Here’s an interesting question recently confronted by the Ninth Circuit:  Is it bad faith for an insurance company to refuse to initiate settlement discussions in a third-party context when liability has become reasonably clear?  The carrier (Deerbrook, an Allstate company) took the position that bad faith could not exist unless the carrier failed to respond to a settlement demand.  (If you do coverage work, then you know that this is part of the dance.  In large-loss third-party cases, the carrier rarely will volunteer an offer.  The claims rep usually wants a demand on the table first.  Probably this is to set a “celling” on the negotiations.)  

The facts of the Ninth Circuit case were simple:  a car accident in which four people were injured.  The policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident.  The lawyer for the underlying plaintiffs submitted a global demand of $300,000.  The claims rep refused to negotiate, saying that there was insufficient information regarding the injuries sustained by three of the four plaintiffs.  Plaintiffs’ counsel then suggested that they try settle the claim of one of the plaintiffs (Yan Fang Du) separately, but did not make a specific demand.  The claims rep refused, stating that Deerbrook had to pay its $300,000 limit and settle all claims.  Later, the carrier offered to pay in its $100,000 “per person” limit with respect to Du.  Du’s counsel rejected the offer as “too little too late.”

The jury came back with over $4 million on Du’s claim.  Deerbrook paid in its $100,000 limit with respect to Du.  The underlying defendant then assigned his bad faith claim to Du in exchange for a covenant not to execute.  Coverage litigation followed, in which the “policyholder” argued that the case would have settled within policy limits had the carrier initiated earlier negotiations. 

To me, the question of whether a carrier has an affirmative duty to initiate settlement discussions is resolved by a simple review of the Unfair Claims Settlement Practices Act, which is codified in New Jersey at N.J.S.A. §17:29B-4(9).  (While the Act does not create a private right of action in New Jersey, the New Jersey Supreme Court has held that it “declare[s] state policy.”  Pickett v. Lloyd’s, 131 N.J. 457, 468 (1993)).  Like New Jersey’s version of the Act, California’s (where the accident took place) identifies as an “unfair claims settlement practice” “’[n]ot attempting in good faith to effectuate prompt, fair and reasonable settlements of claims in which liability has become reasonably clear.”  (In California, this provision appears at Insurance Code section 790.03(h)(5).)

The Ninth Circuit cited the California provision and wrote:  “[T]he conflict of interest that animates the duty to settle exists whenever there is a significant risk of a judgment in excess of policy limits and there is a reasonable opportunity to settle within those limits; this conflict obtains regardless of whether a settlement demand is made by the injured party.  If, as the general duty of good faith requires, the insurer ‘conduct[ed] itself as though it alone were liable for the entire amount of the judgment,’ a rational party should attempt to settle if there is a ‘substantial likelihood in excess of those limits,’ and there is a reasonable likelihood to settle within those limits.”  (Citations omitted.)

But take heart, you carrier types out there.  Under the specific facts of this case, the Court held that Deerbrook did not breach its duty of good faith and fair dealing.  Despite repeated requests, Deerbrook was not given sufficient information to evaluate the claimant’s injuries, and “could not base a settlement offer solely on the representations of plaintiff and plaintiff’s lawyer.”  Therefore, the carrier could not be liable for bad faith in refusing to settle earlier.      

One other interesting thing about this case.  Citing the California Supreme Court in Johansen v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 123 Cal. Rptr. 288, 292-93 (1975), as well as other authority, the Court stated that “a good faith belief in noncoverage does not insulate an insurer from liability for failure to settle a claim.”  So, at least in California, unless the carrier has actually obtained a declaratory judgment of noncoverage, it remains exposed.