COURT LOOKS AT WHETHER AN INSURER COULD BE LIABLE FOR AN EXCESS JUDGMENT WHEN EVALUATING WHETHER A SECTION 998 DEMAND WAS REASONABLE AND IN GOOD FAITH FOR THE PURPOSE OF RECOVERING COSTS

Case Summary and Take Away. In an important new case the California Court of Appeal looked at whether a section 998 demand in excess of policy limits was reasonable and in good faith for the purpose of the plaintiff recovering costs following trial in which the plaintiff prevailed. More specifically, the Court evaluated whether in making the excess policy limit 998 demand it was reasonable for plaintiff to believe that the defendant’s insurer might be liable for a judgment in excess of policy limits.

Aguilar v. Gostischef (California Court of Appeal, Second Appellate District, October 11, 2013, Case No. B238853) arises from a January 3, 2004 car accident.

In February and March 2004, plaintiff’s attorney requested defendant’s insurer to provide information about defendant’s policy limits.

In April 2004, plaintiff’s counsel requested defendant’s insurer to provide information about defendant’s policy limits, stating: “My client has asked to know the policy limits so that he can make a policy limits demand and resolve this case and move on with his life. Unfortunately, until and unless we are advised of the limits in coverage, we are not able to make a policy limits demand. He is, however, prepared to do so upon being advised of the limits. [¶] Once again, we entreat you to get permission from your insured to disclose the policy limits, provide them to us in the form of a certified policy and declaration, so that we can then immediately demand policy limits. Please favor us with a reply within the next two weeks.” Defendant’s insurer did not do so.

In August 2004, plaintiff filed suit against Gostischef alleging one cause of action for personal injury.

In October 2004, defendant’s insurer offered to pay the $100,000 policy limit to settle the case, and informed plaintiff’s counsel that defendant lived on social security and had no real property assets. In November 2004, defendant presented plaintiff with a section 998 offer to compromise for $100,000. In February 2005, plaintiff’s counsel wrote to defendant’s insurer stating that the insurer would be liable for an excess judgment because the insurer ignored three attempts to settle the matter within policy limits. In April 2005, plaintiff made a $700,000 section 998 offer. Defendant’s insurer responded that it would settle the case for $100,000.

The case proceeded to trial at which the jurors awarded plaintiff $4,679,314 which was reduced to $2,339,657 for plaintiff’s contributory negligence. Defendant’s insurer obtained a judgment notwithstanding the verdict, which was reversed on appeal, and the trial court reinstated the judgment in plaintiff’s favor. Plaintiff sought costs in the amount of $1,639,451.14. The trial court taxed costs in the amount of $5,903.85, but awarded the remainder.

Arguing against plaintiff’s recovery of costs, defendant in part argued that plaintiff’s $700,000 section 998 offer was not made in good faith because plaintiff was already informed that defendant had only a $100,000 policy limit, defendant lacked the financial means to pay, and there was no reasonable expectation that defendant’s insurer could be liable for the amount of the section 998 offer in light of the $100,000 policy limit.

The Court of Appeal affirmed the cost award. The issue on appeal was whether plaintiff’s $700,000 section 998 offer was reasonable and made in good faith, not whether defendant’s insurer would be liable for the excess judgment.

Summarizing existing law, the Court stated that the purpose of section 998 is to encourage the settlement of litigation without trial. A section 998 offer must be made in good faith to be valid. Good faith requires that the pretrial offer of settlement be realistically reasonable under the circumstances of the particular case. The offer must carry with it some reasonable prospect of acceptance. Whether the offer is reasonable depends upon the information available to the parties as of the date the offer was served. Reasonableness generally is measured, first, by determining whether the offer represents a reasonable prediction of the amount of money, if any, defendant would have to pay plaintiff following a trial, discounted by an appropriate factor for receipt of money by plaintiff before trial, all premised upon information that was known or reasonably should have been known to the defendant, and if an experienced attorney or judge, standing in defendant’s shoes, would place the prediction within a range of reasonably possible results, the prediction is reasonable.

If the offer is found reasonable by the first test, it must then satisfy a second test: whether plaintiff’s information was known or reasonably should have been known to defendant. The section 998 mechanism works only where the offeree has reason to know the offer is a reasonable one. If the offeree has no reason to know the offer is reasonable, then the offeree cannot be expected to accept the offer.

Applying those principles, the Court held that plaintiff conveyed to defendant’s insurer a few months after the accident an interest in discussing settlement within policy limits. Defendant’s insurer made no response. In its opening brief on appeal defendant’s insurer acknowledged that as a general rule and subject to qualifications an insurer that refuses a reasonable offer of settlement within policy limits by an injured third-party claimant could be liable to the insured for the resulting judgment without regard to policy limits. The Court held that plaintiff’s counsel’s April 2004, letter may be interpreted as a genuine offer to settle; it was not necessarily a ploy to set up a bad faith case although whether it should be interpreted as genuine or as a ploy was beyond the scope of the appeal as the appeal did not present the question whether defendant’s insurer may be liable to pay the judgment beyond the policy limits.

For the purpose of plaintiff’s section 998 offer and plaintiff’s recovery of costs after trial, defendant’s insurer failed to show that it was unreasonable for plaintiff to believe that defendant’s insurer may be liable for a judgment in excess of policy limits.

The Court held that defendant’s insurer had not demonstrated that plaintiff acted in bad faith under all the circumstances of the case when he made a section 998 offer in excess of the policy limits. An insurer can be liable for an excess judgment absent a formal settlement offer under limited circumstances. Here, there was evidence that defendant’s insurer delayed, “perhaps unreasonably” in disclosing defendant’s policy limit, and that delay may support bad faith liability, citing Boicourt v. Amex Assurance Co. Further, plaintiff’s letter stating that he would settle for policy limits reasonably could be understood as a settlement opportunity (regardless of whether it is ultimately determined to be such). And defendant’s insurer had not shown that plaintiff could have no reasonable expectation of acceptance of his $700,000 offer such that the trial court abused its discretion in finding that plaintiff acted in good faith.

The final step in determining whether the offer was reasonable was to determine the information known to defendant’s insurer. The Court held that the parties’ correspondence showed that plaintiff revealed his position that defendant’s insurer may be liable for an excess judgment well in advance of plaintiff’s section 998 offer. Thus, although defendant’s insurer disputed the excess claim and although defendant’s insurer’s position could ultimately be meritorious, defendant’s insurer had not shown that the trial court abused its discretion in concluding plaintiff acted in good faith in requesting $700,000, which as the trial court noted was less than one-third of the ultimate recovery. The burden is on the party complaining to establish an abuse of discretion. The Court of Appeal affirmed the order awarding costs.

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