The Ninth Circuit determined that under California law, the insurer's failure to attempt to reach a settlement after it was reasonably clear that the insured's liability would exceed policy limits breached the covenant of good faith and fair dealing. Du v. Allstate Ins. Co., 2012 U.S. App. LEXIS 11755 (June 11, 2012 9th Cir.)
The insured was involved in an accident, causing injury to the four occupants of the second vehicle. The insured's auto policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident.
The insurer unsuccessfully attempted to obtain medical documentation from one injured passenger, Du. The insurer, however, was aware of serious injury and accepted the liability of its insured. Du's lawyer submitted a $300,000 global demand for all four plaintiffs. For the first time, Du documented her medical costs at $108,742.92. The insurer refused to settle all four claims at once because there was insufficient information about injuries to the other three victims. The insurer offered to settle with Du for $100,000, but Du's lawyer rejected the offer.
Du then filed a personal injury lawsuit against the insured and received a jury verdict of $4.1 million. The insurer paid the $100,000 available against the policy to partially satisfy the judgment. The insured then assigned his bad faith claim to Du in exchange for a covenant not to execute.
Du sued the insurer, alleging it acted in bad faith by failing to settle the claim within policy limits even after the insured's liability for a judgment in excess of the policy limits after Du's medical records became available. The trial court concluded that an insurer had no duty to initiate settlement discussions in the absence of a settlement demand from a third-party claimant.
The Ninth Circuit affirmed the result, but held that an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. Here, however, the insurer did not act in bad faith. The insurer initiated settlement talks in a timely fashion. Initially, all the insurer had regarding Du's injuries were uncorroborated and conflicting assertions by Du and her counsel. Further, the insurer had no proof of the injuries of the three other individuals involved in the accident.
Therefore, there was no evidence that the insurer could have made an earlier settlement offer to Du. Accordingly, the insurer did not act in bad faith.