Pre-Judgment Settlements with the Insured after Claimed Blown Policy Limit Demand


By: Tim Kenna

Every once in a while, an insurer contemplates settlement of the insured’s potential bad faith claim following allegations that a policy limit demand lapsed, and that the insurer is liable for any resulting excess judgment and bad faith damages. In Potter v. Alliance United Insurance Company, 37 Cal. App 5th 894 (2019), the trial court had sustained a demurrer to the personal injury judgment creditor’s complaint seeking to avoid a pre-suit settlement of the bad faith claim on fraudulent conveyance theories without leave to amend.  The Court of Appeal reversed finding that the complaint alleged a colorable claim under California’s Uniform Voidable Transactions Act (UVTA, Civ. Code. Section 3439 et sec.  Although there was also a common law claim it was not considered on appeal.).
The Court held that the complaint adequately alleged the elements of a UVTA claim because the bad faith claim was an asset of the insured he could have used to pay down his civil liability, that the complaint adequately alleged he did not receive a reasonably equivalent value for the claim released and that the transfer of the bad faith claim was made for the insurer’s benefit.  The court took the position that reasonably equivalent value is a question addressed in evaluating the merits of the claim against the payment. That can be definitively determined on a decision on the merits. Thus, it is a hurdle to the claim but it is very closely associated with proving the bad faith refusal to settle.
The case is an interesting twist on the judgment creditor’s voluntary and involuntary bankruptcy options in obtaining an assignment of rights from the judgment debtor’s trustee in bankruptcy.
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