INSURANCE: BEYOND POLICY LIMITS
Raymond Paul Johnson
Cory G. Lee
Raymond Paul Johnson, A Law Corporation
2121 Rosecrans Avenue, Suite 3400
South Bay Los Angeles
El Segundo, California 90245
Most consumer attorneys have been there or will be: Client arrives at your office, injured by an insured person or business. He has incurred tens of thousands of dollars in medical expenses, not to mention pain and suffering and loss of earnings. You estimate total damages in the six figures.
With liability either admitted or a foregone conclusion, making your client whole should be a simple matter of determining his special damages and negotiating over his general damages, right? Wrong. From a practical viewpoint, the amount recoverable is often limited by the defendant’s insurance limits. What’s an attorney to do? Think: Policy limits demand - - but at the right time and in the right form.
Assuming the insured has minimal or no recoverable assets, a properly executed policy limit demand can do two things. It can maximize your client’s recovery, and make the insurance company liable for your client’s full judgment, whether within policy limits or not.
At their root, insurance policies are simply contracts between an insurer and its insured. As a result, unambiguous policy provisions are ordinarily strictly construed, according to the insured’s reasonable expectations. Bank of the West v. Superior Court (Industrial Indemnity Co.) (1992) 2 Cal.4th 1254, 1264.
Under black-letter contract law, the liability limits of the insurance policy ordinarily set the insurance carrier’s total exposure in a case. Fagundes v. American International Adjustment Co. (1992) 2 Cal.App.4th 1310, 1317. In some circumstances, however, an insurance company’s liability may go beyond policy limits.
II. Bad Faith
Most litigators are broadly familiar with the concept of insurance bad faith, or more precisely, breach of the covenant of good faith and fair dealing. Under that legal doctrine, an insurance carrier has the general obligation to deal reasonably with its insured and the insured’s claim. That is, an unreasonable refusal to settle a claim within policy limits opens the insurer to possible bad-faith liability.
In the past, an insurer typically refused to settle because it believed it had nothing to lose and everything to gain by litigating a case to conclusion when its policy limits were its maximum exposure. See Comunale v. Traders & General Insurance Co. (1958) 50 Cal.2d 654, 658. Today, however, an unreasonable refusal to settle exposes the carrier to liability beyond those policy limits.
In the seminal case of Comunale v. Traders & General Insurance Co., supra, the California Supreme Court explicitly and unambiguously opened insurers to such liability for unreasonably failing to settle a claim within policy limits:
The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.
Comunale, supra, 50 Cal.2d at 659 (internal citations omitted).
As such, an insurer that unreasonably refuses to settle a case within policy limits is exposed to the entire amount of any eventual judgment:
It follows from what we have said that an insurer, who wrongfully declines to defend and who refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.
Comunale, supra, 50 Cal.2d at 661.
As a result, whenever a defendant’s insurance policy may not cover all of your client’s damages, consider a policy limits demand. This of course is impractical if your client refuses to settle for the amount of the policy limit. But if your client agrees, a policy limits demand, when executed properly, will “open the policy” and expose an insurer to liability in excess of its policy limits. In such cases, the timing and form of the demand, however, are as important as the demand itself.
III. Effective Policy Limit Demands.
A policy limits demand must meet five criteria before a court will likely hold an insurer in bad faith for rejecting the demand:
Practically speaking, you first need to determine the policy limits in your particular case. If you are already in suit, the amount of coverage, the nature of the coverage, and any coverage disputes (i.e. reservation of rights) between the insured and its carrier are discoverable using Form Interrogatory 4.1 of the Judicial Council, Form Interrogatories- General. See also Cal. Civ. Proc. § 2017.210. If you have not yet filed the complaint, send a registered letter to the adjuster requesting the same information.
Assuming the likely verdict in your client’s case reasonably exceeds the policy amount, determining when to make the policy limits demand becomes key. To be reasonable, the demand must be timed so that the insurer has had adequate opportunity to investigate and discover for itself that the likely verdict exceeds policy limits. As such, some insurance companies may drag out their investigation into the value of your client’s case to forestall exposure to bad faith. You should short circuit this tactic.
If your case is in suit, respond early and fully to discovery requests about your client’s damages and contentions concerning the insured’s liability. If the complaint has not been filed, put a comprehensive written package together to the adjuster disclosing the liability contentions and damages in your case.
Spell it out; don’t pull punches. And back up what you say with documents, photographs and other evidence, including your client’s medical records, any incident reports, witness statements and if available expert reports.
While every case is different, the timing of the policy limits demand must be linked to the state of investigation and/or discovery. The demand should be made after the insurer has the documentation and other evidence which, when objectively evaluated, would lead to the conclusion that the judgment amount would likely exceed the settlement demand. In other words, you must give the insurer a reasonable opportunity to evaluate the case. See Walbrook Insurance Co. Ltd. v. Liberty Mutual Insurance Co. (1992) 5 Cal.App.4th 1445, 1457.
The insurance company’s reasonableness at the time of rejecting a policy limits demand is the standard that courts use in deciding bad-faith cases. So the fuller your disclosure, the more pressure on the carrier. If the carrier then refuses to settle, a strong argument exists for bad-faith liability when plaintiff later obtains a judgment in excess of policy limits.
You should also give the insurance company a reasonable amount of time to accept your settlement demand. Coe, supra, 66 Cal.App.3d. at 994. While the amount of time deemed “reasonable” is dependant on the particular facts of the case, where investigation and evaluation are complete, as little as one week may suffice. Critz v. Farmers Ins. Group (1965) 230 Cal.App.2d. 788, 798.
IV. “Burning” Policies.
In recent years, “burning” or “self-consuming” policies have become popular with insurers. Most litigators have seen the clause below or something similar in insurance policies:
Limits of Liability: The Liability of the COMPANY for each CLAIM including CLAIM EXPENSES under this Policy shall not exceed $ ______________.
If “CLAIM EXPENSES” is defined to include the costs of defending the claim, including attorneys’ fees, you are faced with a “burning” policy.
For many, the first thought might include an expletive when you realize the policy is ever-shrinking due to forces largely outside your control, like how many hours opposing counsel bills, and the amounts the defense spends for investigation, depositions, experts and other litigation costs. If there is reasonable liability in your client’s case, however, and his damages clearly exceed the starting policy limits, you may be able to turn lemons into lemonade. In that regard, your second thought should be: This could be an opportunity for early settlement at or near policy limits.
After you disclose and document the liability of the insured and your client’s full damages, a carrier will know that prolonged litigation or even a drawn-out settlement process could leave its insured without sufficient coverage. You may be able to take advantage of the decreasing coverage by disclosing quickly, and making an early settlement demand at the current policy limits.
A carrier who rejects such a demand would do so at its own risk. Especially so because, as the case drags on, the coverage diminishes, and the carrier will appear less and less reasonable for exposing its insured to more and more uncovered liability. That prospect alone could drive your case to settle.
V. The Policy Limits Demand was Rejected, Now What?.
Once an insurer declines a policy-limits demand, either by explicit rejection or by allowing the demand to expire, new options open to plaintiff.
A plaintiff may seek an assignment of the insured tortfeasor’s bad-faith rights against its insurer in exchange for a covenant not to enforce any judgment against the insured’s personal assets. See Critz, supra, 230 Cal.App.2d 788. Such an assignment may be made at any time, before or after trial, and is effective even if the express terms of the policy forbid it. Smith v. State Farm Mutual Automobile Insurance Co. (1992) 5 Cal.App.4th 1104, 1110-11.
The assignment, however, is not operative until an excess judgment is rendered, i.e. no cause of action for bad faith arises until after an excess judgment is obtained. Safeco Insurance Co. v. Superior Court (1999) 71 Cal.App.4th 782, 788-89.
Be aware, however, that while an insured’s economic damages are assignable, any attempted assignment of personal injury, emotional distress claims, pain and suffering or punitive damages is ineffective. See Murphy v. Allstate Insurance Co. (1976) 17 Cal.3d 937, 942; and Smith, supra, 5 Cal.App.4th at 1111. Therefore, in the assignment of bad-faith rights, the damages recoverable by your client are limited to the amount of judgment in excess of the policy limits. As such, your client does not truly “step into the shoes” of the insured for other bad-faith causes of action and damages. Id.
Depending on circumstances, strategies may be employed to sidestep a potential waiver of the personal injury, emotional distress, and punitive damages claims. For example, the insured may sue directly for these bad-faith damages, then agree to pay the excess judgment or some other amount to your client to satisfy the judgment. See Murphy, supra, 17 Cal.3d at 942-43.
Clearly, an assignment and covenant not to sue offer advantages to plaintiff. For instance, an insured defendant may be less willing to shade or obscure the truth because their personal assets are no longer at stake. On the other hand, of course, an assignment and covenant not to sue should never cross the line to collusion of plaintiff and insured against an insurance company. For instance, an agreement that the insured will not contest liability in exchange for a covenant not to enforce a judgment against the insured’s personal assets would be collusive. See Samson v. Transamerica Insurance Co. (1981) 30 Cal.3d 220, 240-41. Collusion, if proven, would likely be a breach of the insured’s duty to the insurer, and could have dire coverage consequences for the insured. See id.
All consumer attorneys want to prosecute their client’s case so as to maximize the collectible recovery. As such, in the right circumstances, always consider issuing a properly timed and formulated policy limits demand. Ensure that at the time of the demand, the defense has the liability and damages information it reasonably needs to conclude its investigation, and determine that the likely judgment will exceed policy limits. This will maximize the insurance carrier’s bad-faith exposure, and likely lead to efficient and expeditious settlement or, if settlement is not to be, insurance coverage beyond the policy limits for any excess judgment.