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By Patrick A. Calhoon

Much has been written about opening policy limits and creating the insurer’s liability for a verdict or judgment in excess of policy limits. Everyone will agree that the most effective way to open the policy is by providing the carrier with adequate information to properly investigate the claim and then sending a letter-perfect policy limits demand. If the insurer rejects your reasonable demand and your client is awarded an amount in excess of the policy limits, the insurer will be found to have acted in bad faith and liable for the entire verdict, regardless of the policy limits. In fact, there are countless articles and treatises that explain precisely how to draft a policy limit demand, including a recent article in the Trial Bar News authored by our own Rocky K. Copley- See, Copley, R. K. (2015). How to open policy limits. Trial Bar News, 38(2), 13, 24-26. But, under California Law, the rejection of a reasonable demand within policy limits is not the only way to open the policy and recover an excess verdict.

For example, in Boicourt v. Amex Assurance Company (2000) 78 Cal. App. 4th 1390, the California Court of Appeal refused to shield Amex Assurance Co. from a judgment in excess of policy limits even though there was never any settlement demand, let alone one within policy limits. The court held that a formal settlement offer is not an absolute prerequisite to a bad faith action seeking recovery of an excess verdict. This result was extremely fact specific, but the situation will arise from time to time.

In Boicourt, 15-year-old Levi Boicourt, was a passenger riding in his friend’s 1967 Volkwagen Beetle, when another Beetle- whose driver allegedly wanted to race- swerved into the car, causing the car Boicourt was riding in to overturn. The car was insured by Amex Assurance Co. Two months after the accident and prior to filing suit, Boicourt’s attorney contacted Amex and requested information concerning the amount of the insured’s applicable policy limit. However, Amex responded that it would not disclose the limits. As it turned out, Amex had a “blanket rule” against disclosing policy limits pre-litigation or even contacting its own insured to see if the insured would agree to disclose the policy limits.

Four months went by and then Boicourt’s attorney wrote the Amex adjuster to supply him with information concerning the extent of Boicourt’s injuries. In that letter he confirmed Amex’s refusal to disclose the policy limits and declared that “but for the insurer’s actions, the matter might otherwise have been resolved without formal litigation.” The lawsuit was filed that very day.

Five months into the litigation, Amex made a policy limits offer of $100,000. Boicourt declined an offer of policy limits, and never made any settlement demand at all. The case went to trial. At trial the insured stipulated to a judgment far in excess of the policy limits for $3 million, and assigned his rights to Boicourt in exchange for an agreement not to execute the judgment against the insured. Amex paid its policy limit of $100,000. Boicourt then filed an action against Amex for bad faith. Amex brought a successful motion for summary judgment on the basis that Boicourt never made an offer to settle the case within policy limits.

Despite Amex’s offer of policy limits shortly after suit was filed, and the absence of any settlement demand within policy limits by Boicourt, the Court of Appeal reversed a finding of no bad faith as a matter of law. In reversing the grant of summary judgment, the appellate court focused on the fact that Amex’s refusal to disclose policy limits precluded the possibility of settling the case within policy limits and subjected the insured to an excess verdict. The Court stated:

[A] liability insurer “is playing with fire” when it refuses to disclose policy limits. Such a refusal cuts off the possibility of receiving an offer within the policy limits by the company’s refusal to open the door to reasonable negotiations.

Boicourt, at *1392.

The court described this case as a situation where the insurer “played with fire” in refusing to disclose the policy limits. The court held that Amex’s refusal to disclose the policy limits may have foreclosed a possible settlement of the underlying claim within those limits. The court concluded that such a tactic creates a “palpable conflict of interest” between liability insurers and their insureds. The court further concluded that the insurer gains a tactical advantage vis-a-vis the claimant by forcing the claimant to make any pre-litigation offers “in the dark.” The court stated:

Because the essence of bad faith in the liability insurance context is the insurer’s elevation of it’s own parochial interests over the insured’s at the expense of a policy limits settlement—that is, preferring its own interest over the insured’s when there is a conflict of interest between them—we reverse the summary judgment in this case.

Boicourt, at *1392.

The court explained that the conflict of interest between the insured and insurer will arise despite the absence of a formal settlement demand. First, the court pointed out that a blanket rule against contacting the insured to obtain authority to disclose policy limits provides a savings in time and paperwork for the insurer, but “may have the real world effect of “foreclosing” the possibility of a settlement. Id. at *1397.

Second, the court explained there is the negotiating advantage an insurer gains for itself (but not for its insured) when it forces a claimant to make any settlement offer either (a) without benefit of knowledge of policy limits or (b) only after incurring the expense of filing litigation and sending out some initial discovery. The court aptly described this as the same sort of tactical one-upmanship that baseball managers try to obtain when they put in a right-handed pitcher to face a right-handed hitter, when chess players elect the white pieces, or when football captains elect to receive the ball after winning the toss. It doesn’t always win the game, but it gives the player a slight edge in the competition. In negotiation, there is a slight advantage to the party who receives an offer over the party who first makes one, because the latter operates in a universe with less information: namely, what the other party thinks about the value of the transaction. Id at * 1398.

The court concluded that, insurers do have a “selfish” interest (that is, one that is peculiar to themselves) in precluding the disclosure of policy limits (especially pre-litigation), and that interest adversely affects the possibility that an excess claim against a policyholder might be settled within policy limits.

However, as a more recent case makes clear, more than just a bare request for disclosure of policy limits is necessary to expose the insurer to an excess verdict. In Reid v. Mercury Ins. (2013) 220 Cal.App.4th 262 the court examined an insurer’s duty to its insured to settle a third party claim within policy limits when liability is clear and there is a substantial likelihood of a recovery in excess of policy limits. Reid involved an auto personal injury case involving policy limits of $100,000 and injured third parties. The insured’s liability was clear almost immediately after the collusion. The judgment in the underlying personal injury case exceeded $5 million. However, the plaintiff never made any policy limits demand before verdict.

The question on appeal was whether the insurer, in the absence of any demand or settlement offer from the third party claimant, must initiate settlement negotiations or offer its policy limits, and if so how quickly it must do so, to avoid a claim of bad faith failure to settle. The court concluded that an insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured. The court held that in the absence of some manifestation the injured party is interested in settlement, when the insurer has done nothing to foreclose the possibility of settlement, there is no liability for bad faith failure to settle on behalf of the insurer. Id. at *266.

Following Boicourt, the court explained that there must be evidence allowing an inference that the insurer by its conduct has actively foreclosed the possibility of settlement. Id. at *266. In other words, there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within the policy limits could feasibly be negotiated. Id. at *272.

The court stated:

[W]hen a claimant offers to settle an excess claim within policy limits, an opportunity to settle exists and a conflict of interest arises, because a divergence exists between the insurer’s interest in paying less than the policy limits and the insured’s interest in avoiding liability beyond the policy limit. Citing, Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, *873. And a conflict may also arise, without a formal settlement offer, when a claimant clearly conveys to the insurer an interest in discussing settlement but the insurer ignores the opportunity to explore settlement possibilities to the insured’s detriment, or when an insurer has an arbitrary rule or engages in other conduct that prevents settlement opportunities from arising. Citing, Boicourt, supra, 78 Cal.App.4th at *1399.

Thus, the Reid court agreed that a conflict may arise without a formal settlement offer, when a claimant conveys to the insurer an interest in discussing settlement, but the insurer ignores or forecloses the opportunity to explore settlement possibilities to the insured’s detriment.

Accordingly, California law is clear that a “policy limits demand” is not the sole method to open the policy and recover a judgment in excess of policy limits. Rather, any action or inaction which a court concludes triggers a conflict of interest by arguably foreclosing a genuine opportunity of settlement within limits can expose insurers to judgments above their policy limits.