Bad Faith Liability May Be Premised on an Insurer's Failure to Effectuate Settlement When Insured's Liability Was Reasonably Clear

The Ninth Circuit Court of Appeals in a recent decision held that an insurer’s duty of good faith and fair dealing, which is implied in every contract of insurance, may be violated by the insurer’s failure to attempt to effectuate a settlement within policy limits after liability of its insured has become reasonably clear.  In essence, the Court found that an insurer’s unreasonable refusal to attempt to effectuate settlement after the evidence reasonably indicates that the insured’s liability will be in excess of the policy limits constitutes bad faith.

In Du v. Allstate Insurance Company et al., 2012 U.S. App. LEXIS 11755, May 11, 2012 (9th Cir. 2012), the victim was injured in an accident caused by the insurer’s insured, who then obtained a judgment against the insured.  The insured assigned his bad faith claim to the victim, who argued in the District Court that the insurer breached the covenant of good faith and fair dealing when it did not attempt to effectuate settlement of the victim’s claims after it became reasonably clear that the insured’s liability to the victim was in excess of the policy limits.  The victim requested a jury instruction that such a failure by the insurer could constitute bad faith.  The District Court rejected the victim’s request.

On appeal, the Ninth Circuit found that the District Court legally erred in holding that, as a matter of law, bad faith liability could not be premised on an insurer’s failure to effectuate settlement in the absence of a reasonable demand.  In so finding, the Court noted the long standing principal that the duty of good faith and fair dealing “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.” See Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858 (1973).  The Court, however, affirmed the District Court’s judgment and found that the District Court did not abuse its discretion in refusing to give the requested instruction in this case because there was no evidentiary foundation for the victim’s assertion that the insurer should or could have made an earlier settlement offer to the insured.  The Court found that the requested jury instruction was proper, however, the facts of this case did not warrant such an instruction.

Despite the Court’s ultimate finding in this case, this decision by the Ninth Circuit reaffirms the courts’ willingness to extend bad faith liability under a multitude of circumstances wherein an insurer acts unreasonably and places its own interests ahead of its insured.

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