We recently wrote about a policyholder friendly opinion by the Ninth Circuit Court of Appeals that seemingly 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, even without a policy limits settlement demand. In other words, the court held that a demand within policy limits was not an element of a bad faith failure to settle claim. The Ninth Circuit, on October 5, 2012, issued an amended opinion deleting this language and leaving open the questions: 1) whether the duty to settle can be breached absent a settlement demand from the third party claimant; and 2) whether the genuine dispute doctrine can be applied in third-party cases.
California appellate courts have been clear that an insurer can be held liable for bad faith or for a judgment in excess of policy limits (i.e., open up policy limits) when there is an offer to settle an excess claim made within policy limits or when a settlement offer is made in excess of policy limits and the policyholder is willing and able to pay the excess. See Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 873 (1973)(“When a claimant offers to settle an excess claim within policy limits a conflict of interest immediately arises between carrier and assured. In such circumstances the carrier is required to evaluate the settlement offer in good faith, and good faith requires it to consider the interests of the assured equally with its own or, as some of the cases have said, to evaluate the settlement offer as though the carrier itself were liable for the full amount of the claim. If the carrier rejects the offer to settle within policy limits without having made an honest, intelligent, and knowledgeable evaluation of the offer on its merits, then the carrier has acted in bad faith and may become liable to its assured for consequential damages caused by its bad faith rejection.”) see also Coe v. State Farm, 66 Cal. App. 3d at 981, 995-996 (1977) (“[u]nder the controlling authorities actionable ‘bad faith’ arises, not from an insurance carrier’s obligation ‘to settle,’ but from unwarranted failure to accept a reasonable settlement offer.”)
The Ninth Circuit, in its amended opinion in Du v. Allstate Insurance Company et al., __ F.3d __ (9th Cir. 2012) U.S. App. LEXIS 20889 (apparently done to avoid an en banc hearing), deleted the policy holder friendly language regarding an insurer’s duty to settle, and replaced it with a discussion of current California law that states that an insurer cannot be held liable under a bad faith failure to settle claim in the absence of a demand within policy limits. Thus, what once was a case – at least for a few months – being hailed as a victory for policy holders, has done very little to change the landscape of bad faith duty to settle cases. The decision simply cited long standing authority that has held an insurer cannot be liable for bad faith failure to settle claim in the absence of a demand within policy limits, and then decided that the question needed not be answered for purposes of this case.
The Ninth Circuit similarly chose not to decide the question of whether the genuine dispute doctrine applies to third-party cases. The court found that the ultimate issue – whether the trial court gave a proper jury instruction that the jury could consider the insurer’s failure to effectuate a settlement in determining whether the insurer breached the implied covenant of good faith and fair dealing – did not require the expansive discussion of the issues found in its earlier opinion. However, it is likely that what was once a very policyholder friendly decision is no longer.
