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In Good Faith: The Expanding Bounds of the "Reasonable" Settlement Offer

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Two seminal cases from 2013 tested the bounds of a “good faith” settlement offer and resulted in decided victories for plaintiffs in civil actions. An offer to compromise pursuant to Code of Civil procedure section 998 (“998”) is a statutory cost shifting device designed to encourage settlement before trial by providing a strong financial disincentive to any party who rejects a 998 offer and fails to achieve a better result at trial.

In allowing for the recovery of certain costs from the rejecting party, including expert fees (and, under certain circumstances, attorney fees), from the date of the offer forward, a 998 may operate as a severe penalty against a party who declines to accept a “reasonable offer.” This is especially significant if the 998 is served early in the litigation, thereby allowing considerable costs to accrue during the pendency of litigation.

In order to be a valid, a 998 must be made in “good faith,” meaning that settlement offer must be realistically reasonable under the circumstances of the particular case.

Courts use a two-prong test to determine whether a 998 is realistically reasonable. First, the 998 must represent a reasonable prediction of the amount of money the defendant would ultimately have to pay to the plaintiff, if any. Second, if the first prong is satisfied, a 998 is reasonable if the information on which the plaintiff relies in support of her 998 is, or should be, known to the defendant as of the date the offer was served.

Two cases decided in 2013 by the California Court of Appeal, Second District, Division 8, pushed the bounds of what a “good faith” 998 means in California.

In Aguilar v. Gostischef (2013) 220 Cal.App.4th 475 (Aguilar), the Appellate Court held that a 998 knowingly made in excess of an insurance carrier’s (“carrier”) policy limits could be considered a reasonable, good faith offer. Aguilar involved a motor vehicle accident where the plaintiff lost a leg. He made his intention to settle for the policy limits known to the carrier and made three pre-litigation requests for the policy limits, to no avail. After the plaintiff filed suit, the carrier advised of the $100,000 policy limit and thrice offered to settle for the limit. The plaintiff rejected all three offers, served a 998 for $700,000, and ultimately obtained an award in excess of $4.5 million at trial.

In finding for the plaintiff, the Aguilar Court reasoned that it was reasonable for the defendant to believe the carrier could be liable for a judgment in excess of policy limits, given that the carrier delayed the disclosure of the policy limits, which could subject the carrier to excess judgment liability under certain conditions. As such, the 998 in excess of the policy limit was “realistically reasonable” under the circumstances of the case.

In Whatley-Miller v. Cooper (2013) 212 Cal.App.4th 1103 (Whatley-Miller) the same appellate court found that a 998 served in a wrongful death action only two months after the defendant responded to the complaint, and only 9 days after his receipt of the plaintiffs’ discovery responses, was a reasonable offer made in good faith.

Despite the timing, the Court held that the plaintiffs’ 998 offer of $950,000 was reasonable in light of the decedent’s income, the losses accompanying his wrongful death, and the defendant’s $1,000,000 policy limit. The defendant was deemed to be aware of these facts through discovery, and therefore, he “knew or reasonably should have known” that the plaintiffs’ offer was reasonable. Also significant, in light of his contention that he did not have sufficient time to evaluate plaintiffs’ claims, is that the defendant did not seek nor procure any extensions to respond to the 998.

While 998s can be used effectively by litigants on both sides of the courtroom, the holdings in Aguilar and Whatley-Miller clearly provide significant advantages to plaintiffs who seek large settlements in excess of policy limits before defendants have a full and complete opportunity to evaluate their claims.

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