New Ninth Circuit Decision Purportedly Imposes Duty On California Insurers To Negotiate A Settlement Within Policy Limits

Du v. Allstate Ins. Co., ___ F.3d ___ (June 11, 2012)

The recent Du v. Allstate Ins. Co. opinion is the 9th Circuit's Erie guess of the proper interpretation of a long-standing issue of California bad faith law: whether an insurer has a duty to attempt to settle within policy limits even if there is no policy limits demand, and, if so, when that duty attaches. The 9th Circuit ruled that an insurer does have the duty to attempt to settle a claim within policy limits when it is "reasonably clear" that the insured's liability is in excess of the policy limits, or it faces bad faith exposure for a judgment in excess of policy limits. The 9th Circuit also ruled that the bad faith defense of the "genuine dispute" doctrine does not apply to settlement of third-party liability claims.

The 9th Circuit decision in Du is potentially a license for misuse by plaintiffs trying to manipulate the settlement process to "lift the cap off" policy limits. Decades ago, the California Supreme Court in Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880 (1979) gave plaintiffs a direct right to bring bad faith claims against insurers for unreasonably failing to effectuate settlements under the same standard adopted by the 9th Circuit in Du. However, at the time of Du, Royal Globe was not the law since in 1988 when the California Supreme Court surveyed the carnage in insurance claims handling created by Royal Globe and prohibited both plaintiffs and insureds from pursuing bad faith actions based on Insurance Code section 790.03. See Moradi-Shalal v. Fireman's Fund Ins. Companies, 46 Cal.3d 287 (1988). Now the 9th Circuit is attempting to re-open this Pandora's Box in the guise of an assignable bad faith claim of insureds, and the "losers" in this process will be the California insurance industry.

As discussed below, the entire Du decision is obiter dictum which should not be binding precedent. However, the California federal district courts likely will feel compelled to follow this published decision. Because the California state courts typically ignore 0th Circuit decisions on California insurance law (which they are not required to follow, unlike published state court appellate decisions), this will encourage plaintiffs to bring bad faith cases in federal court under diversity jurisdiction.

Du arose out of an auto accident with one severely injured plaintiff and several other plaintiffs with some injuries. The defendant had a $100,000 per person/$300,000 per...