June 21, 2007
BAD FAITH CASES CAN PUNISH STONEWALLING INSURERS
Insurance companies are businesses, and like all businesses they seek to maximize their profit. For this reason, insurance companies are much more enthusiastic about accepting premiums (income) than paying legitimate claims (expenses). This is the dynamic which leads insurers to drag matters out, and to stonewall settlement demands where possible. Unfortunately, under California law, there is no direct way for people to sue someone else’s insurance company for unfairly handling a claim. Even where fault is obvious–say an accident caused by someone running a red light–the guilty driver’s insurance company can delay payment of the claim, and with no legal consequences.
There is an exception to this rule, however, commonly referred to as an “excess judgment” situation. Even though insurance companies are not obligated to treat injured consumers fairly, they do owe a duty to their customers (the insureds) to settle claims within policy limits where possible. When an injured party makes a demand for settlement equal to the policy limits or less, and that demand is rejected, in most cases the insurance company will be liable for the full extent of the injured person’s damages, whether or not those damages exceed the policy limits. The policy behind this law is that insurance company owes a duty to its insureds to handle claims against them in a reasonable, good faith, manner. If the insurance company rejects a settlement demand within policy limits, and instead opts to “gamble” at trial, it will do so with its own money, not the insureds’. In other words, if an insurance company forces a matter to trial and loses, it should be the insurance company that pays that part of the judgment over the policy limits rather than the insured, who had no control over whether the matter settled before trial.
The threat of a judgment in “excess” of the policy can force insurance companies to promptly pay claims they would otherwise drag out. It is our policy to make prompt demands within policy limits where possible, thereby forcing the insurance company either to resolve the matter quickly or to face potential negative consequences in the future. We call this “opening” the policy. The failure to respond promptly to a policy limits demand can lead to severe “penalties” indeed. For example, in a matter recently resolved by this office, the insurance company ignored a $50,000 policy demand despite clear liability and devastating injuries. After the time limit to accept the demand expired, the firm’s client (following our advice) refused all later offers of the $50,000 limits, and instead insisted that he be fully compensated for his injuries. The insurance company eventually resolved the matter for $3,500,000, a amount seventy times greater than the policy limits.
Therefore, in those matters where the reasonable value of the injuries suffered exceeds the available policy limits, a prompt policy limits demand can either end the “stonewalling” or lead to full compensation.