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Update on Insurance Carrier’s Duty to Initiate Settlement Discussions

Update on Insurance Carrier’s Duty to Initiate Settlement DiscussionsFederal court decisions support that there is a duty of an insurance carrier to initiate settlement negotiations once liability has become reasonably clear.

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. Eggshell retains you to represent him with regard to 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. 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 in federal court 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, stating 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 rejects the proposed instruction and instead 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 had failed to accept a reasonable settlement demand, and not for failing to affirmatively effectuate a settlement. The trial court states, “Since Saturn did not have medical records to support the claim, there was no reasonable settlement offer for it to accept and it later made a settlement offer after it obtained the records and Eggshell rejected the offer.” You are stunned by the decision by the trial court. 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!

Update on Insurance Carrier’s Duty to Initiate Settlement Negotiations

Whether the covenant on good faith and fair dealing requires an insurance carrier to initiate settlement negotiations remains unresolved, but the issue has been developing through various cases in both state and federal courts.

Insurance Code Section 790.03(h) (5) requires an insurer to attempt “in good faith to effectuate prompt, fair and equitable settlements. . . .” Section 790.03(h)(5) was construed by the 9th Circuit in Pray By & Through Pray v. Foremost Ins. Co., 767 F.2d, 1329, *1330 (9th Cir. 1985) that:

It is reasonably clear that California courts will interpret the California statute 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.
Pray By & Through Pray v. Foremost Ins. Co., 767 F.2d 1329, *1330 (9th Cir. 1985).

However, the Pray decision was decided at a point in time that a private cause of action existed for violating Insurance Code Section 790.03. The right to bring a private cause of action under Insurance Code Section 790.03 no longer existed after the California Supreme Court issued its ruling in Moradi-Shalal v. Fireman’s Fund Insurance Cos. (1988) 46 Cal.3d 287.

On June 11, 2012, the 9th Circuit issued its first opinion on this issue, which definitively stated the California law imposes a duty upon liability insurers to initiate settlement discussions even in the absence of a settlement demand by the plaintiff. (Yan Fang Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012).) However, that opinion was amended and superseded and its discussion of the duty of an insurance carrier to initiate settlement discussions was left out of the amended opinion as being unnecessary. (See Du v. Allstate Ins. Co., 697 F.3d 753 (9th Cir. 2012).) While the original Du opinion was amended and superseded, the original opinion of June 11, 2012, remains in the Federal Reporter and in the Westlaw database, and it provides directions to policyholders who want to argue that liability insurers have an affirmative duty to initiate settlement discussions to try and settle claims against their policyholders.

Since the Du decision, there have been several new cases that have addressed the issue of whether an insurer has a duty to initiate settlement negotiations. The California Court of Appeal case of Reid v. Mercury Insurance Co. (2013) 220 Cal. App.4th 262 rejected the plaintiff’s contention that Insurance Code Section 790.03(h)(5) imposes an affirmative duty upon liability insurers to initiate settlement discussions. (Reid v. Mercury Insurance Co., supra, 220 Cal.App.4th at 277.)

The Reid decision rejected the suggestion first expressed in the Du opinion that bad faith liability can be based solely upon an insurance company’s failure to initiate settlement negotiations. However, it clearly backed away from language in several California opinions stating that a formal demand from the claimant is a prerequisite to an insurer’s duty to settle. (See Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858; Coe v. State Farm Mutual Automobile Insurance Co. (1977) 66 Cal.App.3d 981.) In the Reid opinion, the court held that there must be a minimum of an expression of “interest” in settling in order to trigger an insurance company’s duty to negotiate. (Ibid at *272.) The Reid court stated that the expression of interest must be substantive and a mere inquiry as to the amount of the policy limits is not enough. (Ibid at *277.) The claimant must communicate to the insurer that settlement may “feasibly be negotiated.” (Ibid at *272.)

An examination of past California Supreme Court decisions recognizing a cause of action for a carrier’s bad faith failure to settle casts doubts on the validity of the Merritt and Coe decisions, and possibly the Reid decision. In Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, and Chrisci v. Security Insurance Co. (1967) 66 Cal.2d 425, *429, the California Supreme Court based the duty of an insurance company to try and settle a claim upon the conflict of interest that is created between an insurer and the insured when there is a substantial likelihood of a judgment in excess of the policy limits. The Supreme Court held that conflict exists regardless of whether the claimant has made a settlement demand. In a later Supreme Court decision known as Johansen v. Cal State Auto Ass’n Inter-Ins. Bureau (1975) 15 Cal.3d 9, the Supreme Court held that a liability insurer “must conduct itself as if it alone were liable for the entire judgment.” That decision provides additional support for finding that liability insurers are required to open settlement negotiations with the claimant. No rationale defendant/insured would ever sit back and allow a high exposure case to go to trial without at least attempting to settle simply because the plaintiff had not made a settlement offer to the defendant/insured.

Two federal court decisions have relied upon the original opinion in Du v. Allstate and found that there is a duty imposed upon insurance carriers to initiate settlement discussions to try and settle the claims being brought against its insured. The decisions are Aspen Specialty Ins. Co. v. Willis Allen Real Estate, 2015 WL 3765008 and Travelers Indem. Co. of Connecticut v. Arch Specialty Ins. Co., 2013 WL 6198966. Both of those federal district court decisions found the original Du opinion as persuasive on this issue. (Travelers Indem. Co. of Connecticut v. Arch Specialty Ins. Co., supra, at *8, quoting Du v. Allstate Insurance Co. 681 F.3d 1118 as persuasive authority; see also Aspen Specialty Ins. Co. v. Willis Allen Real Estate, at *8.)

In summary, while the Reid, Merritt, and Coe decisions continue to be relied upon by carriers to support their contention that they have no duty to initiate settlement decisions, federal case law clearly has held that there is such a duty. The District Court decision in Travelers Indem. Co. made it clear that the word "effectuate," which is used in Insurance Code Section 790.03(h)(5) when discussing a carrier's duty to settle, means something more than a duty to accept reasonable settlement offers. The court held:

“Effectuate” means “to put into force or operation.” Oxford on-line Dictionary at last visited November 21, 2013; see also citing to Random House Dictionary (“to bring about”) and Collins English Dictionary (“to cause to happen”). Therefore, to act in good faith, and to attempt to effectuate settlement, Travelers was required to do something in an attempt to bring about a settlement.
Travelers Indem. Co. of Connecticut v. Arch Specialty Ins. Co., 2013 WL 6198966, at 8 (E.D. Cal. Nov. 27, 2013)

Consequently, should you face the situation where an insurance carrier does not attempt to resolve your client’s claims when it knows that the claim is likely to exceed the policy limits and liability is reasonably clear, you should give serious consideration to filing your insurance bad faith claim in federal court until such time as more state court decisions have addressed this issue. The analysis of the federal decisions of Du, Aspen, and Travelers is much more thorough and persuasive than the state court decision in Reid and a federal district judge would more likely follow and adopt the holdings of those decisions.

Do You Appeal the Judgment Regarding the Claims of Eggshell Eddie?

Applying the recent law to the trial court’s refusal of your proposed jury instruction in the bad faith action filed on behalf of Eggshell Eddie, I believe that you should appeal such a ruling. The 9th Circuit Court of Appeal has already expressed its thoughts on that issue in the original Du v. Allstate decision. Until more state court decisions have been issued on this issue, the federal courts are clearly on board to find that there is a duty of an insurance carrier to initiate settlement negotiations once liability has become reasonably clear. An insurance carrier may not just simply sit back and wait for settlement offers from the plaintiff.

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. (2016). Update on insurance carrier’s duty to initiate settlement discussions. Trial Bar News, 39(6), 11-12, 30-31.

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