On June 22, 2011, the Ninth Circuit issued an opinion that portended to make a fundamental change in California insurance bad faith law on the subject of an insurer’s duty to settle. That decision, Yan Fang Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012), concluded that insurers have a duty to settle even in the absence of a settlement demand from the third-party claimant if there is a substantial likelihood of an excess-of-limits judgment. In addition, the decision pronounced that the “genuine dispute doctrine” does not apply in the context of third party liability claims.
Four months later, apparently rethinking the wisdom of changing the landscape of California’s bad faith law in one sweeping decision, the Ninth Circuit amended its opinion without oral argument after denial of rehearing en banc, at Yan Fang Du v. Allstate Ins. Co., --- F.3d ---, 2012 WL 4748679. The Ninth Circuit decided to put the genie back in the bottle and cork the furor that the June opinion had created in the California insurance community.
Instead of addressing whether the duty to settle can be breached absent a third-party settlement demand or whether the jury instruction predicated on such a duty was properly refused under the “genuine dispute doctrine,” as in the original decision, the Ninth Circuit concluded: “We need not resolve these two legal issues because we find that in any event, the district court did not abuse its discretion in ruling there was no factual foundation for the  proposed instruction.” The Court affirmed the trial court’s refusal to give the instruction because “there was no evidence that [the insurer] should or could have made an earlier settlement offer to [the third-party claimant].” By deciding on the facts specific to the case, the Ninth Circuit avoided the legal issues of the duty to settle and the propriety of the jury instruction.
The amendment of the opinion was wise. The Ninth Circuit should not be making pronouncements of such fundamental issues of state law.
The jury instruction at issue, CACI 2337, approved in 2008 by the Judicial Council of California, was predicated on Insurance Code § 790.03(h)(5) of California’s Unfair Practices Act, which prohibits an insurer from engaging in the general business practice of “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”
The problem with the instruction is that it allows a party to introduce evidence of the insurer’s settlement conduct in a single case and seek to hold the insurer in bad faith based on the statute, contrary to the California Supreme Court’s decision in Moradi-Shalal v. Fireman’s Fund Ins. (1988) 46 Cal.3d 287. In Moradi-Shalal, the Supreme Court announced that no private right of action may be based on violations of Insurance Code § 790.03(h), including subdivision (5), specifically disapproving and reversing its earlier decision in Royal Globe Ins. v. Superior Court (1979) 23 Cal.3d 880, which had extended such a private right of action to insureds and third-party claimants. The aftermath of the Royal Globe decision was a proliferation of lawsuits against insurers and an escalation in insurance costs due to litigation costs and increases in bad faith jury verdicts. In reversing Royal Globe, the Supreme Court in Moradi-Shalal emphasized the purpose of the Unfair Practices Act was to provide the Insurance Commissioner with an enforcement tool to use against insurers’ widespread violations of the unfair practices outlined in Section 790.03(h).
By addressing the propriety of CACI 2337, the Ninth Circuit would have waded into uncharted waters and could have resurrected private causes of action based on Section 790.03(h)(5) that would fly in the face of the California Supreme Court’s prohibition announced in Moradi-Shalal. The Ninth Circuit was likewise wise to supercede its opinion on the issue of the “genuine dispute doctrine” in the context of third-party claims, which has yet to make its way to the California Supreme Court.
The Ninth Circuit’s “Du over” will, at least for the time being, quell the furor created by its initial opinion. Whatever fears that insurers might have had about continuing to do business in California, in the wake of the first Du decision’s murky guidelines on the duty to settle and the prospect of unexpected excess exposure even based on reasonable claims-handling practices, should be put to rest for now.
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