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July 5, 2012

Insurers Take Note: Big Win for Bad-Faith Plaintiffs

By Darrell W. Spence

SACRAMENTO - In Du v. Allstate -- a 9th Circuit case -- the issue before the court was whether an insurer had an obligation to make an effort to settle a case even if a settlement demand had not been made. The court found that, under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.

This ruling shifts the landscape with regard to bad-faith insurance litigation.

In Du, the victim was hurt in an accident caused by the insurer's insured. After the victim received a judgment against the insured, the insured assigned his bad faith claim to the victim. The victim argued that the insurer breached the implied covenant of good faith and fair dealing when it did not attempt to reach a settlement of the victim's claims after the insured's liability in excess of the policy limit became reasonably clear.

At trial, the victim proposed the following jury instruction:

"In determining whether [the insurer] breached the obligation of good faith and fair dealing owed to [the insured], you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of [the victim's] claim after liability [of its insured] had become reasonably clear."

The district court rejected this proposed jury instruction; it concluded that an insurer has no duty to initiate settlement discussions in the absence of a settlement demand from the third-party claimant.

The appeal raised this central legal 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 noted that the breadth of an insurer's duty to settle is substantiated by California Insurance Code section 790.03(h) which enumerates the obligations an insurer owes to its insured. Conduct that violates this section can be the basis for a bad faith claim: Section 790.03(h)(5) specifically identifies as an "unfair claims settlement practice[ ]," "[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear."

The 9th Circuit court held that an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. The victim's proposed instruction was a fair statement of the law.

This ruling puts the onus on settling a case, at least after liability is clear, squarely on the back of the insurer.

 

Mr. Spence is an associate in the Sacramento office of Klinedinst PC. To contact him directly, please click here.

The opinions expressed in this employment update are general in nature, and are not meant to provide specific legal advice. For more information, please contact a Klinedinst attorney. No attorney/client privilege is created or assumed by reading this newsletter.

 

Darrell W. Spence

Darrell W. Spence, Esq.
Associate
Klinedinst Sacramento

 


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