It is a not unusual situation.  A plaintiff’s attorney has a strong case on liability and damages -- but the defendant has inadequate limits of liability to satisfy the potential verdict.  Facing the situation of a partially – even substantially -- uncollectable judgment, the plaintiff’s attorney attempts insurance alchemy.  He or she sends the defendant’s insurer a letter demanding that it settle the case within policy limits. 

Of course, despite the seemingly sincere-sounding settlement offer being made, counsel is, in fact, hoping that the insurer rejects it.  If so, and the case goes to trial, and there is a verdict against the defendant-insured in excess of the policy’s limits, the insured (or plaintiff’s counsel, via assignment) will argue that the insurer’s rejection of the settlement demand was in bad faith.  In other words, the insurer, based on the state’s standards for accepting a within-limits settlement demand, should have done so to prevent the very situation that has now transpired – an insured facing personal liability for the verdict amount above its limits.  Thus, because of its failure, it will be argued that the insurer is liable for the entirety of the verdict -- including the amount of excess of the limits.  If all goes according to plan, the plaintiff’s attorney, ala King Midas, may have now turned a low limits policy into a no limits policy.

In an effort to increase the chances of this desired scenario playing out, the plaintiff’s attorney will sometimes impose hurdles to make it more difficult for the insurer to accept the within-limits settlement demand.  The demand may have a very short time limit for acceptance.  It may not provide adequate information to enable the insurer to accept it.  It may be vague as to the scope of releases that will be provided as part of a settlement.  It may require that the insurer’s acceptance be provided by mail using an inverted Jenny stamp.            

In general, the plaintiff’s counsel’s offer may be designed to make it impossible for an insurer to reasonably accept it.  The argument will likely be that the insurer’s request for an extension, additional information or any other questions about the demand qualifies as a rejection.  So the argument will go -- the insurer was presented with a settlement demand within limits and did not accept it.  Translation: the plaintiff’s attorney has set-up the insurer for possible bad faith and liability for the entirety of an excess verdict.  

In an attempt to ameliorate this situation, on September 28, 2022, California’s Democratic Governor, Gavin Newsom, signed into law SB No. 1155, which amends the state’s Code of Civil Procedure.  The statutory amendment is designed to prevent bad faith set-ups by adopting a mechanism that governs time limited demands. 

The crux of the law are its statements that an insurer’s “attempt to seek clarification or additional information or a request for an extension due to the need for further information or investigation, made during the time within which to accept a time-limited demand, shall not, in and of itself, be deemed a counteroffer or rejection of the demand.”  Further, the law provides that “a time-limited demand that does not 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 extracontractual damages against the tortfeasor’s liability insurer.”  Additionally, a time-limited demand must contain “an offer for a complete release from the claimant for the liability insurer’s insureds from all present and future liability for the occurrence.”  This is no insignificant point.

Interestingly, the statute does not address to which settlement demands it is applicable.  If the demand has a complete connection to California – policy issued in California and underlying action venued in California – that shouldn’t be an issue. But what about if the policy was issued outside of California and the action is in California.  Or vice-versa.  That will no doubt be sorted out by courts.     

While the Golden State is not the first in the nation to put into place statutory procedures for this purpose -- there are not many – I still chose SB 1155 for inclusion as one of 2022’s ten most significant coverage decisions of the year.  [While not a judicial decision, its adoption was still a “decision.”]  My reason being, having been adopted by California -- a state widely-known for its extremely zealous consumer protection laws – it could cause other states to follow suit.  [Did you know that it is a Class B misdemeanor for a company to sell potato chips in California without including a warning on the package that they are not part of a healthy diet for squirrels.]    

Of note, the California statute is procedural.  It does not affect the state’s case law that governs whether an insurer’s rejection, of a procedurally appropriate time-limited demand, will be a basis for a finding that an insurer’s rejection of a limits-demand was made in bad faith.  Given the potential liability and damages, should the demand have been accepted based on the standards adopted by courts?

On that point, the statute requires that that the insurer notify the claimant, in writing, of its reason for rejecting a settlement demand and this “shall be relevant in any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.”  But that’s what a bad faith failure to settle case is going to focus on anyway. 

To be clear, while the new law will certainly be a factor in preventing bad faith set-ups of insurers, time limited-demands that are genuine and made in good faith, can also benefit from expressly defined procedures.

If you are interested in the statute, I suggest reviewing the legislative history, which is easily found on-line.  It contains a summary of its purpose, earlier provisions that did not make the final cut and statements by trade organizations for and against the law.

Rather than summarize the new California statute, it is easier to set out the key provisions verbatim as they are relatively brief and there may be some nuance in the provisions.

Time-limited demands made on or after January 1, 2023 -- putting aside the open issue of the statute’s applicability to demands without a complete connection to California -- are subject to the following [Chapter 3.2 (commencing with Section 999) added to Title 14 of Part 2 of the Code of Civil Procedure]:

A time-limited demand to settle any claim shall be in writing, be labeled as a time-limited demand or reference this section, and contain material terms, which include the following:

(a) The time period within which the demand must be accepted shall be not fewer than 30 days from date of transmission of the demand, if transmission is by email, facsimile, or certified mail, or not fewer than 33 days, if transmission is by mail.

(b) A clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens.

(c) An offer for a complete release from the claimant for the liability insurer’s insureds from all present and future liability for the occurrence.

(d) The date and location of the loss.

(e) The claim number, if known.

(f) A description of all known injuries sustained by the claimant.

(g) Reasonable proof, which may include, if applicable, medical records or bills, sufficient to support the claim.

999.2.

(a) A claimant shall send their time-limited demand to either of the following:

(1) The email address or physical address designated by the liability insurer for receipt of time-limited demands for purposes of this chapter, if an address has been provided by the liability insurer to the Department of Insurance and the Department of Insurance has made the address publicly available.

(2) The insurance representative assigned to handle the claim, if known.

(b) To implement this section, the Department of Insurance shall post on its internet website the email address or physical address designated by a liability insurer for receipt of time-limited demands for purposes of this chapter.

(c) An act by the Department of Insurance pursuant to this section is a discretionary act for purposes of Section 820.2 of the Government Code.

999.3.

(a) The recipients of a time-limited demand may accept the demand by providing written acceptance of the material terms outlined in Section 999.1 in their entirety.

(b) Upon receipt of a time-limited demand, an attempt to seek clarification or additional information or a request for an extension due to the need for further information or investigation, made during the time within which to accept a time-limited demand, shall not, in and of itself, be deemed a counteroffer or rejection of the demand.

(c) If, for any reason, an insurer does not accept a time-limited demand, the insurer shall notify the claimant, in writing, of its decision and the basis for its decision. This notification shall be sent prior to the expiration of the time-limited demand, including any extension agreed to by the parties, and shall be relevant in any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.

999.4.

(a) In any lawsuit filed by a claimant, or by a claimant as an assignee of the tortfeasor or by the tortfeasor for the benefit of the claimant, a time-limited demand that does not 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 extracontractual damages against the tortfeasor’s liability insurer.