“Is the Policy Open”

A. Define “Open Policy”

  1. When has an insurer, by virtue of its failure to meet its duties to its insured, exposed itself to paying the full value of a third party’s claim — including amounts in excess of policy limits?
  2. Typical Examples (black & white):
    1. Failure to pay settlement demand that is within the policy limits, when clearly all available information points toward judgment in excess of policy limits.
    2. Failure to defend based on incorrect decision that claim is not covered.
  3. Atypical examples (more in the “grey” area)
    1. Duty to disclose policy limits pre-litigation (or seek insured’s permission to do so).
    2. Duty, if any, of insurer to affirmatively seek to settle case within policy limits.
    3. Duty, if any, of insurer to clarify specifics of Plaintiff’s demand — instead of simply rejecting it outright. (E.g. are liens included in demand)?
    4. Duty of insurer to request more information/time before rejecting/accepting a settlement demand.
    5. Duty of insurer to conduct reasonable evaluation of the liability and damages aspects of the claim to determine if excess judgment is (substantially) likely.

B. The Implied Covenant of Good Faith and Fair Dealing

  1. The legal basis for “excess” judgment exposure to insurers is the Implied Covenant, which imposes:
    1. Insurer duty to investigate third party claims objectively and reasonably,
    2. Insurer duty to defend if there exists a potential for coverage
    3. Insurer duty to effect reasonable settlements of third party claims within policy limits on timely basis, Communale v. Traders & Gen. Ins Co. (1958) 50 Cal.2d 654; Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425; Betts v. Allstate (1984) 154 Cal.App.3d. 688.
    4. A variety of other insurer duties
  2. The insurer must give the insured’s interest at least as much consideration as its own in evaluating the “reasonableness” of a settlement demand. Communale, supra; Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858
    1. Natural Conflict of Interest between insurer and insured.
      1. Insurer benefits by holding money as long as possible.
      2. Insured almost always benefits from settlement as quickly as possible within policy limits.
      3. Practical Consequences of “Opening the Policy”
        1. Exposure to full value of third party’s claim beyond policy limits
          1. Requires assignment by insured to third party AND
          2. Requires a second lawsuit (including all its costs, risks, time delays, experts, discovery, etc. . . . ), unless settlement is achieved.
        2. Potential for insured to sue insurer for bad faith and punitive damages — (Betts,, supra)


  1. Implied Covenant obligates insurers to accept reasonable settlement demands within policy limits to avoid exposure of insureds to personal liability. Comunale, supra;.
    1. “Unreasonable” refusal to settle; or “Without Proper Cause”
      (The Prudent Insurer Standard)
    2. Components of a “Reasonable” demand (Allen v. Allstate (9th Cir. 1981) 656 F.2d 487).
    3. No Comparative Bad Faith Defense Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390.
    4. “Opportunity to Settle” within policy limits required. (What does it really mean?)
      1. Was a demand actually made? (Examples – “We are inquiring regarding your intent to tender the policy limits?”)
      2. Was the demand capable of acceptance? (Too short a time to accept? All Defendants included? Piecemeal? Other issues.)
      3. If the demand was unclear — insurer duty to seek clarification? (e.g., All parties included?)
      4. If the demand was incomplete — insurer duty to inquire further (i.e. does demand include liens?)
      5. Was the demand “reasonable” based on available information? (Consider fact specific analysis of liability and damages.)
      6. Cases involving the consent of the insured before settlement.
      7. Insurer’s duty to diligently act within time frames of demand.
      8. Failure to disclose policy limits (or obtain insureds’ permission to do so) can prevent insurer from gaining the opportunity to settle with third party, thereby exposing insured to excess personal liability. (See Boicourt discussion below.)
      9. Is there an affirmative duty on the insurer to seek/create the opportunity to settle; or to simply tender its policy limits?
    5. Insurer Affirmative Duty Issues
      1. Boicourt v. Amex Assur. Co. (2000) 78 Cal.App.4th 1390
        1. Duty to seek insured’s permission to disclose policy limits prelitigation. Had insurer done so, case would have settled for policy limits.
        2. Greater significance of Boicourt decision: focus on “opportunity”. (Examples: Discovery issues) (Unknowns)
      2. Duty to initiate settlement negotiations?
        1. Cases suggesting such affirmative duty – Garner v. American Mut. Liab. Ins. Co. (1973) 31 Cal.App.3d 843; Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679; Shade Foods Inc. v. Innovative Product Sales (2000) 78 Cal.App.4th 847
        2. Insurance Code Section 790.03(h)(5) — Insurers must attempt “in good faith to effectuate prompt, fair and equitable settlement” after liability has become “reasonably clear”. (See also Pray v. Foremost Ins. Co. (9th Cir. 1985) 767 F.2d 1329.)
        3. Cases suggesting no affirmative duty to initiate negotiations: Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858 (But see Boicourt, supra, questioning Merritt.)
      3. Duty to seek clarification of unclear terms in demand.
        1. Betts v. Allstate (1984) 154 Cal.App.3d 688 – Insurer may not ignore or summarily reject unclear demand and later challenge its adequacy etc. . . . without ever seeking clarification.
        2. Coe v. State Farm (1977) 66 Cal.App.3d 981 – Insurer can eliminate uncertainty by requiring clarification of terms of settlement — thereby protecting insured.
        3. Allen v. Allstate (9th Cir. 1981) 656 F.2d 487 – Insurer must explore the details of a settlement offer that could extricate insured from the case. Insurer cannot “ignore” offer that is capable of being clarified so as to resolve case.
      4. Insurer Duties When Demand Is Higher than Policy Limits – Heredia V. Farmers Ins. Exch. (1991) 28 Cal.app.3d 1345 – Duty to Inform Insured to Give Insured the Opportunity to Contribute Sums above the Policy Limits.
      5. Ultimate Issue — Did Insurer Have “Opportunity” To Settle And Unreasonably Lose The “Opportunity”?
        1. “Opportunity” is a term that potentially carries broadly defined parameters/implications.
        2. Each case to be judged on a fact specific basis; and it will be a question of fact for a jury to decide whether the insurer had the “opportunity” to settle and unreasonably failed to do so.
        3. Settlement negotiation tactics employed by insurers and defense lawyers frequently raise perilous conflict of interest issues.

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