Limits — continued from Page 16
The policy-limits demand was rejected, now what?
Once an insurer declines a policy-
limits demand, either by explicit rejection or by allowing the demand to expire, new options open to plaintiff. A plaintiff may seek an assignment of
the insured tortfeasor’s bad-faith rights against its insurer in exchange for a covenant not to enforce any judgment against the insured’s personal assets. (See Critz, supra, 230 Cal.App.2d 788.) Such an assignment may be made at any time, before or after trial, and is effective even if the express terms of the policy forbid it. (Smith v. State Farm Mutual Automobile Insurance Co. (1992) 5 Cal.App.4th 1104, 1110-11.) The assignment, however, is not opera-
tive until an excess judgment is rendered; i.e., no cause of action for bad faith arises until after an excess judgment is obtained. (Safeco Insurance Co. v. Superior Court (1999) 71 Cal.App.4th 782, 788-89.) Be aware, however, that while an
insured’s economic damages are assignable, any attempted assignment of damages for personal injury, emotional distress, pain and suffering, or punitive damages is inef- fective. (See Murphy v. Allstate Insurance Co. (1976) 17 Cal.3d 937, 942; and Smith, supra, 5 Cal.App.4th at 1111.) Therefore, in the
assignment of bad-faith rights, the damages recoverable by your client are limited to the amount of judgment in excess of the policy limits. As such, your client does not truly “step into the shoes” of the insured for other bad-faith causes of action and damages. (Ibid.) Depending on circumstances, strategies
may be employed to sidestep a potential waiver of the claims for personal injury, emo- tional distress, and punitive damages. For example, the insured may sue directly for these bad-faith damages, then agree to pay the excess judgment or some other amount to your client to satisfy the judgment. (See Murphy, supra, 17 Cal.3d at 942-43.) Clearly, an assignment and covenant
not to sue offer advantages to plaintiff. For instance, an insured defendant may be less willing to shade or obscure the truth because their personal assets are no longer at stake. On the other hand, of course, an assignment and covenant not to sue should never cross the line to collusion of plaintiff and insured against an insurance company. For instance, an agreement that the insured will not contest liability in exchange for a covenant not to enforce a judgment against the insured’s personal assets would be collusive. (See Samson v. Transamerica Insurance Co. (1981) 30 Cal.3d 220, 240-41.) Collusion, if proven, would likely be a breach of the insured’s duty to
the insurer, and could have dire coverage consequences for the insured.
Conclusion All consumer attorneys want to prose-
cute their client’s case so as to maximize the collectible recovery. In the right circum- stances always consider issuing a properly timed and formulated policy-limits demand. Ensure that at the time of the demand, the defense has the liability and damages infor- mation it reasonably needs to conclude its investigation, and determine that the likely judgment will exceed policy limits. This will maximize the insurance carrier’s bad-faith exposure, and likely lead to efficient and expeditious settlement or, if settlement is not to be, insurance coverage beyond the policy limits for any excess judgment. Raymond Paul Johnson is a Governor-
Emeritus of the Consumer Attorneys Association of Los Angeles, on the Board of Directors of the Western Trial Lawyers Association, and a long- time member of the American Association for Justice (formerly ATLA), and the Consumer Attorneys of California. Cory G. Lee is an attorney with Raymond
Paul Johnson, A Law Corporation. He is a member of the Consumer Attorneys Association of Los Angeles and Consumer Attorneys of California, and practices in the areas of business law, products liability and other civil litigation matters.
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