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Does a New California Case Intend to Pave the Way for Opening Policy Limits Without a Formal Demand?

May 3, 2021

One of the toughest challenges coverage counsel and carriers face is trying to figure out how much breadth should be given to a decision that a California Court of Appeal has actually decided to publish. That difficulty is compounded when the potential impact of the decision requires extrapolation based upon a series of hypotheticals. Under California law, the typical bad faith claim for a failure to settle occurs when: (1) a third party claimant makes a reasonable settlement offer within the policy’s limits; (2) the carrier rejects the offer; (3) the matter proceeds to trial, and (4) the trial results in a judgment against the insured for an amount greater than the policy’s limits. Under such circumstances, the carrier becomes liable for the entire judgment.

However, recently in Planet Bingo LLC v. The Burlington Insurance Company, the California Court of Appeal reversed an Order granting summary judgment in favor of an insurance carrier in the context of a bad faith failure to settle suit, even though no policy limits demand was ever communicated, the underlying action never went to trial and as such, there was no excess verdict rendered against the insured. The key issue addressed on appeal was “whether it matters that there was no offer to settle within the policy limits.” Ultimately, the Court of Appeal held it did not matter and stated “the existence of an opportunity to settle within the policy limits can be shown by evidence other than a formal settlement offer.”

In reaching that conclusion, the Court of Appeal found the subrogation demand letter, which identified total damages in excess of the insured’s available limits was adequate to defeat summary judgment and raise a triable issue of material fact with respect to whether the letter represented an opportunity to settle within the policy limits. The Court seemed to place much focus on the fact the underlying action was one of subrogation and that a subrogation demand “offers a clear invitation to negotiate a settlement for less than that amount…”

Despite the fact the Court of Appeal decision does nothing more than remand the matter back to the Superior Court for a determination on the merits, Plaintiff’s counsel are already asserting this decision paves the way for exposing carriers to judgments in excess of liability policy limits, even when a third party plaintiff never communicates an offer to settle within the limits. Only time will tell if the California judiciary actually intends Planet Bingo to serve as the cornerstone for exposing carriers to judgments in excess of the policy limits, even if no policy limits demand was previously communicated. In the interim, the potential implication of Planet Bingo, should be carefully considered by carriers and adjusters handling third party liability cases in California. We will therefore be closely monitoring how Planet Bingo is utilized in future opinions and provide additional updates.

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