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(Article from Insurance Law Alert, April 2017)

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The Ninth Circuit ruled that a California federal district court erroneously concluded that an insurer’s negligence was insufficient to constitute a breach of the implied duty to settle.  McDaniel v. Government Employees Ins. Co., 2017 WL 892516 (9^th Cir. Mar. 7, 2017).

McDaniel, as assignee of claims against GEICO, alleged that the insurer breached its implied duty to settle by refusing to accept a $100,000 policy limits settlement, after which a $3 million award was issued against the policyholder.  A California district court agreed and granted McDaniel’s summary judgment motion.  The Ninth Circuit reversed, holding that an insurer breaches its implied duty to settle only when it engages in “unreasonable conduct.”  While the conduct need not rise to the level of fraud or dishonesty, it must consist of more than negligence, bad judgment or mistake.  The court held that GEICO’s conduct did not satisfy the “unreasonable refusal” standard because its failure to accept the policy limits offer was based on negligence.  In particular, the record established that GEICO’s failure to accept the offer within the required time frame was due to a miscommunication relating to the receipt of certain discovery responses, and that GEICO had attempted to accept the settlement offer (without realizing that the time frame had expired).