Enough to Go Around?
Minimum policies and the tripartite relationship
An attorney employed by an insurer to represent an insured has the duty to represent the insured’s best interests. She owes the insured the same obligation of good faith and fair dealing as if she was retained by the insured personally.
This interplay between insured, attorney, and insurer is known as the “tripartite relationship.” While the insurance carrier and insurance defense attorney will often have a closer relationship than the attorney and the insured, the attorney’s primary duty is to the insured.
Insurance policies that provide minimum policy limits delineated in Section 16056 of the California Vehicle Code create, or accentuate, complications that carriers and insurance defense attorneys must be aware of in order to avoid bad-faith exposure. California’s minimum insurance policy for automobile liability is $15,000 per claim and $30,000 per incident. Unfortunately, $15,000 often does not provide the coverage required to settle a claim, even in seemingly low-damage collisions. Insurance Information Institute statistics show that the average amount liability insurers paid for a policyholder’s responsibility to others for bodily injury has surpassed $15,000 per claim since 2013.
When the probable outcome of a litigated matter is liability in excess of coverage, there are necessary precautions that must be taken. California law requires insurance companies to act within the implied covenant of good faith and fair dealing, and therefore make reasonable efforts to settle a third party’s lawsuit against the insured. A carrier should regularly communicate with defense counsel regarding liability and exposure so settlement negotiations can be undertaken in an informed manner. Otherwise, the insurer is exposed to a potential bad-faith lawsuit by the insured—or prevailing plaintiff if assigned by the defendant—to recover damages proximately caused by the breach.
When there has been a settlement demand made by an injured third party, a claim for bad faith based on an alleged refusal to settle within the policy limits first requires proof that the offer was reasonable and within the policy limits. A settlement demand meets this element if:
• Its terms are clear enough to have created an enforceable contract resolving all claims had it been accepted by the insurer.
• All of the third-party claimants have joined in the demand.
• It provides for a complete release of all insureds.
• The time provided for acceptance did not deprive the insurer of an adequate opportunity to investigate and evaluate its insured’s exposure (Graciano v. Mercury Gen. Corp. (2014) 231 Cal. App. 4th 414, 425).
In the context of minimum policies, the greatest potential for problems to arise is when there are multiple third-party claimants or when there has not been adequate opportunity to investigate and evaluate exposure and the validity of a third party’s claims.
When attempting to settle a claim, an insurer must undertake the settlement in a way that avoids exposing the insured to personal liability on any of the claims. This premise is emphasized while settling claims with multiple third parties. Piecemeal settlements among a number of claimants are not barred as a practice. If policy limits are large enough, there is no risk in settling claims as they arise or are established. But $30,000 can be quickly exhausted when there are multiple injured third parties, and doing so opens the insurer and attorney to bad-faith claims for “unreasonable” earlier settlements.
Consequently, the ability to settle a claim within policy limits, if there is a possibility to do so, is frustrated by potential claimants or plaintiffs holding out. A matter in litigation can be set for trial before the statute of limitations has run, thereby creating additional stressors. If a court is unwilling to continue the matter until after the statute of limitations has run to give potential claimants an opportunity to file suit, and there is potential to settle within policy limits among the already-named plaintiffs, the insurer must decide how to allocate its risk because either option creates an exposure problem.
Further, the reasonableness of a settlement offer is dependent on facts known or available to the insurer at the time of the proposed settlement, and whether there was time to adequately investigate and evaluate the exposure. Sometimes, the ability to determine whether a claim will exceed minimum policy limits is apparent on the face of the claim, such as when a collision results in loss of life or limb. This clarity is not always apparent, however, and while a claimant may believe she has provided sufficient information for an insurer to evaluate a claim, it is generally more complicated than that. Obtaining complete medical records—supporting documents to loss of earnings, expert reports, etc.—takes time.
An example of how these elements come together and interact is during a wrongful-death claim. In California, there is an outstanding question as to whether the “one-action rule” applies to pre-litigation settlements of wrongful-death claims. An unpublished opinion, Moody v. Bedford (2012) 135 Cal.Rptr.3d 867, states that it does not.
There can be multiple claimants in a wrongful-death claim, and the defense is not in a position to know who the proper claimants are, which is the reasoning as to why the burden is on plaintiff to bring other claimants in as additional plaintiffs or nominal defendants. If the “one-action rule” does not apply to pre-litigation settlements, however, then an insurance company must weigh these risks.
Defense counsel, as always, is an advisor to the insurer and to the insured concerning the potential consequences of litigation, but this advice becomes paramount once sufficient information is known. Carriers must therefore continuously reevaluate the case as new information is provided, while keeping the limits in mind, while guided by consistent communication between the insured, defense counsel, and themselves.