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By: Patrick A. Calhoon

In the last edition of the Trial Bar News we reviewed Barickman v. Mercury Cas. Co. (2016) 2 Cal. App. 5th 508 and Mercury’s attempt to dodge an “open policy” argument arising from its failure to settle a case for the policy limits of $30,000. Specifically, Mercury took issue with certain innocuous language plaintiffs’ counsel added to the settlement release. The result- Mercury was on the hook for a $3 million excess verdict. Now we examine yet another failed attempt by an insurance company to avoid an excess verdict for breaching its duty to settle. In Madrigal v. Allstate Ins. Co. (C.D. Cal. 2016) 215 F. Supp. 3d 870, Allstate argued that plaintiff’s policy limit demand was defective and could not be accepted, thus the policy was not “open”. The result- Allstate is now on the hook for a $14 million excess verdict. Boom!

The Accident and Policy Limits Demand

Carlos Madrigal was involved in an automobile versus motorcycle accident with Richard Tang. Madrigal, 24-years old, suffered fractures at multiple levels of his spine, leaving him paralyzed and without sensation from below his mid-chest. At the time of the accident, Mr. Tang and his wife, Anna Tang, were insured with Allstate, and their policy had a $100,000 limit for bodily injury coverage, per claimant. Mr. Tang does not speak or write English and Mrs. Tang speaks English, but with difficulty.  

Madrigal retained an attorney who contacted Allstate to obtain Mr. Tang’s policy limits. Allstate assigned the claim to an adjustor who had 32 years as of experience. Madrigal’s attorney supplied Allstate with Madrigal’s medical bills totaling approximately $34,000 and records that covered first few weeks of his initial hospital stay after the accident. Allstate was also informed that Madrigal was uninsured. Allstate placed a notation in the file stating “Prop 213” (meaning Madrigal is statutorily barred from recovering non-economic damages).  Accordingly, Allstate was aware from the beginning that Madrigal’s claim would not include non-economic damages. However, the recovery would include the past and lifetime future medical costs for a paralyzed 24-year old, as well as any past and future loss of earnings. Madrigal, supra at *878.

Several months later, Madrigal’s attorney served Allstate with a letter stating that Madrigal was making a “policy limits demand to Defendant Richard Tang and his insurance carrier, Allstate … for $100,000.” (hereinafter “the Demand”) The Demand began by explaining that Madrigal’s attorney had been advised that Mr. Tang’s available insurance coverage was limited to the $100,000 available under the policy, and was based on that assumption.

The Demand recommended that Allstate interview four listed witnesses, whose testimony was claimed to be favorable to Madrigal. It stated that the evidence shows that Mr. Tang, while driving in the center lane, made a sudden left turn into a parking lot without giving prior warning, striking Madrigal. It indicated that Mr. Tang was “100% liable for this accident.” The Demand further stated that Madrigal’s damages far exceeded Allstate’s policy limits; that Madrigal’s injuries were “life altering” and that he used a wheelchair “and may never walk again.”

The Demand further stated that, in order to effect a settlement, Allstate was required to fully comply with six listed conditions within 30 days from the date of the Demand. The conditions were:

  1. You must timely deliver to my office legible photocopies of all available liability insurance policies maintained by your insured;
  2. You must timely deliver to my office the appropriate release of all claims forms;
  3. You must timely deliver to my office a declaration under penalty of perjury, signed by your insured, specifically stating that no other liability insurance policies exist for the subject accident, (including an umbrella policy) [,] that he was not in the course and scope of employment, and an asset sheet of all assets or lack thereof;
  4. You must deliver to my office a settlement draft, equal to the total amount of all available liability insurance policy limits along with a certified copy of the policy revealing limits;
  5. [I]f you do not understand any portion of this letter or if you believe that any portion of this letter cannot be complied with for any reason, then this instant conditional policy limits settlement offers [sic] requires you, as another condition precedent to be performed by you, at or within thirty (30) days from the date of this letter, to communicate in writing to my office, whatever, [sic] “problems” you deem to exist. If your written problems establish good cause, then my office will grant you an extension of time within which you may accept my client’s conditional policy limits settlement offer;
  6. Any effort on your part to comply with any of the above conditions precedent orally or telephonically will be deemed by this letter to [be a] rejection of this conditional policy limits settlement offer…. No one in our office is authorized to orally or telephonically modify any of the terms of this instant policy limits settlement offer letter. Id. at *880.

Allstate’s Response to the Demand

Following receipt of the Demand letter, Allstate’s claims management met to discuss the case. They discussed the value of the case, including the fact that there was only $34,000 in medical bills and no evidence of prospective medical expenses or lost wages. Not discussed was the fact that Madrigal was uninsured and could not recover non-economic damages. In any event, Allstate management determined to pay the $100,000 policy limits, despite terms in the Demand they deemed “problematic.” In fact there was never a discussion concerning whether to accept the Demand on its own terms because “there were too many problems with it”. Importantly, however, Allstate never once contacted Madrigal’s attorney to seek clarification or discuss the “problems” with the Demand. Id. at *883.

Allstate sent Madrigal’s attorney a letter offering to pay policy limits. The terms of the Allstate letter required a release (without identifying in the letter itself that Mrs. Tang was also an insured) before the check could be delivered, but did not require the Tangs to provide an asset sheet as set forth in the Demand. Allstate’s offer did not identify any problems the Demand. Id. at *884.

Before Allstate’s policy limits offer was accepted, Allstate’s adjustor realized that she had overlooked the fact that Madrigal was uninsured, which meant that general damages for pain and suffering were not available. She contacted Madrigal’s attorney to clarify Madrigal’s insurance status. The adjustor told Madrigal’s attorney that she made the policy limits offer on the erroneous assumption that Madrigal was insured, but that she was willing to honor the offer if he was willing to accept it. According to the adjustor, Madrigal’s attorney stated that he was not “accepting or denying” the offer, and told her that she had all of Madrigal’s medical records. The adjustor then stated that she would follow up with her managers. Id. at *885.

The adjustor then met with a “claims processes expert” to inform him of her mistake and to ask for guidance, given that she had extended a $100,000 offer. It was decided that Allstate could “revise” the offer to pay only for the out-of-pocket medical expenses of $34,000 that Madrigal had documented.

Only days after Allstate’s policy limits offer, and without discussing it with the insureds, the adjustor sent a new offer via fax to Madrigal’s attorney. Allstate dropped the amount of the offer to $34,398, with an invitation to provide further medical bills for Allstate’s consideration. Madrigal’s attorney called the adjustor to confirm that Allstate’s offer was reduced. He then sent the adjustor a confirming letter regarding their conversation and further informed Allstate that Madrigal had been working at the time of the accident and had lost wages. Id. at *886.

Following the conversation with Madrigal’s attorney, the adjustor went back to management with the information concerning lost wages. Allstate’s management agreed that the $100,000 should be put back on the table. The adjustor then sent Madrigal’s attorney a letter extending the $100,000 offer contingent upon the execution of the release which included both Mr. and Mrs. Tang.

Madrigal’s attorney responded by a letter the same day, stating “In response to your fax today, there has been no ‘confusion.’ Allstate has clearly rejected the policy limit demand of $100,000 in writing … and verbally to me … as confirmed by my fax … We are moving forward against your insured as if the policy were open…Please put your insured on notice.”

Following that letter, Allstate offered to pay the $100,000 policy limits on twelve different occasions. Madrigal’s attorney rejected each offer and filed a lawsuit against Mr. Tang. Mrs. Tang was added as a defendant after the suit began, but was dismissed before trial, and the case proceeded only against Mr. Tang. Id. at *887.

At trial, the jury rendered a verdict finding that Richard Tang was 100% at fault for the accident and awarded Madrigal damages that, with costs, exceeded $10 million. Following the judgment, Allstate paid Madrigal the policy limit of $100,000 in partial satisfaction of the judgment. In addition, Madrigal and the Tangs entered into an Assignment of Rights agreement in which Madrigal agreed not to execute the ultimate judgment in exchange for all assignable rights that the Tangs possessed against Allstate. Id.

The Bad Faith Action

Madrigal and Mr. and Mrs. Tang filed a bad faith action against Allstate seeking to recover the amount of the judgment for breach of the duty to settle and other damages, including emotional distress, attorney’s fees, and punitive damages. The case ultimately went to trial and the jury found Allstate liable on Madrigal and the Tangs’ respective bad faith claims. The jury awarded Madrigal the amount of the underlying excess judgment, plus interest and costs “to be determined by the Court.” The jury awarded Mrs. Tang and Mr. Tang $50,000.00 each for the emotional distress caused by Allstate’s breach of the implied covenant. However, the jury also found that the Tangs were not entitled to punitive damages. Id.

Prior to the verdict, Allstate made a motion for judgment as a matter of law (“JMOL”) which was renewed after the verdict was rendered.

Among other arguments raised in its motion for JMOL, Allstate attempted to dodge the “open policy” argument for two primary reasons. First, Allstate raised a “failure to release” argument. According to Allstate, the Demand was unreasonable as a matter of law because it did not specifically offer to release Mrs. Tang. Further, according to Allstate, the interpretation of a settlement demand is an issue of law for the court to decide, and the trial court’s decision to submit the determination of the reasonableness of Madrigal’s demand to the jury was erroneous as a matter of law. Second, Allstate contended that Allstate’s failure to accept the Demand was reasonable because “the undisputed evidence at trial” showed that Allstate could not comply with the settlement demand’s condition requiring Mr. Tang to provide an asset sheet.

In support of its “failure to release” argument, Allstate  argued it was under no duty to seek clarification of the terms of Madrigal’s offer because after Allstate put Madrigal’s attorney on notice of Mrs. Tang’s existence, Madrigal’s counsel neither agreed to modify his existing demand nor made a new demand to include Mrs. Tang. Finally, Allstate contended that it was prohibited by law from disclosing that Mrs. Tang was an insured without her consent. Because Mrs. Tang was not included in the demand, Allstate insisted that not only was the demand “unreasonable,” but also that its failure to accept the demand was reasonable. Id. at *889-890.

With regard to Allstate’s alleged inability to comply with the asset sheet requirement Allstate argued the following: that its adjustor discussed the asset sheet condition with the Tangs; the Tangs were aware of the condition; Allstate appropriately recommended that the Tangs consult an attorney or a financial adviser, which the Tangs chose not to do; and the Tangs never provided an asset sheet or otherwise disclosed to Allstate what assets Mr. Tang owned. Allstate also rejected any alleged contentions that industry custom or practice required it to give Mr. Tang “legal advice” regarding the asset disclosure condition, or that it was derelict in failing to provide Mr. Tang with an asset disclosure form. As such, Allstate contended that it was incapable of accepting the demand for reasons beyond its control.

With respect to the failure of the demand to include an explicit release of Mrs. Tang, Plaintiffs argued that the reasonableness of the Demand was not a pure question of law because there was a “factual dispute as to the terms of Madrigal’s offer, the interpretation of those terms, the breach of the implied covenant of good faith and fair dealing, breach of that covenant, and what could/should have been done before rejection of the policy limits offer.” Plaintiffs noted that the California Supreme Court has recognized that “ ‘the reasonableness of a rejected settlement offer is often an issue of fact to be determined by the jury.’ ” quoting, Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 243. Madrigal, supra at *890.

Furthermore, Plaintiffs emphasized that all of Allstate’s correspondence prior to the Demand affirmatively identified only Richard Tang as the insured. According to Plaintiffs, exempting an insurer from liability because a settlement demand did not specifically refer to an insured whose existence the insurer did not disclose “would encourage insurance companies to hide the identity of potentially culpable insureds so that [they] could never have to pay a policy limits demand.” Plaintiffs further contended this was not situation where the claimant knew of the existence of all relevant insureds, but deliberately offered to release only selected insureds. citing, Graciano v. Mercury General Corp., (2014)  231 Cal.App.4th 414, 425. Finally, Plaintiffs argued that to the extent that Allstate was concerned about whether the release of Mrs. Tang was encompassed by the settlement demand’s reference to an “appropriate release,” Allstate had a duty to clarify any ambiguities before rejecting the demand. citing, inter alia, Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, *708 n.7, Coe v. State Farm Mut. Auto. Ins. Co. (1997)  66 Cal.App.3d 981, *991–92.

As far as the asset disclosure condition, Plaintiffs argued that the evidence at trial established that Mr. Tang, through his wife’s conversations with the adjustor, did not refuse to provide an asset sheet. Rather, the evidence showed that there was no impediment to disclosure because the Tangs did not have any substantial assets. Plaintiffs further argued that Allstate’s claim that it categorically could not comply with the asset disclosure requirement is not credible because Allstate easily could have advised the Tang’s to provide an asset sheet and bears responsibility for the failure to do so. Madrigal, supra at *891.

The motion for JMOL is denied

As a preliminary matter, the Court found that the question of the reasonableness of the Demand was properly submitted to the jury because the meaning of the demand’s terms and conditions depended on the resolution of many disputed facts. Under California law, it is “solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.” Cty. of Solano v. Handlery, 155 Cal.App.4th 566, 574, (2007). Furthermore, the California Supreme Court has specifically recognized that “the reasonableness of a rejected settlement offer is often an issue of fact to be determined by the jury.” Samson, supra 30 Cal.3d at *243.

With regards to the “failure to release” argument, the Court’s decision turned on the reasonable interpretation of the phrase “appropriate release” contained in the Demand. The Court concluded that a reasonable jury could find that the Demand was directed to Mr. Tang (the known insured), but also incorporated a condition that Allstate provide an “appropriate release” that included any other insured (whether disclosed or not) whom Allstate may have deemed necessary for the resolution of the claim. The Court noted that Allstate failed to disclose Mrs. Tang’s existence or Mrs. Tang’s status as an insured until Allstate’s policy limits offer, two weeks after Madrigal had tendered the Demand. Moreover, Allstate sent Madrigal’s attorney seven letters, all of which identified only Richard Tang as Allstate’s insured, without any reference to Mrs. Tang as a second insured. Madrigal, supra at *893-901.

The Court also disagreed with Allstate’s argument that its failure to accept the Demand was reasonable because Mr. Tang did not and would not provide an asset sheet. Thus, it could not accept the Demand due to factors outside its control. The Court stated that Allstate had an obligation to “attempt[ ] in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” citing Cal. Ins. Code § 790.03(g)(5); Graciano, supra at *425 (the implied covenant “obligates the insurance company … to make reasonable efforts to settle a third party’s lawsuit against the insured”). The Court noted that Allstate merely advised the Tangs about the request for an asset sheet and that they may want to consult an attorney about it. According to the Court, a reasonable jury could find that the duty to effectuate a fair settlement compels something more than that. This is especially true given Mr. Tang’s educational background and language barrier. The Court also found that Allstate was responsible for the failure to obtain the asset sheet because when Allstate initially offered the policy limits following the Demand, its own offer did not include the provision of an asset sheet. Id. at *901-905.

The Ninth Circuit Court of Appeals affirmed the District Court’s decision in its entirety on June 15, 2016. See, Madrigal v. Allstate Ins. Co. 2017 WL 2590771 (9th Cir. June 15, 2017).

Lessons to be learned

The Madrigal v. Allstate opinion is dense with legal issues and arguments that should be carefully reviewed before making a policy limits demand.  Among other things, this case provides authority for the proposition that the reasonableness of a policy limits demand is a question of fact for a jury to decide where there is a factual dispute as to the demand’s terms. Further, it serves as an important example of how courts will enforce an insurance company’s duty to attempt to effectuate a settlement on behalf of its insured to prevent a verdict in excess of policy limits, and will hold the insurer accountable for focusing on its own bottom line instead. Here, muddled up amongst all of Allstate’s machinations to avoid the “open policy” argument is the simple fact that Allstate initially offered to pay policy limits, but then rescinded that offer in an blatant attempt to save itself money. Particularly egregious is that Allstate was aware that Madrigal was paralyzed and would need significant care in the future and yet it attempted to settle the case for only $34,000. Finally, this case also strengthens the insurer’s duty to clarify the terms of an unclear policy limits demand rather than wait to use the lack of clarity as a defense to an “open policy” argument in a subsequent bad faith case.