States across the country recognize that when a policyholder’s liability is clear and a judgment in excess of policy limits is likely, an insurance company has a duty to participate in settlement negotiations in good faith. A strongly worded demand for policy limits can appropriately put pressure on insurance companies to settle and such letters are critical to catch the primary (and excess, if applicable) insurer’s attention.
The list below of 10 considerations provides some tips to practitioners to (a) craft a good demand and (b) avoid pitfalls that may give an insurer an “out” for rejecting a demand.
1. Client Consent.
Before drafting and sending a demand letter for policy limits, get your client’s consent to settle for policy limits. This is not only a practical tip but also helps preserve against a later argument from a client who may complain that a settlement was insufficient or not enough.
2. Clear Terms.
The terms of a demand must be clear, undisputed and unambiguous. While the initial question of coverage is typically not under the control of the attorney drafting the demand, the settlement terms are, and whether the amount demanded is within policy limits and whether such amount is reasonable are distinct issues the drafter can control. It is worth putting in a catch-all phrase in a policy limits demand that if there are any unclear terms or questions about the demand to contact the drafting attorney’s office for clarification.
3. Policy Limits.
It goes without saying that a strong policy limits letter should demand the correct policy limits. A drafter should check (and double check) that they are demanding the policy limits of the correct insured under the correct policy number(s). Attorneys should also bear in mind whether the policy is a burning or eroding policy tied to offsetting defense costs incurred by the carrier. In policy erosion cases, those costs will be deducted against the coverage available for settlement, and thus, it may be unclear to the drafting attorney what the remaining and available insurance limits are. In erosion situations, this should be anticipated when preparing a demand, either with a reduced settlement figure or by specifically seeking all available “policy limits.”
4. Multiple Policies and Excess/Tower Issues.
Complex and complicated issues arise where there are multiple insurance policies and multiple insurers involved who may be subject to pay a presented settlement demand. Looking to your jurisdiction’s case law on how courts have handled issues when multiple policies are at play is essential.
Drafters of policy limits demands should also review the policy language on “other insurance”, contribution, duty to defend, and the duty to indemnify clauses. Typically, insurers have no legal obligation to contribute toward a settlement more than its percentage of the settlement as determined by the “Other Insurance” clause but the language of the policy or policies will provide the most concrete information on coverage.
Another complex issue arises when a claimant demands an amount above the limits of the insured’s primary insurance coverage but within the limits of the insured’s excess insurance policy. Where an insured is covered by both a primary policy and an excess policy, the excess liability carrier may not be obligated to participate in the defense until the primary policy limits are exhausted. Importantly, depending on the rules in your jurisdiction, there are two potential exceptions to this scenario: (1) when the excess carrier exercised “control” over the settlement process; or (2) when the excess carrier is put on notice that the damages amount is certain to exceed the primary policy limits.
5. Choice of Law.
Choice of law is a legal question, but more and more often, a choice of law analysis is warranted if policies to do not expressly lay out which law to apply. Recent decisions across various jurisdictions have highlighted the important choice of law considerations in complex coverage cases and show that many courts focus on which state has the most significant interest and relationship to determine which state’s law applies. Check the language of the policy or policies at issue to see if it is clear which state law should apply; if it is possible that a conflict of law may apply, drafters of policy limits demands should carefully assess the choice of law issues when crafting their demands.
6. Reasonableness.
In addition to being within the scope of coverage and within the available policy limits, a settlement demand must be reasonable. Satisfying this element hinges on the likelihood and degree of the insured’s potential exposure to an excess judgment. Ensuring that a proposal meets the threshold criteria for reasonableness is vital to drafting a valid policy limits demand.
7. Release.
The demand letter must make clear that the plaintiff is offering a full and final release of all claims in exchange for payment of the policy limit. The offer must be unequivocal and should not contain any built-in contingencies or variables. The demand must resolve all claims against all insureds by all claimants for it to be a full and final release.
8. Set a Deadline.
The letter should include a clear deadline for the insurance company to respond. Reasonableness is key, which depends on the facts of the case. Consider including a procedure to request an extension to respond in the demand, such that if the insurer needs more time to respond, they must state precisely what additional facts, witnesses, authorities, or information the insurance company needs that cannot already be accessed. This forces the insurer to justify why it cannot complete its evaluation and response sooner/by the deadline. And it is important to keep in mind that once the deadline expires, a claimant is under no obligation to repeat a demand for policy limits. Further, a catch-all phrase can be included asking the insurer to contact counsel immediately if for any reason the carrier cannot accept the demand by the deadline because the letter is missing important or crucial information or the carrier has questions. Bottom line: set a deadline that is fair and reasonable and would appear that way to a trier of fact.
9. Use a Proper Address.
A drafter should make sure any demand letter goes to the proper address. If counsel has been corresponding with an insurer/their counsel at a specific address, use both that address and the general claims address. Further, while the letter can be sent electronically, the letter should also be sent by certified mail, return receipt requested, so there is concrete proof that the insurer received the demand.
10. Take the Opportunity to Lay Out Your Case and Cite to Relevant Authority.
Drafters should take the opportunity to lay out their case to the insurer as to why they are liable when sending a demand for policy-limits. A well-written policy limit demand can help establish a drafter’s case with the insurer. Cite to relevant case law and statutes for imposing liability and explain why most (if not all) of liability is likely to rest with the insured.
On the damages side, provide the carrier with sufficient information to show the size of any likely verdict against the insured. If there are reasonable verdict comparisons for your case, those may be helpful to include. The overall goal in the letter should be to show the insurer that a judgment in excess of policy limits is likely, and thus, they should settle now.
