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INSURANCE NOTES

CCP §998 Offer To Settle Conditioned On General Release Of "All Claims" Held Invalid

08.21.2008
If a party wants a general release to be part of an offer to compromise under California Code of Civil Procedure ("CCP") §998, it should avoid using language that can be interpreted to release claims outside those at issue in the lawsuit. Otherwise, the offer may be deemed invalid.

In Chen v. Interinsurance Exchange of the Automobile Club, 2008 WL 2453975 (decided June 19, 2008), the California Court of Appeal held that an insurer’s pre-trial CCP §998 offer was invalid, because it was conditioned on the execution of a "general release of all claims," which could be construed to release a known claim not at issue in the lawsuit. As a result, the Court reversed the trial court’s award of more than $310,000 in costs to the insurer after the insurer obtained a more favorable result at trial than the pre-trial CCP §998 offer.

The plaintiffs owned houses in San Marino and San Gabriel, California, insured against property damage by the Exchange.  In 2003, the San Gabriel house suffered water damage to a bathroom, and the San Marino house suffered damage from high winds. Plaintiffs submitted claims to the Exchange.

Later, Plaintiffs sued the Exchange for breach of contract and bad faith. While the lawsuit was pending, the San Gabriel house suffered water damage in the kitchen unrelated to the earlier claims. Plaintiffs submitted a new claim with the Exchange for the kitchen damage. The kitchen damage claim was not a part of the lawsuit.

The Exchange then made a statutory offer to compromise under CCP §998. Under that statute, if a plaintiff rejects a defendant’s pre-trial offer to compromise and fails to obtain a more favorable judgment at trial, the plaintiff cannot recover postoffer costs and must pay the costs the defendant incurred after the offer. The Exchange’s CCP §998 offer was to pay $251,000 to Plaintiffs "conditioned upon plaintiffs executing a dismissal with prejudice of the action, as well as a general release of all claims . . . ." Plaintiffs rejected the offer.

After trial, the jury found the Exchange had paid all benefits due, but had acted unreasonably in handling the claims. It awarded Plaintiffs $150,000 in damages. Because the $150,000 award was less than the Exchange’s CCP §998 offer of $251,000, the Court granted the Exchange’s motion for an award of post-offer costs of more than $310,000. Plaintiffs appealed.

The Court of Appeal reversed the trial court’s award of costs, finding that the pre-trial CCP §998 offer was invalid and thus could not shift responsibility for costs.

The Court stated that, to be valid, a §998 offer must not dispose of claims beyond the claims at issue in the litigation. It noted that any ambiguity in the offer should be interpreted against the drafter, in this case, the Exchange.

The Court determined that the phrase "all claims" in the offer was ambiguous as to whether it referred to the two claims at issue in the lawsuit or the three claims submitted under the insurance policies (including the claim for kitchen damage).  The Court observed that, if the offer had been accepted, the Exchange could argue that the general release included the claim for the kitchen damage, as a general release under Civil Code §1542 includes "known" claims.

The Court distinguished the case of Goodstein v. Bank of San Pedro, 27 Cal.App.4th 899 (1994), which established that a "general release can be part of a valid 998 offer," because the offer in Goodstein (requiring the execution of a "general release by [plaintiff] in favor of [defendant]") did not suggest the settlement of more than the claims at issue in the lawsuit.
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