Malpractice rule applies to insurance bad faith, too

In their recent article advocating a change in the law concerning claims for legal malpractice ("Legal Malpractice: Show me the damage!" Feb. 28), Ken Feldman and David Samani make a strong case for the common sense notion that when a plaintiff sues his attorney for legal malpractice after having a substantial judgment rendered against him, he should be required to prove that he actually paid the judgment or, at a minimum, that there is some likelihood that he will have to pay it in the future. Otherwise, a pauper who suffers a million dollar judgment as the result of legal malpractice is entitled to sue his attorney for the amount of the judgment, even though he is never going to be required to pay it and the plaintiff with the "paper judgment" against such a judgment-proof defendant will likely never even attempt to collect it.

The elementary justice of this proposed rule applies with even greater force to the current law concerning insurance bad faith and the responsibility of an insurance carrier to pay the full amount of a judgment against its insured, regardless of the insurance policy limits, whenever it is determined that the insurer unreasonably refused to accept a settlement demand within the insurance policy limits. See, e.g., Hamilton v. Maryland Casualty, 27 Cal. 4th 718, 725 (2002). This rule applies even if an insured is bankrupt and completely judgment-proof, with no chance that he will ever actually be required to pay the judgment entered against him. Purdy v. Pacific Auto Ins., 157 Cal.App.3d 59, 74 (1984). In fact, about the only time that such an excess judgment is not enforceable against the insurer is where the insured is deceased and the estate is also bankrupt. See, e.g., Shapero v. Allstate, 14 Cal. App. 3d 433 (1971).

The consequence of this positively quixotic rule of "excess liability" for even judgment-proof insureds is that, perhaps with the exception of transporting explosives, there is probably no occupation more fraught with peril than that of an insurance adjuster attempting to handle policy limit demands in California personal injury actions. Such demands now routinely come with a host of "conditions," and a letter cautioning that if any one of the conditions is not met to the letter, the insurer's response will be treated as a rejection of the policy limit demand and a counter-proposal, thereby "opening the limits." This has resulted in a climate where, as described by former state Supreme Court Justice Otto Kaus years ago (in an admittedly different context), plaintiffs' attorneys are less interested in settling the case than in "using their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith." White v. Western Title, 40 Cal. 3d 870 (1985).

One of the unfortunate consequences of the current system is that many cases that should be resolved for the insurance policy limits are unnecessarily prolonged or taken to trial whenever one of the multiple "conditions" of a policy limit demand are not met with rigorous exactitude. ("The release included property damage so it constitutes a counter-offer"; "Our demand only included a release of the insureds and you included others in the release so you made a counter-offer"; "We demanded acceptance in writing and said that any other attempted form of acceptance would be considered a counter-offer - you called and attempted to accept telephonically," etc.)

This process of "setting up" insurers for insurance bad faith claims is clearly in need of reform and a rule limiting recoverable damages to the "actual harm" sustained by the insured would be a step in the right direction.