaned further support from the fact that no state court had ruled to the contrary, and from the fact that the Court of Appeals had previously interpreted California law in this manner. Finally, the Court of Appeals turned to the insurance code, which has deemed a failure to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear an unfair claims settlement practice. The Court of Appeals noted that it previously interpreted the insurance code as requiring an insurer to actively investigate and attempt to settle a claim by making, and accepting, reasonable settlement offers once liability has become reasonably clear, albeit in the now obsolete context of a private
right of action under the code.

The Ninth Circuit also addressed and rejected Deerbrook's argument that the genuine dispute rule insulated it from bad faith liability because its obligations as to whether it should settle were unsettled. In so doing, the court distinguished third-party and first-party cases, concluding that the genuine dispute doctrine does not apply to the former and that a good faith belief in non-coverage does not insulate an insurer from liability for failure to settle a claim.

Finally, despite the Ninth Circuit's conclusion that an insurer has an affirmative duty to attempt to effectuate settlement even absent a demand, it nevertheless concluded that, in this particular case, there was no evidentiary basis for the requested jury instruction. The record supported Deerbrook's contention that if there was a duty to initiate settlement talks, it did so in a timely fashion in view of the circumstances. Deerbrook could not have made an earlier settlement offer because it lacked corroborating proof of Du's injuries and medical expenses. Nor did Deerbrook have earlier proof regarding the other three individuals injured in the accident. The Court of Appeals concluded that there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du and, as such, the district court did not abuse its discretion in not providing the
requested jury instruction.

The effect of this decision remains to be seen in terms of whether California state courts will agree with the Ninth Circuit's interpretation of California law, and whether the analysis regarding settlement overtures absent a demand will be considered mere dicta.

CA Supreme Court Adopts 'All-Sums-with-Stacking' Rule

In a long-running case involving the Stringfellow hazardous waste site, the California Supreme Court, applying California law, has adopted an “all-sums-with-stacking” default allocation rule for insurer liability in the context of long-tail environmental claims. See State of California v. Continental Ins. Co., 2012 Cal. LEXIS 7324 (Cal. Aug. 9, 2012).

The policyholder, the state of California, designed and supervised the construction of an industrial waste site in a canyon into which 30 million gallons of waste was deposited. The site suffered from a number of design defects, allowing contaminants to escape beneath the surface and through a barrier dam. In addition, heavy rains in 1969 and 1978 caused contaminants to overflow the dam. In separate litigation, the state was held liable for all past and future remediation costs at the site.

The state sought coverage from its various insurers, resulting in trial court rulings that: 1) the “all sums” approach applied; 2) the policyholder was not entitled to stack the limits of all triggered policies; 3) continuous damage from disposal and migration of wastes constitutes one occurrence; 4) the insurers were entitled to a setoff in the amount of $120 million for sums received by the policyholder in settlements with other insurers; 5) the policyholder had no duty to mitigate losses and its recovery could not be reduced for failure to implement remedial actions in a timely fashion; and 6) evidence of a lost policy maintained in a reinsurer's underwriting file was admissible under the ancient records exception to the hearsay rule.

On appeal, the intermediate appellate court affirmed the decision with three exceptions. First, it held that the state could “stack” policy limits across policy periods. Second, the court refused to substantively engage the issue of whether the insurers were entitled to a setoff after concluding, in light of its holding on stacking, that the total loss would be so large that the issue would be moot. Finally, it held that the trial court incorrectly admitted documents indicating the existence of a lost policy from a reinsurer's underwriting files. See State v. Continental Insurance Co. , 88 Cal. Rptr. 3d 288 (Cal. Ct. App. 2009).

The California Supreme Court now has affirmed the “all-sums-with-stacking” rule. The court did not substantively address any of the other issues. The California high court began by noting that its prior decisions in Montrose Chemical Corp. v. Admiral Insurance Co. , 913 P.2d 878 (Cal. 1995) and Aerojet-General Corp. v. Transport Indemnity Co. , 948 P.2d 909 (Cal. 1997) supported an “all sums” approach to liability. After acknowledging that a large number of high courts in other jurisdictions had adopted a pro rata rule for indemnity allocation, the court concluded that the policies here obligated the insurers to pay “all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was 'on the loss.'” The court rejected the argument that the “during the policy period” language, which appeared in the definition of “occurrence,” limited the insurers' indemnification obligations. It stated that the “during the policy period” language did not appear in the insuring agreement section of the policies, and therefore was “neither 'logically [n]or grammatically related to the 'all sums' language in the insuring agreement.'”

Next, the court approved “stacking” of the insurance policies. It reasoned that “[t]he all-sums-with-stacking indemnity principle incorporates the Montrose continuous trigger of coverage and the Aerojet all sums rule, and 'effectively stacks the insurance coverage from different policy periods to form one giant 'uber-policy' with a coverage limit equal to the sum of all purchased insurance policies.'” It stated that these policies, which did not contain anti-stacking language, permitted stacking.

The court contended there were “numerous advantages” of the all-sums-with-stacking rule, stating that it “resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury.” The court further stated that the rule “comports with the parties' reasonable expectations” and “ascertains each insurer's liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.” The court also stated that “in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking.”

This California decision on allocation stands in contrast to leading cases from other state high courts, such as the Massachusetts Supreme Judicial Court in Boston Gas Co. v. Century Indemnity Co. , 910 N.E.2d 290 (Mass. 2009), the New Jersey Supreme Court in Owens-Illinois, Inc. v. United Insurance Co. , 650 A.2d 974 (N.J. 1994), and the New York Court of Appeals in Consolidated Edison Co. v. Allstate Insurance Co. , 774 N.E.2d 687 (N.Y. 2002). Those courts have all found that an insurer can be held liable only for its fair share of a policyholder's liability ' the amount attributable to the time period during which the policy was in force.

Brian Oubre, of Gordon & Rees, LLP, contributed the first Case Brief. Laura Foggan, Parker J. Lavin and Edward R. Brown, of Wiley Rein LLP, contributed the second Case Brief. Foggan is a member of this newsletter's Board of Editors.