More Stringent California Claim Law Could Benefit Policyholders

To combat a perceived litigation tactic by plaintiffs counsel of using settlement demands within policy limits to set up insurers for bad faith, insurance company associations lobbied for statutory clarification to avoid uncertainty around insurers' duties when faced with time-limited demands. [1]

The result was the enactment of California Code of Civil Procedure Chapter 3.2, Sections 999–999.5, titled "Time-Limited Demands," which goes into effect Jan. 1, 2023.[2]

Claimants' time-limited settlement demands often seek the available policy limits and are usually referred to in the industry as "policy limits demands," though theoretically they could be for an amount below limits. The demands must be reasonable in order to subsequently impose extracontractual liability on an insurer for bad faith failure to settle.[3]

For certain types of claims and policies, Section 999 imposes several new criteria that a presuit demand must comply with to be considered a reasonable offer to settle within policy limits. We'll call these "Section 999 demands."

After Jan. 1, claimants must carefully draft Section 999 demands to meet the procedural requirements of these new sections, or their presuit demands will not be a basis to later impose liability in excess of the policy limits on the tortfeasor's insurer. These additional requirements are, theoretically, designed to constrain and limit bad faith claims.

However, because Section 999 makes it clear how to make a reasonable demand, where to send it and how much time must be provided, it can also be viewed as a road map. If used correctly, compliant Section 999 demands may be a tool for claimants and policyholders to more easily establish that a reasonable presuit offer to settle was made.

And because Section 999 also creates new requirements for how insurers must respond, it may also make it easier to prove that the basis for the insurer's rejection of a demand was unreasonable — thus exposing the insurer to liability in excess of limits.

Genesis of Section 999 and the Pinto Decision

The insurers' scapegoat set up scenario played out in a case that came before the Court of Appeal last year, Pinto v. Farmers Insurance Exchange, where the plaintiff made a policy limits demand on a short fuse, ignored requests for extensions, and failed to respond to a request for clarification that all claims and liens would also be released by the demand.

Then, Farmers accepted the demand, agreed to the material terms and sent a check before the deadline.

Nevertheless, the plaintiff rejected the tender because Farmers had been unable to obtain, in the limited time frame, a declaration from the additional insured, a permissive driver — and thus had not complied with all the terms of the demand.

The plaintiff then obtained an assignment of rights and a stipulated excess judgment and sued Farmers for bad faith failure to settle successfully in the trial court. The appellate panel in Pinto reversed, finding that Farmers did all it could to achieve a settlement.

The Pinto decision was relied on in promoting the bill, which attempts to prevent similar situations in the future by codifying what such demands must include, and how much time they must provide, as prerequisites for bad faith liability.

Limited Application of Section 999

Section 999 does not apply to most policy limits demands. Although Section 999 broadly defines a "time-limited demand" as one made by a claimant to a tortfeasor with "a liability policy" for purposes of settling "within the limit of liability insurance," the statute is actually very limited in scope.

Section 999 only applies to claims for property damage, personal or bodily injury, or wrongful death under auto, homeowners, or commercial premises liability insurance policies.[4]Thus, this framework is irrelevant to claims covered by other kinds of liability policies — for example, errors and omissions policies, directors and officers policies, employment practices liability policies, cyber policies, or noncommercial renters policies.

In addition, Section 999 is limited to demands made before litigation or arbitration is filed. In practice, however, many policy limits demands come during litigation, including right up to or during trial. Section 999 does not apply to those situations. It also does not apply where the claimant is not represented by counsel.

Requirements for Section 999 Demands

The law provides a detailed framework for what a Section 999 demand must include, how it can be transmitted and how much time it must provide the insurer to respond.

A Section 999 demand must:

• Be in writing;
• Be identified as a time-limited demand or cite Section 999;
• Provide at least 30 days in which to respond — 33 if sent by noncertified mail;
• Include a "clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens";
• Offer a complete release from the claimant for all insureds;
• Include the following details: date and location of the loss, the claim number, if known, and a description of the claimant's injuries;
• Provide "reasonable proof ... sufficient to support the claim"; and
• Be sent either to the insurance representative assigned to handle the claim, if known, or to the email or physical address publicly designated by the liability insurer for receipt of time-limited demands with the Department of Insurance.[5]

A demand must only substantially comply to be considered reasonable, so any demand that meets most of these requirements should be treated as a valid Section 999 demand.

The 30-day time frame is longer than is often provided, but still allows for prompt, presuit resolution and removes the uncertainty around insurers' claims that they did not have sufficient time to respond.

The requirement that the claimant put forth reasonable proof is a new and additional hurdle for plaintiffs, especially presuit. Section 999 does not define or provide guidance as to what constitutes reasonable proof. I anticipate future battles over what did or did not constitute reasonable proof in the context of a particular case.

Clearly the demand should provide some factual basis for liability on the part of the insured. But this requirement does not eliminate an insurer's duty to conduct a prompt and thorough investigation.[6] And insurers should evaluate the demand based on all information available to them at the time,[7] not only what was provided in the demand.

Requirements for Insurers' Section 999 Responses

Section 999.3 addresses how an insurer should respond to a Section 999 demand. Within the time limit provided, an insurer must respond in one of three ways:

• Agree, in writing, to the offer in its entirety.
• Request additional information or an extension based on the need for additional information or time to investigate. Such a request will not be deemed a rejection of the offer.
• Respond, in writing, notifying the claimant of its decision to reject the demand, and the basis for its decision.

Insurers might try to hide behind Section 999.3 by arguing that they lack information or use it to seek additional time to respond. But such a request should provide specific, reasonable requests for additional time and identify the further information sought. And since the statute was proposed by the insurance industry to ensure adequate time was provided, the presumption should be that 30 days is sufficient to respond in most cases.

"If, for any reason, an insurer does not accept" the demand, Section 999.3 mandates that the insurer notify the claimant in writing of the basis for rejecting it — which can then be held up to judicial scrutiny. Most of the time, insurers deny demands without explanation. But an explanation is now required and will be evidence in the bad faith case.

The Legislature has taken the extraordinary step of telling the courts that this response "shall be relevant in any lawsuit alleging extracontractual damages against the tortfeasor's liability insurer."

And even if an insurer's request for an extension is denied or ignored by the claimant, the insurer must still provide a compliant response. "[A]n attempt to seek" clarification, information, or an extension "shall not, in and of itself, be deemed ... a rejection of the demand."

Moreover, the creation of a written record means insurers should be held to the reasons stated at the time, which will help avoid situations where insurers reject a demand and then years later attempt to justify that rejection retroactively.[8]

And in the event the demand is rejected by the insurer because, allegedly, more time was needed and not granted, that assertion will also be evaluated for its reasonableness. Importantly, a failure to respond at all is a violation of the statute — and, in a bad faith case, would itself be evidence of unreasonableness.

Section 999 does not alter the factors courts can, and cannot, take into account in evaluating whether the demand amount was reasonable, which have been established by the California Supreme Court.[9] Instead, it eliminates many arguments by the insurer that it was reasonable in rejecting a demand for reasons other than case value.

This result is achieved because the new law makes it clear that where the claimant has complied with the statute, the only question should be whether the amount demanded is reasonable in light of the liability exposure based on the evidence available to the insurer at that time. Insurers faced with reasonable settlement opportunities within limits thus will not be allowed to avoid covering a subsequent excess judgment based on technical quibbles with the demand.

Court decisions addressing the reasonableness of a policy limits demand — or the insurer's rejection of it — have focused on the amount of exposure relative to the likelihood of success. I anticipate insurers now pointing to Section 999 as a reference point for how such demands should be drafted, even in situations not governed by the statute.

However, any attempt by an insurer to argue it was justified in refusing a demand on these kinds of technicalities in other situations should be rejected, as the statute was explicitly drafted to apply to a narrow category of demands. Any demands outside of those enumerated by Section 999 must continue to be evaluated on a case-by-case basis for reasonableness.

That said, it may be prudent to conform policy limits demands that are not governed by Section 999 to the statute to the extent possible — understanding, of course, that especially during litigation the time frames may be much shorter.

It will be interesting to see whether, in the long run, Section 999 will provide a shield from bad faith liability, as the insurance industry hopes — or whether, if used correctly, it instead provides a more specific road map for plaintiffs to open a policy's limits.