This article is intended to be Part 2 of a [growing] series. The previous section, Part 1, provided a 20,000-foot view of third-party bad faith strategy. Part 2 focuses on the pre-litigation demand phase. Part 3 will address litigation specific considerations (i.e., discovery timing, extension requests, etc.). Part 4 talks about CCP 998s, alternative dispute resolution, and mediation-related concerns. Part 5 pertains to trial considerations, post-judgment discussions, and assignment.
In this article, we will explore just a few of the strategies available to the weary but bright-eyed prudent associate looking to develop their practice further into the world of “prospective bad-faith matters.” Utilizing the demand strategies discussed in this article will help the prudent associate learn to recognize the pressure points, leverage points, and factual showings necessary for the future prosecution of a bad-faith matter. This outlook will not only improve the efficacy of your efforts in pursuit of pre-trial resolution but will also prepare you further for the goal of going to trial and collecting a judgment in excess of the policy limits. I hope we can all agree that the prudent associate is not looking for a participation award when going to the boss with a potential bad faith situation. Rather, the prudent associate is going to the boss with one of two goals in mind: either you are handing over an airtight bad-faith case, or you have one that is close, and you want to update your boss. In either situation, you better be prepared. If you walk in only to say, “I sent a demand that they rejected… therefore bad faith,” you could be in for an afternoon of bad-faith seminars.
The Pre-Demand Phase – “PTG”
So what comes first? Parties, Types, Goals. When you first start as an associate, it is common to find yourself looking for cookie-cutter approaches to the job in an effort to make sure you are doing everything you should be doing. This, of course, is a foundational step for any young associate; however, what happens when that cookie cutter gets dull? Well, it is time to make yourself some new tools, of course. So how do you go about that? To put it simply, experience. Start today and get in the practice of evaluating your experiences with different people, be it attorneys, their staff, parties, or unrelated third parties and their counsel. You need to learn to speak with each of these folks, and find out what makes their job tick. Ask yourself: where is opposing counsel or this adjuster located along the Defense hierarchy? If I were in their position, what type of information would make me evaluate this matter in favor of Plaintiff? What would make me kick it up the food chain and bring to my boss? Ultimately, the more experience you get talking and dealing with each of these people, and LEARNING ABOUT THEIR JOB, the better. Don’t take this time for granted as it is the foundational stage for your eventual litigation in a given manner, as well as your long-term professional development. Breaking down and processing this readily available information immediately when you get a case [and updating as you move forward] will maximize your opportunities to not only steer a case towards resolution but also maximize your ability to pursue a recovery above the set policy limits.
So, you get your initial PTG done, you draft and send your initial representation letter(s) (assumedly with a request for the adverse policy limit information), and you start down the path of investigation and collection of bill/record/wage-loss evidence. What comes next? Well, you wait for all that investigation and collection of evidence to come back as you wait for the carrier to comply with the coverage request. Right? NO. Instead, the prudent associate should be asking themselves, what is the core objective at this stage? Get the carrier to disclose or fail to disclose the available liability policy limits. This issue was addressed in Boicourt v. Amex Assurance Co. (2000) 78 Cal. App.4th 1390. In Boicourt, the claimant asked the insurer to disclose its policy limits. The insurer refused to do so (and did not ask its insured for permission to do so), explaining that it “had a ‘policy not to disclose the amount of the policy limits.’” (Id. at p. 1393.) The claimant then filed suit against the insured and recovered an excess judgment. (Ibid.) He later testified that he would have been willing to settle for the policy limits, had he known what they were. (Ibid.) The appellate court held “that a bad faith claim can be based on an insurer’s prelitigation refusal to disclose the policy limits” . . . “even in the absence of a formal offer to settle within the policy limits.” (Id. at pp. 1393-1399, 93 Cal. Rptr.2d 763.) In that situation, “A conflict of interest can indeed develop without a formal settlement offer being made by the claimant” between the insurer and the insured.” (Id.) More specifically, the Court stated that “[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.”’ [Citation.]” (Id. at p. 1391.) Thus, the court also held that “a formal settlement offer is not an absolute prerequisite to a bad faith action ….” (Id. at p. 1399.) “At a minimum, Boicourt means that the existence of an opportunity to settle within the policy limits can be shown by evidence other than a formal settlement offer.” (Planet Bingo LLC v. Burlington Insurance Company (2021) 62 Cal. App.5th 44.) Again, when the prudent associate runs into this issue, and they will, often, it is vitally important to memorialize any verbal conversations in writing. The core assignment: to convey that you will be pursuing a lawsuit for the specific purpose of collecting the policy limits information, that the carrier has unreasonably withheld the limits following a good-faith request, and that carrier is putting their insured at risk by not providing the policy limits. Such correspondence sets the stage for future interactions and demands, especially if carrier fails to reasonably correspond with the insured during this process.
“The Judgment-Proof Defense”
The unpredictability of bad-faith matters, at least from a business model perspective, comes from the notion that defendants “can always just declare bankruptcy,” i.e., that they are “judgment-proof.” Unlike secured judgments (i.e., judgments that have already attached to a piece of property or collateral, e.g., foreclosure of a home mortgage following default, etc.), unsecured judgments typically do not share similar protection under bankruptcy laws. Furthermore, unlike certain fraud or contractual litigations, California law does not allow for “prejudgment writs of attachment” (i.e., the procedural tool you can use to “secure” an anticipated future judgment) for personal injury matters. This means that the prudent associate, or their boss, can spend all the way to trial, get a righteous judgment, only to have the defendant declare bankruptcy (i.e., Defendant says they have no cash or other fungible assets to pay or auction after satisfying secured creditors). Because the judgment is unsecured, there is a higher level of risk related to collection as an “unsecured creditor.” Such a [high] risk can be a tough pill to swallow, and it is certainly the insurance lobby’s intention to keep it that way. This is what I and most of the prudent associate’s colleagues have come to identify as the “judgment-proof defense.” If an insurance adjuster OR attorney ever tries to use bankruptcy or insolvency to dissuade you from pursuing a matter over the policy limits, I can only tell you to do one thing: get that person to articulate their position in writing, and then promptly save that writing. In my personal opinion, an adjuster or attorney hired by the carrier to protect or represent an insured is arguably acting in actionable bad faith if they are exposing their insured to an excess judgment over policy limits while using the “judgment-proof defense.” Bankruptcy is not a fun thing to go through. People do not want to declare bankruptcy. Despite the clever commercials on the radio talking about how easy it is, it is not an asset to a defendant in most situations. No one on the defense side should be using the threat of bankruptcy to protect the insurer’s interests over their insured. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-66; Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 724-725.) Though evaluation of this type of conduct falls follows an objective standard, in my opinion, this is per se bad faith, and potentially professional malpractice.
The Policy Limit Demand
The initial demand is the prudent associate’s primary opportunity to resolve the case, or alternatively, an opportunity to preserve the carrier’s unreasonableness on the record. To that end, again, it is vital that you immediately begin to memorialize and highlight specific acts of unreasonableness both before and in the initial demand. But what should go into the initial demand for the purpose of bad faith? Of course, any demand should include a thorough and accurate recitation on the basic positions and facts relative to causation, liability, and damages (“CLD”). We will skip over presentation style and content for purposes of this article. Rather, we will be focusing on those relevant conditions/terms and authorities that may impact the prudent associate’s ability to pursue a bad faith action following the demand phase. In practice, “An offer to settle an insurance claim is generally multidimensional, the most obvious component being the amount demanded. Other components include the conditions for acceptance and the scope of any release.” (Pinto v. Farmers Ins. Exchange (2021) 61 Cal.App.5th 676, 688). This evaluation must include, at the very least, a determination of what information the carrier has or reasonably needs (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 793), a reasonable time to respond (Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 41), and analyses of what impact, if any, other requirements or conditions in the demand will have on the carrier’s obligation to tender or respond. (See Heredia v. Farmers Ins. Exchange (1991) 228 Cal.App.3d 1345, 279) [settlement offer deemed in excess of the policy limits, because it required insurer to pay the policy limits and to continue to provide a defense post-settlement]. See also Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 994 [timing of offer issue for jury].
In addition to the above, every policy limit demand should include a request for the carrier to provide their insured with your firm’s standardized Asset Declarations Form as well as a request for a [certified] Declaration of No Additional Coverage. Once conveyed, these requests must be communicated to the insured. If the carrier and/or its adjuster is reasonably performing their job, the next communication between the carrier and its insured will include information about the risks the insured may assume if they choose not to comply with the requests, namely that they will be subject to litigation. Such communications between the carrier or defense attorney and their insured or client, respectively, can effectively drive a wedge between the interests of the carrier and the insured by highlighting the reality that a law firm is taking stock of the insured’s assets beyond the policy limits. Especially when litigation is likely to follow, involving the insured at this stage can provide significant leverage later down the line.
If you have accomplished and concluded the above steps, and you receive a denial to your demand, your next trip should be back to your computer. Do yourself a favor and put all of your documents and materials together into a tabbed summary and memorandum. This summary should include, at minimum, relevant dates (e.g., incident, complaint filing, demand, correspondence, pertinent procedural steps, discovery responses, depositions, etc.), but also relevant materials (with proofs of service, notices and correspondence tabbed). Once that is complete, you are now ready to head down the hallway to your boss’s office. Get after it, and good luck.