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How to Open Policy Limits

How to Open Policy LimitsCareful planning is necessary when making a policy limits demand so that the insurance carrier cannot later claim that it is not liable for the excess judgment.

Jimmy “The Bud” Weedman owned the largest supplier of medical marijuana in Southern California. Bud Weedman had invented and patented a technique for trimming his plants to make his marijuana a more potent painkiller. His company slogan “It Will Kill Your Pain and Anything Else That Ails You!” had been attached to several videos, which went viral on the internet.

Bud Weedman sometimes used his childhood buddy, Crackhead Craig, for various odd jobs. Since Crackhead Craig’s monster truck was unreliable, Bud Weedman had added Crackhead Craig as an occasional driver of one of his older trucks covered under his business automobile insurance policy issued by Allsnake Insurance Company. Bud Weedman sold the older pickup truck to Crackhead. Crackhead registered the truck in his own name and purchased an insurance policy through Allsnake. Ten days after buying the vehicle, Crackhead was driving the pickup truck to the monster truck conversion center when he ran a red light and collided with a vehicle operated by Eggshell Eddie. Eggshell and his fun-loving girlfriend, Ima Forit (a passenger), were severely injured and they retained attorney Billy Greenhorn. Attorney Greenhorn was Eggshell’s brother-in-law that had recently passed the bar exam after completing a correspondence course from a law school that he learned about on the back of a matchbook cover.

Immediately after the accident, Crackhead provided Ima with an expired registration and an insurance card that Bud Weedman had given Crackhead Craig when he was working for Bud. Ima provided that information to Attorney Greenhorn. The expired registration reflected Jimmy “The Bud” Weedman as the registered owner and the insurance card referenced the policy number of Bud’s Allsnake insurance policy. Attorney Greenhorn gathered medical records of Eggshell Eddie and Ima Forit and submitted a policy limits demand to Allsnake Insurance Company. The demand letter identified Jimmy “The Bud” Weedman as the driver and owner of the vehicle and provided the Allsnake policy number for Bud Weedman. The letter was dated November 5, 2013, and stated the demand would remain open for ten days from the date of the letter. The letter was received by Allstate on November 8 and Adjuster Jean Lowball was assigned the claim. She investigated the coverage and determined that the policy that had been issued to Bud Weedman was in force at the time of the accident, but the subject truck had been removed at the request of Bud Weedman from the policy approximately two weeks before the accident occurred.

Unbeknownst to Adjuster Lowball, Crackhead Craig had contacted Allsnake and reported the auto accident. His claim was assigned to a different adjustor at Allsnake named Sean McScrewem. Crackhead provided Adjuster McScrewem with the facts of the accident and McScrewem determined that it was a policy limits case because Crackhead had bought minimum limits of $15,000 per person and $30,000 per accident. However, Crackhead had become so flustered at the accident scene that he failed to obtain the names of the victims in the other vehicle.

On November 8, 2013, Adjuster Lowball contacted Attorney Greenhorn and requested an extension on his policy limits demand so that she could complete her coverage investigation before responding to the demand. Attorney Greenhorn refused the request. Adjuster Lowball left several voicemail messages on Bud Weedman’s phone. Bud Weedman finally returned her calls and explained that he had sold the vehicle to Crackhead Craig and had removed the vehicle from his policy prior to the accident. Adjuster Lowball obtained a copy of the Traffic Collision Report, which confirmed that Crackhead Craig was driving the vehicle and also provided her with the names of Eggshell Eddie and Ima Forit as the victims in the other vehicle. She contacted Crackhead Craig and asked if he had insurance. Crackhead informed Adjuster Lowball that he had an auto policy through Allsnake and had already reported the claim to Allsnake. She immediately checked her claim databases and determined that a separate claim had been opened when Crackhead reported the claim.

Jean Lowball forwarded the policy limits demand letter to Adjuster Sean McScrewem who contacted Attorney Greenhorn and notified him that they just determined that Crackhead was not covered under the policy issued to Bud Weedman, but was possibly covered under his own individual policy and that they were still investigating that issue and needed an extension of time of the policy limits demand. Attorney Greenhorn refused the request.

Sean McScrewem immediately contacted his supervisor and obtained approval to offer up the policy limits of Crackhead’s policy to both Eggshell Eddie and Ima Forit. A letter was prepared, which offered $30,000 and identified that sum as the full policy limits on Crackhead Craig’s policy and stated that it would be for a release of all claims (known and unknown), liens and loss of consortium claims. Sean McScrewem called Attorney Greenhorn on the last day of the policy limits demand and left three voicemail messages. He attempted three times to fax the settlement offer of policy limits of $30,000 to Attorney Greenhorn but was unsuccessful because Attorney Greenhorn had turned off his fax machine at 3:30 p.m. After receiving the letter by regular mail, Attorney Greenhorn notified Allsnake that his clients were not accepting the policy limits offer. He proceeded to trial and obtained a $2 million judgment for Eggshell Eddie and a $500,000 for Ima Forit. Crackhead Craig assigned his rights against Allsnake to Eggshell and Ima in exchange for a covenant not to execute. Attorney Greenhorn filed suit against Allsnake for breach of contract, breach of the implied covenant of good faith and fair dealing, and requested that Allsnake be held liable for the entirety of the judgment notwithstanding its limited policy limits.

The matter was assigned to Judge Solomon’s department. The matter proceeded to trial and the jury returned a verdict in favor of Eggshell Eddie and Ima Forit. Allsnake’s counsel, John Plodalong, filed a motion for judgment notwithstanding the verdict. Judge Solomon granted the motion.

Analysis of Policy Limits Demand

Judge Solomon’s order explained that an insured’s claim for bad faith, which is based upon the alleged wrongful refusal to settle, requires the insured to prove that the third party had made a reasonable offer to settle the claims against the insured for an amount within the policy limits. The offer must be clear enough to have created an enforceable contract that resolved all claims had it been accepted by the insurer (Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Call.App.l3d 981, *992-993) and all of the third-party claimants must join in the demand and provide a complete release of all insureds (Strauss v. Farmers Ins. Exchange (1994) 26 Cal. App.4th 1017, *1021). And finally, the time period provided for the acceptance must not deprive the insurer of an adequate opportunity to investigate and evaluate its insured’s exposure (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, *798).

The policy limits demand letter by Attorney Greenhorn reflected that his clients were willing to settle their claims against Bud Weedman for his policy limits. That policy had deleted the subject vehicle and Crackhead Craig prior to this accident. Therefore, there is no evidence that Eggshell or Ima offered to settle their claims against Crackhead for Crackhead’s policy limits under his Allsnake policy. There is no legal authority that an offer to release one potentially liable party in exchange for that party’s policy limits, if rejected by the insurer, can serve as the basis for a wrongful refusal to settle claim by a different potentially liable party (Crackhead Craig). The analogous authorities suggest a contrary rule. In McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, the carrier was not held to have opened its policy for refusing to settle because there was nothing in the settlement demand that indicated the claimants were willing to provide a release of their claims against the insured. In Strauss v. Farmers Ins. Exchange (1994) 26 Cal.App.4th 1017, a carrier was held not to have acted in bad faith for refusing plaintiff’s policy limits demand because the demand did not agree to release all of the insureds under the policy. In Coe v. State Farm Mut. Auto Ins. Co. (1977) 66 Cal. App.3d 981, the court concluded that an insurance carrier did not breach its duty to settle because it did not resolve all of the potential claims that could be brought against its insured.

Attorney Greenhorn argued that Allsnake had acted negligently and had bungled its investigation and was liable for the excess judgment because it should have made the connection between Crackhead Craig and the injured claimants at an earlier point in time. Judge Solomon reminded Attorney Greenhorn that, while a third party is entitled to set a reasonable time limit within which the insurer must accept a settlement proposal, (Martin v. Hartford Acc. & Indem. Co. (1964) 228 Cal.App.2d 178, *185) an insurance carrier “need not be governed by whatever time limit counsel for plaintiff in a personal injury action may impose.” (Id. at *185.) Whether or not an insurance carrier has satisfied its duty to attempt to settle and protect its insured “must be measured in the light of the time limitation, which plaintiff had placed on her offer.” (Ibid.) When a liability insurance carrier timely tenders its “full policy limits” in an attempt to settle the claims against its insured, the insurance carrier has acted in good faith as a matter of law. (State Farm Mut. Auto Ins. Co. v. Crane (1990) 217 Cal.App.3d 1127, *1136.) The rationale is, “By offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.” (Lehto v. Allstate Ins. Co. (1994) 31 Cal. App.4th 60, *73.)

Judge Solomon rejected Greenhorn’s arguments that Allsnake was negligent and was liable for the excess judgment. The legal standard of good faith and fair dealing requires the examination of the reasonableness of the insurer’s conduct and “mere errors by an insurer” in fulfilling its obligations “does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing.” (Brandt v. Superior Court (1985) 37 Cal.3d 813, *819.) To be liable in tort, the conduct by the insurance company must also have been unreasonable. (Id.). It has long been repeated in such cases that “so long as insurers are not subject to a strict liability standard, there is still room for an honest, innocent mistake.” (Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, *1460; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, *1280-1281 [California law clearly provides that erroneous denial of a claim does not by itself support tort liability; tort liability requires insurer to withhold benefits unreasonable].)

In this case, the delays in evaluating the policy limits demand were brought about by Attorney Greenhorn’s erroneous facts about the driver and policy number. Despite the confusion caused by Attorney Greenhorn, Allsnake was able to conduct its coverage investigation and connect Crackhead Craig to the actual incident and the injuries suffered by Eggshell Eddie and Ima Forit within a week. In one case, a oneweek limitation attached to a settlement offer did not preclude a finding of bad faith rejection of a policy limits demand. However, that case involved a situation where the insurer’s investigation and evaluation of the claim had been completed. (See Critz v. Farmers Ins. Group (1964) 230 Cal. App.2d 788, *798.) It is not unreasonable for an insurance company to request an extension when it needs more time to conduct its investigation and make a good faith assessment of the value of the claim or for consultation with its policyholder. (Id.)

In summary, Allsnake did everything it could to resolve this claim within the abbreviated time period that was unilaterally set by Attorney Greenhorn. As a matter of law, Allsnake Insurance Company did not unreasonably refuse to settle the claims of either Eggshell Eddie or Ima Forit. Therefore, Allsnake is not liable for the excess judgment.


This Crackhead Craig chronicle was derived from the recent case of Graciano v. Mercury General Corporation (2014) 231 Cal.App.4th 414. The case provides an excellent analysis of the law that applies on whether or not an insurance company will be held to have opened up its policy limits by failing to accept a time-limited policy limits demand. Practitioners should make sure their facts are accurate, provide a clear and unequivocal offer to settle all claims against all of the insureds under the policy, and make sure that all of the potential claimants are included in that policy limits demand. If you are not representing someone else who was also injured, you should contact that person or their attorney to determine if they intend on making a claim and then have them join in the policy limits demand. Many unrepresented claimants will agree to accept a token payment ($5) in full settlement of their claims when they learn that other victims in the accident suffered serious injuries and are in desperate need of being compensated for expenses and other damages. In summary, careful planning needs to be conducted when making a policy limits demand so that the insurance carrier cannot later claim that it is not liable for the excess judgment. If you do not have the experience in making such demands, consideration should be given to retaining an experienced personal injury attorney or someone with insurance coverage background to assist you in drafting your policy limits demand.

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. (2015). How to open policy limits. Trial Bar News, 38(2), 13, 24-26.

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