Plaintiff’s CCP § 998 Offer In Excess Of Policy Limits Could Be In Good Faith And Therefore Valid

Plaintiff’s CCP § 998 Offer In Excess Of Policy Limits Could Be In Good Faith And Therefore Valid

06.13.2014

In Aguilar v. Gostischef, 220 Cal.App.4th 475 (2013), the California Court of Appeal upheld an award of Plaintiff’s costs of over $1.6 million dollars after an insurer rejected Plaintiff’s offer in excess of the $100,000 policy limit pursuant to California Code of Civil Procedure §998, stating that the evidence supported a finding that the offer was “realistically reasonable” and thus was in good faith.

Plaintiff and Defendant were involved in a motor vehicle accident.  Plaintiff sustained severe injuries and incurred over $500,000 in medical costs.  At the time of the accident, Farmers Insurance Exchange insured Defendant under a policy with a $100,000 limit.  Three times in three months after the accident, Plaintiff’s counsel wrote to Farmers requesting disclosure of Defendant’s policy limits so that he could make a policy limit settlement demand.  Farmers did not respond.

After Plaintiff filed suit against Defendant, Farmers offered to pay the $100,000 policy limit to settle the case, disclosing that was the policy limit.  Plaintiff rejected Farmer’s offer and made a CCP § 998 offer to compromise for $700,000.  Farmers responded to Plaintiff’s offer by again offering the $100,000 policy limit, which Plaintiff rejected.  At some point, Farmers intervened in the suit.

The case proceed to trial, and Plaintiff obtained a $2.3 million verdict.  Thereafter, Plaintiff sought more than $1.6 million in costs.

On his motion to tax costs, Defendant argued that Plaintiff’s offer was not made in good faith since it exceeded the policy limit of $100,000.  The trial court disagreed, stating that “[t]his case involves a claim that Plaintiff suffered the loss of a leg.  It is not bad faith for the Plaintiff to seek an amount commensurate to his loss.  Further, the fact that the Plaintiff recovered substantially more money than his settlement amount is prima facie evidence showing that the offer was reasonable.”

Farmers appealed and argued that Plaintiff’s $700,000 CCP § 998 offer could not have been made in good faith, as there was no reasonable expectation that it would be accepted because Plaintiff knew the policy limit was $100,000 and Defendant lacked the financial means to pay.  Concurrently, the parties were litigating whether Farmers was liable for a judgment in excess of policy limits in a separate case.

In analyzing Plaintiff’s CCP § 998 offer, the Court explained that an offer must be made in good faith to be valid.  The Court stated that “[g]ood faith requires that the pretrial offer of settlement be ‘realistically reasonable under the circumstances of a particular case . . . .’”  The Court applied a two-part test:  (1) whether the offer represents a reasonable prediction of the amount of money a defendant would have to pay following a trial, discounted by a factor for receiving money before trial, based on information known to the defendant; and (2) whether the plaintiff’s information was known to the defendant so that the defendant had reason to know the offer was reasonable.

Applying the above test, the Court found that there was ample evidence that Farmers should have known that it could be liable for a judgment in excess of policy limits.  The Court pointed out that Farmers never responded to Plaintiff’s requests for policy limits information and that Farmers only disclosed the policy limits after Plaintiff filed suit.  The Court acknowledged that this appeal was not to determine whether Farmers was liable for an excess judgment for refusing a reasonable offer by an injured party to settle with its insured.  The Court determined, however, that Farmers had not shown that it was unreasonable for Plaintiff to believe Farmers may be liable for a judgment in excess of limits.  Before serving the CCP § 998 offer, Plaintiff had written to Farmers asking for the policy limits information so he could make a policy limit demand and further stating his position that Farmers may be liable for an excess judgment.

The Court noted that although Farmers vigorously disputed its liability for a judgment excess of policy limits (and was litigating that issue in a separate case), a liability insurer “is playing with fire” when it refuses to disclose policy limits and closes the door on reasonable settlement negotiations.  The Court added that Plaintiff’s offer of $700,000 was less than a third of the verdict.  Thus, the Court held the two-part test to determine the reasonableness of a CCP § 998 offer had been met.

The Aguilar Court determined that the trial court did not abuse its discretion in ruling that Plaintiff acted in good faith in requesting $700,000 pursuant to CCP § 998 because the evidence showed that Farmers could be liable for an excess judgment.  As a result, the costs award against the Defendant was affirmed.  Whether Farmers acted in bad faith by not promptly disclosing the policy limits or by not accepting Plaintiff’s offers and thus was liable for that excess judgment would be decided in the separate case.

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