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Can You Open the Policy on UM/UIM Claims?

Liability insurance policy limits can be “opened” when an insurance carrier unreasonably fails to accept a settlement offer within its policy limits.

Eggshell Eddie’s children, Robin and Wren, returned home from college for a brief visit over Christmas vacation. Robin and Wren borrowed their father’s car and drove up to Julian to eat some apple pie.

Robin was driving Eggshell’s new Lexus hybrid through downtown Julian when a monster truck drove through a stop sign and collided with their vehicle. The driver of the monster truck was Crackhead Craig. Crackhead had been up in the mountains smoking some new medical marijuana that his friend, Jim “The Bud” Weedman had just started selling. It was extremely potent and Crackhead was totally under the influence at the time of the incident. Robin and Wren were severely injured.

Eggshell arranged for his children to retain an aggressive and world-renowned trial attorney, Seickem Bulldog, to represent them. Crackhead was insured by Saturn Insurance and had liability limits of $15,000 per person and $30,000 per occurrence. Attorney Bulldog gathered the medical records and bills and submitted a policy limits demand upon Saturn. Saturn accepted the demand and paid its policy limits.

Attorney Bulldog submitted a settlement package to Allsnake Insurance for the policy limits for underinsured motorist benefits under the automobile policy covering Eggshell Eddie’s vehicle. Adjuster Shawn McScrewem was assigned to handle the claim. Adjuster McScrewem delayed several months and ignored multiple phone calls and messages from Attorney Bulldog about the status of his settlement demand. After three months, Attorney Bulldog made a policy limits demand of $250,000 for Robin and $250,000 for Wren (less the $30,000 credit for the third-party settlement) with an expiration date of 30 days. Adjuster McScrewem and Allsnake did not respond to the policy limits demand.

Two weeks after the policy limits demand expired, Adjuster McScrewem sent a letter to Attorney Bulldog and informed him that he had made arrangements for Robin and Wren to be examined by a local orthopaedic surgeon, Dr. Richard Gangrenefield. Dr. Gangrenefield was on a list of orthopaedic surgeons that had been approved by Allsnake. Dr. Gangrenefield had a long-standing business relationship with Allsnake and handled approximately 50 to 75 cases a year, earning approximately $150,000 providing medical/legal services to Allsnake. Dr. Gangrenefield wrote a report based upon a five-minute examination on Robin, as well as Wren. Dr. Gangrenefield conceded most of the injuries, but disputed that any additional surgery or treatment was needed. As to Robin, he felt that the pain and discomfort should have resolved six weeks after the spinal fusion surgery. He also contended that the radiculopathy down Wren’s right leg would clear up in another three to six months and surgery would not be necessary. Those opinions were completely rejected by the treating doctors.

After receiving Dr. Gangrenefield’s report, Adjuster McScrewem offered $75,000 in new money to Robin as well as to Wren.

Attorney Bulldog approaches you because he knows that you handle insurance coverage and bad faith cases on a regular basis. Attorney Bulldog wants to know whether the Allsnake policy has been “opened.”

Analysis of Whether UM/UIM Policies Can Be Opened

Attorneys frequently claim the policy limits have been “opened” when they make a policy limits demand for uninsured or underinsured motorist benefits and the carrier rejects the demand. The analysis is similar, but totally different. In Rappaport-Scott v. Interinsurance Exchange of Auto Club (2007) 146 Cal.App.4th 831, *836-837, the court analyzed and compared the duties of the insurance company in defending a third-party claim versus handling a first-party claim as follows: “[In analyzing Comunale v. Traders & General Ins. and Crisci v. Security Insurance] we considered the duty of the insurer to act in good faith and fairly in handling the claims of third persons against the insured, described as a ‘duty to accept reasonable settlements;’ in the case before us we consider the duty of an insurer to act in good faith and fairly in handling the claim of an insured, namely a duty not to withhold unreasonably payments due under the policy. Those are merely two different aspects of the same duty.” (Citing Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, *573.)

The contractual obligations of an insurance company in defending a third-party case are markedly different from its obligations in a first-party case. The fundamental contractual obligation of an insurer in a third-party case is to pay such judgments as shall be recovered against the insured because of the insured’s own tortious conduct. California law imposes a duty upon the insurer arising out of the implied covenant of good faith and fair dealing to accept all reasonable settlement offers by the third-party claimant to settle within the policy limits. Liability is imposed upon the insurer for the bad-faith breach of the contract for its failure to accept reasonable settlements. The ultimate test of liability for any alleged tortious breach of the implied covenant of good faith and fair dealing in thirdparty cases is the reasonableness of the insurer’s decision to reject a thirdparty settlement offer. (Austero v. Nat’l Cas. Co. (1978) 84 Cal.App.3d 1, *29.)

“In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, *429.) “[T] he only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.” (Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, *16.) “In other words, if a prudent insurer operating without policy limits would evaluate the case as likely to produce a judgment for a figure less than the offer, then it would not be unreasonable to refuse the offer even though the subsequent trial resulted in a judgment equal to or greater than the offer which also exceeded the policy limits.” (Austero v. Nat’l Cas. Co., supra, 84 Cal.App.3d at *29.)

In situations where the insurance carrier believes that there is no coverage and denies a settlement demand, the insurance carrier denies coverage “at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful, it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract.” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, *660.) The courts have held for many years that “an insurer’s ‘good faith,’ though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer’s refusal to accept a reasonable settlement offer. (Fn. omitted)” (Johansen v. California State Auto. Assn. Inter- Ins. Bureau (1975) 15 Cal.3d 9, *16.)

Moving away from the situations where coverage is denied, there are situations where coverage is accepted, but a settlement offer that is made within the policy limits is refused. In such a case, the courts have held that “whenever it is likely that the judgment against the insured will exceed the policy limits with the result that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insured to settle the claim.” (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, *429.) In such a situation, the Crisci court commented, “Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.” (Crisci, supra, at *430.)

When analyzing the conduct of the carrier in responding to a policy limits demand in a first-party case, there is a different analysis. “In the usual first-party case, the promise of the insurer is to pay money, due under the policy, to the insured upon the happening of the event, the risk of which has been insured against. The benefit contracted for by the insured is the availability of money promptly upon the happening of the event and insured against, and when an insurer refuses unreasonably to make a payment of the benefits due under the terms of the policy, it deprives the insured of the essential benefit of the agreement. This follows, for the insured bargain for prompt payment, not a right of action against the insurer.” (Austero v. Nat’l Cas. Co., supra, at *29-30.) Insurance companies are not required to pay every claim presented to it. In addition to the duty to deal fairly with the insured, the insurance company also has a duty to its other policyholders and to its stockholders not to dissipate its reserves through the payment of meritless claims. (Ibid. at *30.)

“Thus, allegations which assert [a claim of bad faith] must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. Just what conduct will meet these criteria must be determined on a case by case basis and will depend upon the contractual purposes and reasonably justified expectations of the parties.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, *1395; Accord State Farm Fire & Casualty Company v. Superior Court (1996) 45 Cal.App.4th 1093, *1105.)

“The mistaken [or erroneous] withholding of policy benefits, if reasonable or based on a legitimate dispute as to the insurer’s liability under California law, does not expose the insurer to bad faith liability.” (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, *1280-1281.) Without some facts establishing that the withholding of the benefits was unreasonable or without proper cause, such a denial of benefits is merely a breach of contract. (Id.)

Furthermore, “the reasonableness of the insurer’s decisions and actions must be evaluated as of the time that they were made; the evaluation cannot fairly be made in the light of subsequent events which may provide evidence of the insurer’s errors.” (Chateau Chamberay Homeowners’ Ass’n v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, *347.) Consequently, “before an insurer can be found to have acted tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be shown that the insurer acted unreasonably or without proper cause.” (Chateau Chamberay Homeowners’ Ass’n v. Associated Int’l Ins. Co., supra, 90 Cal.App.4th at *347.)

In summary, in the third-party claim situation, insurance carriers are liable for the full judgment entered against its policyholder for its unreasonable refusal to accept a reasonable settlement demand within policy limits. The excess judgment awarded against its insured is considered damages caused by its unreasonable refusal to accept a reasonable settlement demand within its policy limits. In contrast, firstparty claims do not result in excess judgments. On the contrary, the insured is simply seeking the policy benefits that the insurance carrier was contractually obligated to pay. Consequently, there are no excess judgments. However, the insured is entitled to pursue, at the conclusion of the case, a claim against the carrier for breach of the implied covenant of good faith and fair dealing for unreasonably or without proper cause refusing to pay the policy benefits.

The insurance carrier will typically assert the Genuine Dispute Doctrine, sometimes known as the Genuine Issue Doctrine, as a defense in any claim for breach of the implied covenant of good faith and fair dealing arising out of its refusal to pay first-party damages. While that defense can be asserted under certain circumstances, there have been a number of recent cases that have severely undermined that defense and it is very difficult for insurance carriers to prevail on a motion for summary judgment based upon the Genuine Dispute Doctrine.


In conclusion, liability insurance policy limits can be “opened” when an insurance carrier unreasonably fails to accept a settlement offer within its policy limits. However, policy limits are not “opened” when it refuses to accept a policy limits demand in the first-party claim situation because there is no excess judgment situation. The tort arises from the insurance carrier’s unreasonable refusal to pay the policy benefits without proper cause. The damages are the damages caused by the delay in paying the benefits. As the Supreme Court stated in Gruenberg, “Those are merely two different aspects of the same duty.” However, the damages claimed in the third-party situation are different from those in the first-party situation.

This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2017). Can you open the policy on UM/UIM claims? Trial Bar News, 40(9), 7-8, 34-35.

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