Drivers purchase $X amount of insurance. Usually $X is the most that injured people can (practically) recover.
But there are some situations where the insurance company makes a mis-step and the policy is “opened.”
When the policy is open, the insurance company is responsible for paying the full amount of the injured person’s damages.
For example, if the insured purchases $25,000 in coverage and there is a verdict for $1,000,000, the insurance company has to pay $1,000,000.
Why do Insurers Risk Opening the Policy?
It would be easy to say that insurers are greedy.
But it’s not greed. It’s just playing the odds.
Insurers bet that they are going to be able to save enough money paying lowball settlements to more than offset the situations where they have to pay more than the amount of coverage purchased.
When is it Important to Open the Policy?
Washington is progressive in many ways. But it’s shockingly behind the times in terms of minimum requirements for auto insurance.
The State only requires $25,000 in coverage. That amount was set in the early 1980s. During that time the cost of medical treatment has increased dramatically.
Here’s a chart that shows the increase in spending (with a constant, inflation adjusted dollar).
Once you factor in inflation, treatment for injuries that would have cost $25,000 in the early 1980s now costs $450,000.
The need to find more coverage is vital in many cases.
What Opens the Policy?
There are a bunch of things that can open the policy. But they all basically resolve around the insurer doing something that demonstrates a greater concern for its financial interest than the insured’s financial risk.
Here are some examples:
Refusing to Provide Limits Information: If limits information is requested, the carrier refuses to provide it and the injured person has to file a lawsuit to find out the amount of coverage.
Negligent Investigation of Claim: The insurer must thoroughly investigate the cause of the insured’s accident and the nature and severity of the plaintiff’s injuries. An insurer is liable for damages resulting from a failure to settle within policy limits if that failure is attributable to either bad faith or negligence. Tyler v. Grange Ins. Ass’n, 3 Wn. App. 167, 473 P.2d 193 (1970). Negligence in investigation which leads to a mistake in failing to settle constitutes a breach of the insurer’s duty to its insured. Id.
Competent Defense Counsel that Doesn’t Get Involved in Coverage Issues: The insurer must retain competent defense counsel for the insured and defense counsel must only act on behalf of the insured. This has two parts: (1) any bad legal advice or erroneous position taken in the lawsuit potentially opens the policy and (2) the attorney hired for the insured cannot meddle in coverage issues and advocate on behalf of the carrier on coverage issues. (How many times do insurance defense attorneys go to bat for their clients on coverage issues (versus siding with the insurer that’s paying (or actually employs) them)?)
Failure to Keep Insured Informed: The insurer must fully inform the insured about progress in the lawsuit. That includes disclosure of all settlement offers. This is one that we haven’t really tapped. I’m thinking now about what questions to ask the defendant at deposition that would reveal the carrier’s failure to keep the insured informed and not violate the attorney-client privilege and would appreciate feedback.
Refusing to Pay Limits: This is the big one. See., e.g., Hamilton v. State Farm, 83 Wn.2d 787, 523 P.2d 193 (1974).
What do we do to Invite the Carrier to Open the Policy?
We take a systematic approach that encourages insurers to be true to their natural instincts.
First, we request policy limits information. If policy limits information is not provided, we file suit. (If the policy limits information is not provided on the basis that the carrier has not received authorization from its insured, we ask whether the carrier has explained to its insured that failure to provide limits information will result in a lawsuit and the loss of an opportunity to settle within limits (meaning that the insured is now personally exposed to an excess judgment). If the carrier indicates that it is prohibited from providing information due to privacy concerns, we ask the carrier to identify the specific authority that prevents it from providing limits information—more likely than not there is an exception in this situation.)
Second, we send a demand letter for policy limits early with the information we have available. (Insurers could ask for more time or information. But they usually don’t and make a counteroffer.)
Under Washington law making a counteroffer implicitly rejects the original demand. The policy is now open.
This is the textbook way to open the policy. Demand limits and wait for the insurer to make a counteroffer.
Third, if it’s a case that doesn’t fit the normal model, we keep a careful eye on the other ways insurers can open the policy.
During the last year we’ve settled a number of cases for multiples of the policy limits.
One case with a $50,000 limit settled for over $150,000.
A couple of others with $25,000 limits settled for over $125,000 and $200,000.
We also obtained verdicts for substantially more than policy limits and those verdicts were paid by the insurance carriers.
Let us know if you have questions about open insurance policies.