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Do Insurance Carriers Have a Duty to Initiate Settlement Discussions? Yes They Du!

Do Insurance Carriers Have a Duty to Initiate Settlement Discussions? Yes They Du!Crackhead Craig strikes again. Crackhead Craig drove his vehicle at a high rate of speed through a red light and collided with the Toyota Prius operated by Eggshell Eddie. Eggshell was severely injured and retains you to pursue his claims against Crackhead. You notify Crackhead’s insurance carrier, Saturn Insurance Company, of your representation and the serious nature of Eggshell Eddie’s injuries. Saturn requests you to provide medical records, medical authorizations and a recorded statement from Eggshell. You refuse. However, you submit a policy limits demand package to Saturn and provide it with 30 days to accept the policy limits demand. The demand package includes the medical bills, medical authorizations, an offer to have Eggshell Eddie provide testimony by way of a deposition, an offer to allow Eggshell Eddie to be examined by a medical doctor selected and hired by Saturn, a copy of the Traffic Collision Report that identifies three witnesses that saw Crackhead run the red light and you provide a detailed analysis of the effects of the injuries upon Eggshell.

You agree to a 15-day continuance of the 30-day policy limits demand. Saturn never orders the medical records or arranges for a deposition or defense medical exam of Eggshell. At the end of the 45 days, Saturn indicates that it does not have sufficient information to accept the policy limits demand. You file suit and Saturn immediately subpoenas the medical records and evaluates the case as a case of liability against its insured and that the value exceeds its policy limits of $250,000. It waits ten months to offer its $250,000 to settle Eggshell’s claims against Crackhead. Since you have now incurred thousands of dollars in expenses, you reject the offer. You take the matter to trial and the jury returns a verdict of $1 million. Crackhead Craig assigns his rights against Saturn to Eggshell in exchange for a covenant not to execute.

You file suit against Saturn on behalf of Eggshell Eddie as the assignee of the insurance contractual rights of Crackhead Craig. At time of trial, you request the CACI instruction 2337, which provides the following:

In determining whether Saturn breached the obligation of good faith and fair dealing owed to Eggshell Eddie, you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Eggshell Eddie’s claim after liability of Crackhead Craig had become reasonably clear.

The court gives an alternative instruction that makes it clear that a breach of the implied covenant of good faith and fair dealing could be found only if Saturn failed to accept a reasonable settlement demand, and not for failing to affirmatively effectuate a settlement. The jury returns a verdict in favor of Saturn.

Do you appeal the trial court’s decision to reject your proposed jury instruction? Yes, you Du!

Ninth Circuit Decision of Du v. Allstate Insurance Co.

The facts of Eggshell Eddie’s claims against Crackhead Craig are similar to the facts of a recent decision that the insurance industry claims supports its position that it has no duty to initiate settlement discussions and to bring about a settlement. The opinion in Yang Fang Du v. Allstate Insurance Co. (2012) 681 F.3d 1118 was initially issued on June 11, 2012, but was later amended
on October 5, 2012.

Du and three other passengers sustained injuries caused by an automobile collision. The automobile collision was caused by Allstate’s insured, Joon Hak Kim. Kim’s policy had liability limits of $100,000 per person and $300,000 per accident. Du’s counsel represented to Allstate in a joint prelitigation policy limits demand that the medical expenses of Du were $108,742, and the medical expenses of the three passengers were $6,676, $13,274 and $13,809. The demand did not provide medical authorizations or the medical records relating to the medical bills that were submitted with the demand. The demand was a global demand that required Allstate to accept and pay the policy limits of $300,000 to settle all claims of all four claimants. Individual settlements were not permitted.

Allstate claimed there was insufficient information about the other three claimants to be able to accept the global policy limits demand and suggested settling Du’s claim separately. Du’s attorney refused and demanded that Allstate pay the full $300,000 policy limits and settle all four of the claims. Approximately one month later, Allstate offered $100,000 to settle Du’s claim. The offer was rejected. A lawsuit was then filed and the jury returned a verdict in favor of Du in the amount of $4.1 million. Allstate’s insured, Kim, assigned his bad faith claim to Du in exchange for a covenant not to execute.

The district court refused Du’s requested CACI 2337 jury instruction in the bad faith action. Judgment was rendered in favor of Allstate based upon a jury instruction that bad faith could only be found if Allstate refused to accept a reasonable settlement demand and did not reflect any obligation of Allstate to initiate settlement discussions.

The Ninth Circuit’s initial opinion affirmed the judgment, but held the trial court had committed legal error by refusing Du’s proposed instruction. The court stated the implied covenant of good faith and fair dealing covers the duty to settle within policy limits “where there is substantial likelihood of recovery in excess of those limits.” Citing, Kransco v. Am. Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390. The court stated that California courts have commonly applied the duty to settle to situations in which the insurance carrier unreasonably rejected a settlement offer within policy limits. However, the court stated that the issue in this case “is whether the duty more broadly requires an insurer to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand. For several reasons, we conclude that it does.” Du v. Allstate Ins. Co, supra, 681 F.3d 1118, 1123.

The Ninth Circuit distinguished the cases relied upon by Allstate. Allstate relied on Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858 and Coe v. State Farm Mutual Automobile Insurance Co. (1977) 66 Cal.App.3d 981. The Du court held that the court’s refusal to find bad faith in Merritt rested not on a “categorical rule that there is no duty to initiate settlement, but on the facts of that case: any settlement overtures would have been futile.” Du, supra, at 1124. The Ninth Circuit relied upon Boicourt v. Amex Assurance Co. (2000) 78 Cal.App.4th 1390 as holding that the Merritt decision did not reject the plaintiff’s claim “on the legal ground that an insurer need never ‘initiate settlement overtures,’ but on the particular facts of the case before the
court: There was no evidence at all to support the conjecture that ‘overtures’ might have been fruitful.”

The Ninth Circuit pointed out that the central theory of the Coe case concerned the insurer’s refusal to accept a deficient demand and not a failure to initiate settlement discussions. (See Coe at 337-338.) There was no claim in Coe that the insurer acted in bad faith by failing to initiate settlement discussions. It held that Coe’s broad language was therefore dicta and not consistent with the more recent decision in Boicourt that held an insurer could violate the duty of good faith and fair dealing without a settlement demand by the claimant. Citing Boicourt, supra, at 768-769.

The court noted that Insurance Code §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.” In Pray ex rel Pray v. Foremost Insurance Co. (9th Cir. 1985) 767 F.2d 1329, 1330, the Ninth Circuit found “[i]t is reasonably clear that California courts will interpret the California statute [Insurance Code section 790.03(h)(5)] as imposing upon an insurance company the duty actively to investigate and attempt to settle a claim by making, and by accepting, reasonable settlement offers once liability has become reasonably clear” (emphasis added) and subsequent cases have held that violations of
Insurance Code §790.03(h) is evidence of breach of the implied covenant of good faith and fair dealing. Citing Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc. (2000) 78 Cal. App.4th 847; Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062.

The initial Du decision stated, “Du’s proposed instruction was a fair statement of the law. The district court’s rejection of that instruction on the ground that no such duty could exist in absence of a settlement demand was in error.”

Allstate Insurance Company petitioned for rehearing. The Ninth Circuit reiterated much of the same discussions on the duty imposed upon an insurance company to initiate settlement discussions to settle a case absent a settlement demand from a third party. However, it stated, “We need not resolve [that issue] because we find that in any event, the district court did not abuse its discretion in ruling that there was no factual foundation for Du’s proposed instruction.”

The Ninth Circuit agreed with the trial court’s analysis of the facts that “The issue of settlement was broached at a sufficiently early time in the litigation that it vitiates any claim or effective claim insofar as a failure to initiate settlement discussion.”

The Ninth Circuit pointed out that at the time the joint policy limits demand was made, Allstate had no medical records or corroborating evidence to support the representations of Du’s attorney as to the severity of Du’s injuries. Second, Allstate had no proof of the injuries of the other three individuals. If Allstate had paid the $100,000 to Du, the payment could have left its insured (Kim) unprotected if the remaining claims of the three claimants exceeded $200,000. The Ninth Circuit noted that prior counsel had asserted that two of the three other claimants had suffered “lifethreatening” injuries. In summary, the Ninth Circuit affirmed the judgment in favor of Allstate.

Application of Du to Claims of Eggshell Eddie

The trial court refusal of your proposed jury instruction in Eggshell’s bad faith action against Saturn would probably constitute legal error requiring a reversal. Unlike Du, you provided medical authorizations to Saturn to allow it to obtain the corroborating evidence. Saturn has a duty to begin its investigation immediately, but in no event greater than 15 days after receiving notice of a claim. 10 C.C.R. §2695.5(e)(3). Your earlier refusal to provide medical records, a recorded statement, or medical authorizations is irrelevant to the duty of Saturn to conduct its investigation when it had the ability to do so. Although Saturn is not required to accept your representations, it has an obligation under the implied covenant of good faith and fair dealing, Insurance Code §790.03(h) and the Fair Claims Settlement Practice Regulations to conduct a prompt, diligent and thorough investigation of the claims. Saturn did not use the medical authorizations to obtain the medical records or indicate that it desired a medical examination or the deposition of Eggshell Eddie prior to the expiration of the policy limits demand. Saturn cannot, therefore, claim that it had insufficient information to justify its refusal to initiate settlement discussions when the information, documentation and facts supporting the claim were reasonably available to it and it chose not to conduct an investigation to obtain those facts. A carrier is deemed to have knowledge of facts that a reasonable investigation would have revealed. Span, Inc. v. Associated Internat. Ins. Co. (1991) 227 Cal.App.3d 463, 482; California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal. App.3d 1, 37; Civil Code §19.

While the Ninth Circuit’s final opinion did not include a holding that an insurance carrier has a duty to initiate settlement discussions, it provides insight into the thinking of the Ninth Circuit on that issue. There were no facts in Du that would support a claim for breach of the implied covenant of good faith and fair dealing based upon a failure to initiate settlement discussions. Allstate did not have the facts and documents to evaluate the case and make a settlement offer, and was not in a position to obtain those facts. Allstate did not have subpoena power and Du’s counsel refused Allstate’s request for the medical records, medical authorizations or to allow a recorded statement. The final opinion was based upon the facts that Allstate had no evidence to evaluate the case and no ability to obtain the evidence without Du’s cooperation.

As a result of your efforts to distinguish the Du decision on its facts, the Court of Appeal reverses the judgment rendered in favor of Saturn and returns the matter to the trial court with instructions to instruct the jury that California requires insurance carriers to initiate settlement discussions and attempt to settle the case when no settlement demands have been made by the claimant. Shortly thereafter, you settle Eggshell’s lawsuit against Saturn for payment of the judgment plus interest that has accrued. While justice was temporarily delayed, it was ultimately achieved.

This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2013). Do insurance carriers have a duty to initiate settlement discussions? yes they Du! Trial Bar News, 36(1), 15-16, 32-33.

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