Pre-litigation settlement just got a lot more demanding

Pre-litigation settlement demands are commonplace in motor vehicle and other injury situations likely to involve a party with liability insurance - such as an auto, homeowners or commercial liability policy. As of Jan. 1, several new California Code of Civil Procedures sections created strict new requirements for attorneys making time-limited settlement demands. This new law is a legislative response to the evolving problems stemming from the strategic and complex settlement demands liability insurers have increasingly received over the last two decades - demands that were often viewed as primarily designed to try to "open" policy limits, rather than settle claims.

A common settlement technique is to demand payment of the amount of the available liability insurance, often conditioned on the liability insurer's ability to satisfy a list of other criteria within a short period of time.

If the insurer decides to reject (or fails to "properly" accept) the demand within the allotted time, the injured party may file suit and eventually secure a judgment exceeding the available policy limit. The policyholder is likely to assign "bad faith" rights in return for a covenant not to execute against the insured's personal assets. The plaintiff, who has now recovered a judgment exceeding the policy limit, then sues the insurer, arguing that failure to properly accept the settlement demand "opens" the policy limit and makes the insurer legally responsible for paying the entire judgment.

Over the last two decades, time limit settlement demands became more arduous, particularly when viewed from a liability insurer's standpoint. They were often purposefully ambiguous, sent with short-fuse deadlines and numerous conditions that seemed designed to make it very challenging for the insurer to successfully settle. Some demands even seemed to intentionally omit basic information the insurer would need to match the letter to a file, such as the insured's name or the claim number.

The insurer's ability to respond was often complicated by an offer to release some, but not all insureds, or a demand for full policy limits made by some, but not all claimants. Some demand letters threatened that a request for clarification or an extension of time to respond would be treated as a rejection.

It became commonplace for demands to devote several pages to reminding the insurer about "bad faith" law and its dire consequences. Such demands might omit explanation of why the insured was liable and offer no support for the alleged damages. Demand letters that offered insurers a chance to chase down medical records might condition the signed medical authorization on the insurer's willingness to make various concessions.

Last year the California Legislature took action to address some of the perceived abuses, and Gov. Gavin Newsom signed SB 1155 into law on Sept. 28. The new law took effect Jan. 1, and should help to curb some of the extreme approaches that had become part and parcel of far too many injury-related settlement demands. The new law is codified as California Code of Civil Procedures Sections 999, 999.1, 999.2, 999.3, 999.4, and 999.5. Together, these new Code sections establish certain basic requirements for a valid time limited settlement demand. The new law seems to have some teeth - an injured party's attorney's failure to satisfy the new law's criteria will mean that the policy limit is not opened, even if the settlement demand is rejected.

What Types Of Matters Does The New Law Govern?

Significantly, the new law only applies to pre-litigated settlement demands. If a lawsuit or demand for arbitration has been filed, the new legislation is inapplicable to any demands that might be made thereafter.

At first glance, the new law does not seem to apply to a claimant who is not represented by counsel. Section 999.4 says, "This section shall not apply to a claimant that is not represented by counsel." Section 999.4 establishes that in any lawsuit filed by a claimant or the at fault party, a time limited demand that fails to substantially comply with the "terms of this chapter shall not be considered to be a reasonable offer to settle the claims against the tortfeasor for an amount within the insurance policy limits for purposes of any lawsuit alleging extra contractual damages against the tortfeasor's liability insured."

Presumably the statutory scheme is creating requirements for time limited settlement demands in situations where the claimant making the demand has an attorney, even if the attorney directs the injured claimant to send the demand themselves and without any overt indication of the attorney's behind-the-scenes representation. But that may be a debated issue (along with the surrounding ethical considerations).

Only claims that are covered under certain types of insurance policies expressly fall within the statute. Specifically, Section 999.5 specifies that the chapter applies only to "claims covered under automobile, motor vehicle, homeowner, or commercial premises liability insurance policies." Do the new rules apply to an umbrella policy that provides coverage above an automobile or homeowner policy? Is a landlord policy a commercial premises liability insurance policy? While the new settlement demand law will certainly affect a broad array of pre-litigation injury claims, some claims, against some policies, may not fall within its scope.

Timing Requirements?

What are the new law's timing requirements? The new law provides that the demand must remain open for acceptance for at least thirty (30) days from the date the demand is transmitted if sent by email, facsimile, or certified mail. If the demand is sent by regular mail, at least thirty-three (33) days must be given for the acceptance of the demand. Earlier versions of the bill would have created a 45-day window to respond to demands. The new law appears to reflect a compromise as to what constitutes a reasonable time to respond to a pre-litigation settlement demand.

Pre-litigation demands are increasingly sent soon after an accident, and long before meaningful liability and damages information is available. A police report may not yet be available. It may be too early to know if others who may have been hurt in the accident will be making competing claims against the policy limits. The extent of injury and prognosis for recovery may still be uncertain. This means that even 30 or 33 days may not be enough for an insurer to make an informed decision. But the days of the 10-day demand mailed out on a Friday afternoon and set to expire the day after the ensuing three-day weekend should be mostly over.

Essential Ingredients?

The new law also imposes substantive requirements on pre-litigation time limited settlement demands.

To be a valid demand within limits under the new law, the demand must make a "clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens." Previously, liens could be a complicating factor, especially since some claimant's attorneys would offer to resolve certain types of liens, but not others. The new law seems to be unequivocal in that the demand, to be valid for purposes of "opening" a policy limit, must include "the satisfaction of all liens," making no distinctions between statutory and contractual liens.

In addition, the demand must offer "a complete release from the claimant for the liability insurer's insureds from all present and future liability for the occurrence." As a result, to pass statutory muster, demands are going to have to unequivocally offer protection for all insureds against all present and future liability arising from a particular incident.

To make the insurer's ability to respond to the demand more meaningful, the new law will also require demands to include "the date and location of the loss, the claim number, if known, a description of all known injuries the claimant has sustained, and reasonable proof sufficient to support the claim, such as medical records or bills." And the new law specifies that an insurer's request for clarification, an extension, or more information, "shall not, in and of itself, be deemed a counteroffer or rejection of the demand."

Laws that punished insurers by "opening" the policy limits when an insurer decided to take a case to trial rather than reasonably settle it within policy limits seemed to serve a purpose for many years. But to the extent that rule of law created a situation where insurers that merely wanted to understand claims and settle them quickly and fairly were no longer able to do so, many will see the new law as a bit of welcome relief that was long overdue. One thing is for sure, attorneys who handle injury claims, make settlement demands or respond to them, will want to familiarize themselves with the details of the new law sooner, rather than later.