Opening Automobile Policy Limits In California

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California, and Los Angeles in particular, is known for its cars, traffic, and a cultural penchant for driving.  As a result, California experiences a large number of car accidents.  In fact, Los Angeles ranks as having the second highest pedestrian deaths caused by automobile in the United States.

When you are in a car accident that is not your fault, one of the first things that usually occurs is an insurance claim is made to the negligent driver’s insurance company.  The negligent driver’s insurance will often have policy limits which may not be adequate to cover the injuries that were caused.  Yet, the insurance company nevertheless frequently refuses to settle with the injured victim for an amount at or under the negligent driver’s policy limits, preferring to take their chances at trial.  The negligent driver, however, not the insurance company, is the one that stands to lose if the insurance company’s gamble does not pay off, because she or he is liable for the judgment.  The California Supreme Court has explained that the duty to settle is important “to protect the insured from . . . the insurer’s gamble—on which only the insured might lose.”  (Murphy v. Allstate Insurance Company (1976) 17 Cal.3d 937, 941.)

If the insurer refuses a reasonable settlement offer within policy limits, it is playing a risky game.  If, ultimately, “the judgment exceeds the policy limits,” the insurance company is liable “for the entire judgment,” including the amount in excess of policy limits.   (Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 502.)  This is what is referred to in the insurance industry as “opening up” a policy.

Opening up a policy can be a technically tricky maneuver to pull off, but it is a potentially powerful tool claimants possess to get insurance companies representing negligent third parties to pay policy benefits.  This is important, because as has beenpreviously discussed on this blog, an insurance company only owes a duty of good faith and fair dealing to its own insured, not third-party claimants.

Several steps must be accomplished to open a policy.  First, the claimant must make “a reasonable settlement offer within the policy limits.”  (Blue Ridge, supra, 25 Cal.4th at 502.)  A demand that is “plainly beyond the policy limit” does not open the policy.  (Heredia v. Farmers Ins. Exchange (1991) 228 Cal.App.3d 1345, 1355.)  Second, the claimant must provide the insurance company with access to all information reasonably necessary to make a decision on the claim, including liability and damages.  (Isaacson v. California Ins. Guar. Ass’n (1988) 44 Cal.3d 775, 792.)  In addition, claimants must allow the insurance company sufficient time to consider and evaluate the demand and information about the claim, and an unreasonably short “deadline imposed by the offer’s terms” may prevent opening the policy.  (Coe v. State Farm Mutual Auto Ins. Co.(1977) 66 Cal.App.3d 981, 994.)  Further, the claimant must offer a full release of liability relating to the accident because an insurance company is not allowed “to make a payment that would bankroll a plaintiff’s caseagainst the insured.”  (State Farm Mutual Autmobile Ins. Co. v. Crane (1990) 217 Cal.App.3d 1127, 1136.)  Finally, the offer to settle must be a “reasonable settlement” offer under the circumstances, it is not enough that it just be below policy limits.  (Comunale v. Traders And General Ins. Co. (1958) 50 Cal.2d 654, 660.)  Whether an offer is reasonable, in many cases, is a highly factual and debatable question.

Persons who have been injured by a negligent driver in California who may not have enough insurance to cover the damages caused, should consider making a policy limits offer to settle, and take the steps necessary to provide the negligent driver’s insurer with any reasonably necessary information, so that any refusal to pay those limits risks opening the policy.