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When a Policy Limits Demand can be Abusive

Demands for insurance policy limits frequently generate substantial concern for  insurers.  A properly executed policy limits demand that is rejected by an insurer will “open the policy” and expose the insurer to liability in excess of its policy limits.  The timing and form of the demand, however, are as important as the demand itself.

A policy limits demand must meet five criteria before a court is likely to hold that an insurer acted in bad faith in rejecting the demand:

  • The settlement terms must be clear enough to create an enforceable contract if accepted. Coe v. State Farm Mut. Auto. Ins. Co., 66 Cal.App.3d 981, 991 (1977);
  • All claimants must join in the settlement demand. Coe, 66 Cal.App.3d at 992-93;
  • All insureds must be released. Strauss v. Farmers Ins. Exch., 26 Cal.App.4th 1017, 1021 (1994);
  • The settlement amount demanded must be both within policy limits and “reasonable.” Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 661 (Cal. 1958); and
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