The United States Court of Appeals for the Ninth Circuit affirmed the district court's rejection of a jury instruction suggesting the defendant insurer had a duty to initiate settlement discussions in the absence of a settlement demand from the third party claimant. The Ninth Circuit held the district court erred in deciding an insurer never has a duty to initiate settlement as a matter of law. But the district court did not abuse its discretion in finding the facts provided no foundation for the proposed jury instruction.
On June 17, 2005, plaintiff and appellant Yang Fang Du ("Du") and three occupants in a vehicle with her were injured in a car accident with opposing driver Joon Hak Kim ("Kim"). Kim was insured by Deerbrook Insurance Company, a subsidiary of Allstate Insurance Company (collectively "Deerbrook"), under a policy with limits of $100,000 for each individual and a $300,000 aggregate for any one accident.
On February 15, 2006, Deerbrook acknowledged Kim's liability. On June 9, 2006, Du's lawyer supplied documentation of Du's medical costs at $108,742, listed medical costs for the other three claimants, and demanded $300,000 as a global settlement. Deerbrook rejected the global demand citing the lack of documentation concerning the other three claimants. Deerbrook offered Du $100,000 individually, which Du rejected in August of 2006. In October of 2006, Du filed suit against Kim, and obtained a jury verdict of $4,126,714. Kim assigned his rights against Deerbrook to Du.
Du brought suit against Deerbrook for bad faith. At trial, Du proposed the following jury instruction:
In determining whether Deerbrook Insurance Company breached the obligation of good faith and fair dealing owed to Mr. Kim, you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Yang Fang Du's claim after liability [of its insured Kim] had become reasonably clear. ?
The district court rejected Du's proposed jury instruction. Instead, the district court provided the jury with instructions which made clear that bad faith could only be found if Deerbrook failed to accept a reasonable settlement demand, not for failing to initiate settlement.
The Ninth Circuit first analyzed whether Du's proposed jury instruction correctly states California law. Where a jury instruction is challenged as a misstatement of law, the Court of Appeal reviews the instruction de novo. Finally, the Ninth Circuit performed an abuse of discretion review of the district court's finding that Du's proposed jury instruction lacked foundation.
California law implies a covenant of good faith and fair dealing in every policy of insurance. PPG Indus., Inc. v. Transamerica Ins. Co.1 The implied covenant "requires the carrier to consider in good faith the interests of the assured equally with its own and evaluate settlement offers within policy limits as though it alone carried the entire risk of loss." Merritt v. Reserve Ins. Co.2
The Ninth Circuit held the duty to settle requires an insurer to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand. It explained that "a rational party would attempt to settle if there is a 'substantial likelihood of recovery in excess of those limits,' [] and there is a reasonable opportunity to settle within policy limits." An insurer conducting itself as though it alone were liable for the full amount of a judgment should also attempt to settle in those circumstances.
The Ninth Circuit found an insurer's affirmative duty to settle is supported by Insurance Code section 790.03(h)(5) which defines unfair claims settlement practices to include "[n]ot attempting in good faith to effectuate prompt, fair , equitable settlements of claims in which liability has become reasonably clear." Though Insurance Code section 790.03 (h) affords no private right of action, Moradi-Shalal v. Fireman's Fund Ins. Cos.,3 violations of section 790.03 can serve as evidence of bad faith, Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc.4
Judicial Council of California Civil Jury Instruction 2337 ("Violation of Insurance Regulation or Industry Practice") tracks Insurance Code section 790.03(h), and does not require bad faith claims be predicated on the insurer's rejection of a claimant's demand. CACI 2337 (insurer that "[d]id not attempt in good faith to reach a prompt, fair, and equitable settlement ? after liability had become reasonably clear" may be liable for bad faith.)
Deerbrook argued it was insulated from liability by the genuine dispute doctrine, because the governing law was "unsettled." The Ninth Circuit rejected this argument, holding the genuine dispute doctrine does insulate an insurer from liability for failure to settle a claim. Gibbs v. State Farm Mut. Ins. Co.;5 see Howard v. Am. Nat'l Fire Ins. Co.6
Ultimately, however, the Ninth Circuit held the district court did not abuse its discretion in finding Du's proposed instruction lacked foundation. "[A] party is entitled to an instruction about his or her theory of the case if it is supported by law and has foundation in evidence." Deerbrook could not have made settlement offers earlier than it did because Deerbrook lacked proof of the extent of Du's medical expenses prior to June of 2006. In June or July of 2009, Deerbrook offered Du the individual policy limit of $100,000 which Du rejected. There was no evidence Deerbrook should or could have made an earlier settlement offer. Accordingly, the district court judge did not abuse his discretion when it rejected Du's proposed jury instruction.
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1 PPG Indus., Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312.
2 Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 871.
3 Moradi-Shalal v. Fireman's Fund Ins. Cos. (1998) 46 Cal.3d 287.
4 Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc. (2000) 78 Cal.App.4th 847, 915-916.
5 Gibbs v. State Farm Mut. Ins. Co. (9th Cir. 1976) 544 F.2d 423, 427.
6 See Howard v. Am. Nat'l Fire Ins. Co. (2010) 187 Cal.App.4th 498, 529-530.