The U.S. Court of Appeals for the 9th Circuit (Washington State is in the 9th Circuit Federal Court of Appeals) recently held that insurance companies have an affirmative duty to attempt to settle cases within policy limits once liability becomes “reasonably clear.” This duty arises even in the absence of a settlement offer by the opposing party. However, the extent of this duty remains unsettled.
The case involved an automobile accident in 2005.[1] The plaintiff Ms. Du and her three passengers were injured. A subsidiary of Allstate Insurance Company (Dearbrooke) insured the other driver Mr. Kim, who caused the accident. The insurance policy included limits of $100,000 for each individual and $300,000 aggregate limit for one accident.
The insurance company eventually acknowledged Kim’s liability. Du’s lawyer submitted a $300,000 global demand (policy limit) for all four plaintiffs with documentation of Du’s and other passengers’ medical expenses of over $100,000. The insurance adjuster refused to settle, asserting there was insufficient information about the other plaintiffs to accept that settlement offer. At trial (jury trial) the court refused to allow the jury to consider whether the insurance company did not attempt to reach a prompt, fair and equitable settlement of the plaintiff’s claim after liability had become reasonably clear. The trial court concluded that bad faith could only be found if the insurance company failed to accept a reasonable settlement demand, rather than for failing to initiate settlement discussions itself. Nevertheless, Plaintiff Du received a judgment against Kim in the amount of over $4 million!
Kim then assigned the bad faith claim against the insurance company to Du. On appeal, the 9th Circuit held that the insurance company could have initiated earlier settlement discussions even in the absence of crucial information about the three other plaintiffs. However, because there was no evidence submitted on that issue, a bad faith claim was not appropriate. The bottom line is that the Court of Appeals ruled that insurers have a duty to initiate settlement once liability becomes “reasonably clear.” The Court gave no test to apply as to when it becomes “reasonably clear” that liability has occurred.
Comment: This automobile accident case should help contractors in their struggles with insurers. It is extremely frustrating for contractors to pay insurance premiums and yet some insurance companies send the covered contractor through an excruciating process before a settlement is obtained. Often times, settlement is achieved at a substantial discount from what is due under the plain terms of the policy. By placing the burden on the insurers to come forward with a reasonable settlement offer after their liability is clearly established, will remedy some of the common abuses that have occurred in the insured/insurer relationship.
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[1] Yan Fang Du v. Allstate Ins. Co., No. 10-56422, 2012 WL 4748679 (9th Cir. Oct. 5, 2012).