Background
Zhiwei Chen filed a diversity action alleging state law claims arising from an automobile accident against Allstate Northbrook Indemnity Company. The district court granted judgment on the pleadings dismissing the case and denied Chen’s motion to remand the action to state court.
The court’s reasoning
The appellate court reviewed the case de novo. It found that the district court had subject matter jurisdiction under the diversity jurisdiction statute. The court held that the relevant insurance policy granted the defendant the authority to settle any claim or suit. Under California law, when a policy provides discretion to settle, the insurance company generally has no liability to the insured for settling within the policy limits. To establish a breach of the duty of good faith and fair dealing, a plaintiff must show that benefits were withheld unreasonably or without proper cause. The court rejected Chen’s contention that the district court abused its power.
What it means going forward
Insurance companies with settlement discretion in their policies are protected from liability when settling claims within policy limits, provided they do not act unreasonably.
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