Legal News

Recent Federal Court decision interpreting California bad faith insurance law, Du v. Allstate Insurance Co.

Recently, the Ninth Circuit issued its opinion in Du v. Allstate Insurance Co. (June 2012) 12 C.D.O.S. 6368, an interesting decision in the field of bad faith litigation. In affirming the district court judgment in favor of Allstate, the Ninth Circuit observed that Du's appeal raised the following issue: "Does an insurer have a duty, after liability of the insured has become reasonably clear, to attempt to effectuate a settlement in the absence of a demand from the claimant?" The court answered affirmatively and held that "under California law, an insurer has a duty to effectuate a settlement where liability is reasonably clear, even in the absence of a settlement demand."

The underlying personal injury case involved an automobile accident. Yan Fang Du was injured by Allstate's insured driver, Joon Hak Kim. Three other individuals were in the car with Du and were also injured. Kim's policy limits were $100,000 per individual with a $300,000 aggregate maximum. In the underlying personal injury claim by Du, Allstate accepted liability for Kim in February 2006, months before Du's lawsuit was filed. No settlement demands or offers were made until June 2006, when the claimants' attorney made a demand for a global settlement on behalf of all four injured parties for the $300,000 policy limits. At that time, Du's medical costs were substantiated, but those of the three other injured parties were not. Allstate offered $100,000 to settle the claim of Du only. That offer was rejected in August 2006 as "too little, too late."

In October 2006, Du (who was not joined by the other injured parties) filed a personal injury action against Kim and received a jury verdict in excess of $4,000,000. Thereafter, Allstate paid the $100,000 per individual policy limit to plaintiff to partially satisfy the judgment. Kim assigned his bad faith action to Du in exchange for a covenant not to execute against him.

In September 2008, Du filed a bad faith claim against Allstate for breach of the covenant of good faith and fair dealing it owed to Kim. "Du alleged that [Allstate subsidiary] Deerbrook breached the implied covenant when Deerbrook failed to affirmatively settle Du's claim within Kim's policy limits even after Kim's liability for a judgment in excess of the policy limits became clear on February 15, 2006" when Kim's liability was accepted by Allstate.

At the trial of the bad faith action, the district court rejected one of Du's jury instructions that suggested the insurer had a duty to initiate settlement--not just respond to settlement demands made by the third party claimant's counsel--even in the absence of a demand from the claimant. At the heart of Du's appeal to the circuit court was the trial court's decision not to give the proffered instruction.

Though the Ninth Circuit found the district court erred in ruling as a matter of law that an insurer never has a duty to initiate settlement, it affirmed the district court's judgment and held the court did not abuse its discretion in finding no evidentiary basis existed for giving the proposed instruction. The basis for its decision was that Allstate did make a meaningful and timely settlement offer for the substantiated damages sustained by Du--the $100,000 policy limit--and therefore the proffered instruction was inappropriate. However, the court did hold that Du's proposed instruction was a correct statement of the law and stated under California law "an insurer can violate the duty of good faith and fair dealing by failing to attempt to effectuate a settlement within policy limits after liability has become reasonably clear."

Unlike in automobile accident cases like Du, in professional liability cases records and other evidence of causation and damages are typically made available to the carrier and counsel fairly early on to assist with a determination of likely damages. In Du, Allstate had very limited access to information about the claimants during the pre-filing negotiations. For that reason, only the policy limit for Du was offered and the global settlement demand of $300,000 for all four injured claimants was rejected. Because expert testimony is required in most medical negligence cases, a fact pattern like that in Du is less likely to occur in a med mal case. In addition, under Business & Professions Code section 801.01, the written consent of the insured physician is required before a case can be settled on his or her behalf which presents a different set of circumstances regarding the insurer's ability to settle from the auto accident scenario in Du. However, it is good to be aware of the holding. Since Du is a Ninth Circuit Federal Court decision it is not binding on California state courts, but it will likely be cited by plaintiffs in bad faith litigation as persuasive authority. Whether California state courts will adopt the holdings of Du at some point is unknown.

In light of the Du decision (though, as stated, it is a Federal court case), insurers seeking to avoid potential bad faith liability should consider whether or not it is advisable to wait for a settlement demand in those cases in which it is "reasonably clear" that damages will exceed policy limits. The Du decision makes it clear that an insurer can no longer risk just sitting back in a case in which the likelihood of recovery in excess of policy limits is apparent and wait for a demand to be made first. Though the court did not explain what amount of evidence would make it "reasonably clear" that damages would likely exceed policy limits, Allstate was aware there was a claim of serious injury by Du not long after it had accepted Kim's liability.