In Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012), the United States Court of Appeals for the Ninth Circuit held 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.” Id. In so ruling, the Ninth Circuit rejected the district court’s determination that the duty to effectuate settlement is limited to situations in which a demand for settlement has been made and, thereby, eliminated “potential confusion as to the scope of insurers’ duty to settle.” Id.
Appellant Yang Fang Du (“Du”) was injured in an automobile accident caused by Joon Hak Kim (“Kim”). Id. At the time of the accident, Kim was insured by appellee Allstate Life Insurance Co. and its subsidiary Deerbrook Insurance Co. (collectively, “Deerbrook”). Id. After Du received a judgment against Kim in the amount of $4.125 million, Kim assigned his bad faith claim to Du. Id. Du sued Deerbrook, alleging that the insurer breached the implied covenant of good faith and fair dealing owed to Kim by not attempting to reach a settlement of Du’s claims after Kim’s liability in excess of policy limits became reasonably clear. Id. At trial, the district court rejected “Du’s request to instruct the jury that it could consider Deerbrook’s failure to effectuate settlement in determining whether Deerbrook breached the implied covenant.” Id. Du appealed. Id.
On appeal, the Ninth Circuit explained that the implied covenant of good faith and fair dealing imposes a duty upon insurers to settle within policy limits when there is a “substantial likelihood” that the insured’s liability will exceed those limits. Id. According to the Court, California courts have commonly applied such a duty to situations in which the insurer unreasonably rejects a settlement offer within policy limits. Id. Here, the Court held that an insurer may also violate the duty by failing to take affirmative steps to effectuate settlement when liability is reasonably clear but no settlement offer has been made by the injured party. Id. Accordingly, the Court concluded that Du’s proposed jury instruction accurately stated California law and the district court, therefore, erred when it rejected that instruction on the ground that no such duty could exist in the absence of a settlement demand. Id.
Nonetheless, the Court found that there were no facts supporting the argument that Deerbrook should or could have made an earlier settlement offer to Du in this case. Id. Thus, the Court held that the district court did not abuse its discretion in rejecting Du’s proposed jury instruction for lack of foundation in evidence. Id.
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