Ninth Circuit Amends Recent Decision

The Amended Decision

In the amended decision, the Ninth Circuit omitted its original discussion which suggested that an insurer has a duty to promptly effectuate settlement when liability of its insured is reasonably clear and that the “genuine dispute doctrine” does not apply to third-party claims. Instead, the court framed three considerations: 1) whether the duty to settle can be breached absent a settlement demand from the third-party claimant; 2) whether the jury instruction proposed by Du could have been properly refused under the “genuine dispute doctrine,” and 3) whether there was an evidentiary foundation for the proposed instruction. The court then sidestepped the first and second issues, and instead concluded that the “district court did not abuse its discretion in ruling there was no factual foundation for Du's proposed jury instruction.” It observed that the bad faith allegation by Du in the underlying matter was based on an argument that the claim would have been settled within policy limits had Deerbrook initiated earlier settlement negotiations, to which Deerbrook responded that if there was a duty to initiate settlement, it did so in a timely manner given the underlying facts. The Ninth Circuit then concluded that the record supports Deerbrook's contention that it could not have made an earlier settlement offer to Du, and there was no evidentiary basis for Du's proposed instruction.

The amended decision departs considerably from the earlier issued decision. In the June 2012 decision, the Ninth Circuit felt that confusion existed regarding the scope of an insurer's duty to settle, and opined that an insurer has a duty to effectuate settlement when liability is reasonably clear, even absent a demand. 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.

Brian Oubre is senior counsel in the Insurance and Commercial Litigation practice groups at Gordon & Rees, LLP.

The U.S. Court of Appeals for the Ninth Circuit has issued an amended decision, Docket No. 10-56422, 2012 U.S. App. LEXIS 20887, 2012 U.S. App. LEXIS 20889, 2012 WL 4748679, (9th Cir. Cal. Oct. 5, 2012), to retract Du v. Allstate Ins. Co. et al., 681 F.3d 1118, 2012 U.S. App. LEXIS 11755, 2012 WL 2086584 (9th Cir. Cal. 2012), in which the court opined 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. The amended decision, filed on Oct. 5, 2012, supplanted the prior decision, issued on June 11, 2012, to limit the holding to the issue of whether a foundation existed for the jury instruction sought by Du with regard to bad faith and the insurer's settlement obligation. The Insurance Coverage Law Bulletin reported on the prior decision in September.

Joon Hak Kim (“Kim”), an insured of Allstate subsidiary Deerbrook Insurance Company (“Deerbrook”), caused a collision that injured appellant Yang Fang Du (“Du”). Kim's policy with Deerbrook had liability limits of $100,000/$300,000. Deerbrook attempted to obtain medical documentation for the next year, and notwithstanding a lack of cooperation by Du and Kim, accepted Kim's liability. Deerbrook eventually made several attempts to achieve a global settlement (Du's lawyer made a $300,000 global settlement demand for all four injured parties, but Deerbrook advised that there was insufficient information to settle; Deerbrook later tried to settle just Du's claim by offering $100,000, which was rejected). Du then filed a lawsuit against Kim and obtained a $4.1 million judgment. Kim then assigned his claim to Du, and Du brought suit against Deerbrook alleging bad faith and breach of the implied covenant of good faith and fair dealing.

At trial, Du requested a jury instruction based on Judicial Council of California Civil Jury Instruction (“CACI”) 2337 to conclude that Deerbrook violated applicable insurance regulations by not attempting 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, finding 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.

The Amended Decision

In the amended decision, the Ninth Circuit omitted its original discussion which suggested that an insurer has a duty to promptly effectuate settlement when liability of its insured is reasonably clear and that the “genuine dispute doctrine” does not apply to third-party claims. Instead, the court framed three considerations: 1) whether the duty to settle can be breached absent a settlement demand from the third-party claimant; 2) whether the jury instruction proposed by Du could have been properly refused under the “genuine dispute doctrine,” and 3) whether there was an evidentiary foundation for the proposed instruction. The court then sidestepped the first and second issues, and instead concluded that the “district court did not abuse its discretion in ruling there was no factual foundation for Du's proposed jury instruction.” It observed that the bad faith allegation by Du in the underlying matter was based on an argument that the claim would have been settled within policy limits had Deerbrook initiated earlier settlement negotiations, to which Deerbrook responded that if there was a duty to initiate settlement, it did so in a timely manner given the underlying facts. The Ninth Circuit then concluded that the record supports Deerbrook's contention that it could not have made an earlier settlement offer to Du, and there was no evidentiary basis for Du's proposed instruction.

The amended decision departs considerably from the earlier issued decision. In the June 2012 decision, the Ninth Circuit felt that confusion existed regarding the scope of an insurer's duty to settle, and opined that an insurer has a duty to effectuate settlement when liability is reasonably clear, even absent a demand. 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.

Brian Oubre is senior counsel in the Insurance and Commercial Litigation practice groups at Gordon & Rees, LLP.