Recently Enacted Code of Civil Procedure Sections 999 – 999.5 Seek to Clarify and Define the Process for Making and Responding to Time-Limited Policy Limits Demands Under Certain Liability Policies

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California case law allows for extracontractual damages to be awarded for a breach of the implied covenant of good faith and fair dealing (also known as “bad faith”) where an insurer unreasonably refused to accept a settlement offer within a policyholder’s liability policy limits.  California courts have struggled for decades to define the elements of an insurer’s bad faith failure to settle.  Some decisions focused on the reasonableness of the settlement demand, whereas others focused on whether the insurer’s rejection of the settlement demand was unreasonable. Until now, no statutory guidance existed to determine what constitutes a reasonable settlement demand or an unreasonable rejection of such a demand.  (See 2022 Cal. Legis. Serv. Ch. 719 (SB 1155) (West); June 21, 2022 Hearing of Assembly Committee on Judiciary SB 1155 (Caballero), at pp. 4-5 [“6/21/22 Hearing Analysis”].)

In response to this problem, the California Legislature enacted Code of Civil Procedure sections 999 – 999.5, effective January 1, 2023.  These sections govern “time-limited demands” for settlements within insurance policy limits transmitted on or after that date.  (C.C.P. §999.5(c).)  A “time-limited demand” means a pre-lawsuit or pre-arbitration offer to settle within a liability policy’s limits any cause of action or claim for personal or bodily injury, property damage, or wrongful death made by or on behalf of a claimant to a tortfeasor with a liability policy, which by its terms must be accepted within a specified period of time.  (Id., §999(b)(2).)  Sections 999 – 999.5 only apply to causes of action and claims covered under automobile, motor vehicle, homeowner, or commercial premises liability insurance policies.  (Id., §999.5(a).)  They do not apply to a claimant not represented by counsel.  (Id., §999.4(b).)

In enacting sections 999 – 999.5, the Legislature sought to provide a statutory framework for processing the long disputed and controversial issue of “time-limited demands” made to insurers, by clarifying existing law and providing a defined process for making and responding to such demands.  (6/21/22 Hearing Analysis, at pp. 1, 5-6.)  A second stated purpose is to encourage prompt settlements of civil actions and claims for the benefit of claimants, policyholders and insurers.  (C.C.P. §999(a).)

To be effective, a demand must be in writing, must be labeled as a time-limited demand or reference section 999.1, and must include the following minimum terms:

  • a clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens;
  • a complete release from the claimant for the policyholder(s) from all present and future liability for the occurrence;
  • the date and location of the loss:
  • the claim number, if known;
  • a description of all known injuries sustained; and
  • reasonable proof sufficient to support the claim. (Id.,§999.1(a) – (g).)

Additionally, an insurer must accept a demand that meets these minimum requirements within 30 or 33 days, depending on the method of transmission.  (Id., §999.1(a).)

A claimant shall send their “time-limited demand” either directly to the liability insurer if its address is known, or to an address provided by the insurer to the Department of Insurance, which address shall be posted on the Department’s internet website.  (Id., §999.2)

An insurer’s acceptance of a demand that contains the materials terms outlined in section 999.1 must be written, and must include acceptance of the material terms in their entirety.  (Id., §999.3(a).)  If an insurer needs to seek clarification, additional information, or an extension because it requires further information or investigation within the time period within which to accept a demand, that request shall not, in and of itself, be deemed a counteroffer or rejection of the demand.  (Id., §999.3(b).)  If an insurer does not accept a “time-limited demand,” it shall notify the claimant in writing of its decision and the basis for it.  (Id., §999.3(c).)  This decision shall be relevant in any lawsuit alleging extracontractual damages against the insurer.  (Id.)

Importantly, a “time-limited demand” would not be considered a “reasonable” offer to settle a lawsuit alleging extracontractual damages against a liability insurer if the demand does not substantially comply with all of the material terms outlined above.  (Id., §999.4(a).)  In contrast, a demand that substantially complies with the material terms outlined above would constitute a “reasonable” offer to settle and would provide the policyholder with grounds to recover any excess of policy limits liability the insured may suffer if the insurer rejected it. (See 6/21/22 Hearing Analysis, at p. 2.)

Prior to enactment of these new sections, the guidance available in case law, the Unfair Insurance Practices Act, and jury instructions was not particularly concrete for evaluating whether an insurer acted reasonably in rejecting a “time-limited demand” and thus encouraged bad faith litigation.  (Id., pp. 4-5.)  By providing clearer requirements for making and responding to a “time-limited demand,” sections 999-999.5 are anticipated to reduce the uncertainty in determining whether an insurer’s denial of a “time-limited demand” was “reasonable” or not and thereby discourage bad faith litigation.  (Id., p. 5.)  Although the provisions are only stated to be applicable to certain lines of business, litigants and the courts may very well rely upon them for guidance in evaluating demands under other types of insurance.