California Court Holds § 998 Offer Exceeding Policy Limits Made In Good Faith

In its recent decision in Aguilar v. Gostischef, 2013 Cal.App. LEXIS 816 (Cal. App. 2d Dist. Oct. 11, 2013), a California appellate court had occasion to consider whether a claimant’s statutory settlement offer under California Code of Civil Procedure, §998, knowingly made in excess of an insurer’s policy limits, could be considered a “good faith” offer.

Section 998 of the California Code of Civil Procedure permits a party to make an offer to settle and compromise a litigation. and establishes consequences if the other side rejects the offer.  Under such circumstances, if the party rejecting the offer is unsuccessful in the litigation, or less successful than the dollar amount of the offer, then the losing party may be obligated to pay a certain portion of the other party’s costs.  In order to be a valid §998 offer, it must be made in “good faith,” meaning that settlement offer must be realistically reasonable under the circumstances of the particular case.  The Aguilar decision addresses the issue of whether a claimant’s § 998 offer knowingly made in excess of the defendant’s insurance policy limits could be made in good faith.

Aguilar and Gostischef were individuals involved in a motor vehicle accident.  Gostischef was insured by Farmers Insurance Exchange (“Farmers”) under an auto liability policy with a $100,000 combined single limit.  Subsequent to the accident, Aguilar's counsel wrote to Farmers three separate occasions to obtain information on the policy limits for the express purpose of making a settlement demand. The last letter to Farmers stated: “My client has asked to know the policy limits so that he can make a policy limits demand and resolve this case and move on with his life. Unfortunately, until and unless we are advised of the limits in coverage, we are not able to make a policy limits demand. He is, however, prepared to do so upon being advised of the limits.  Once again, we entreat you to get permission from your insured to disclose the policy limits, provide them to us in the form of a certified policy and declaration, so that we can then immediately demand policy limits. Please favor us with a reply within the next two weeks.”  Farmers, however, did not respond to any of these requests.

Given Farmers’ silence, Aguilar eventually brought suit against Gostischef.  Farmers then advised Aguilar of the $100,000 policy limit and offered to pay its full policy limit to settle the case.  Gostischef later made a § 998 offer to Aguilar in the same amount.  Aguilar rejected both offers.  Instead, his counsel wrote to Farmers and advised that in light of Farmers’ failure to have previously disclosed the limits, and to settle the claim on behalf of its insured, Farmers would be liable for any judgment in excess of its policy’s limits.  A month later, Aguilar made a section §998 offer to settle in the amount of $700,000.  Farmers again offer to pay $100,000 and this was rejected.

The case was tried, and Aguilar was ultimately awarded $2,339,657.  Aguilar then sought $1,639,451.14 in costs from Farmers pursuant to §998.  Farmers argued the §998 offer in the amount of $700,000 was not made in good faith since Aguilar knew that the policy limits were $100,000.  The trial court disagreed and awarded costs, on the basis that the offer was “realistically reasonable under the circumstances.”  Farmers appealed, arguing that the offer could not have been made in good faith as there was no reasonable expectation that it would be accepted, based on plaintiff’s knowledge of the policy limits and defendant’s financial hardship.

The appellate court held that it was reasonable for Aguilar to believe Farmers could have been liable for a judgment in excess of policy limits, as case law supports the proposition that an insurer that refuses to disclose its limits may be subject to excess judgment liability in certain circumstances.  Farmers further failed to show any bad faith on plaintiff’s part; plaintiff had made its intention to seek policy limits known to Farmers, and had made three requests to Farmers for the information.  As such, the court agreed that Aguilar’s $700,000 demand was made in good faith and that Farmers was liable for the costs awarded pursuant to §998.