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Disclosing Policy Limits in Liability Claims: a Landmine for Bad Faith

Tim Ryles | April 12, 2019

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Justice scale, gavel, and books

In reconciling competing demands as a regulator, I came to appreciate the aphorism, "All anyone ever wants is a fair advantage." Then, as now, I came to realize that few experiences trump the insurance claims process as a vivid example of this principle, especially when it comes to explaining what policies actually pay for.

In a previous commentary, "Insurer's Duty at the Outset of a Personal Lines Claim," I wrote about an insurer's duty to advise first party insureds/claimants of their rights and benefits under an insurance policy as an essential part of claims adjustment, a process I generally view as "adjusting" the terms and conditions of an insurance policy to facts of the situation. An implicit premise of my thoughts on that subject is that an insurer possesses superior knowledge of the contract, and this information should be shared with policyholders to benefit—not shortchange—them.

"Information is power" is a contemporary cliché, but worthy of note because it confers specific advantages in the claims environment wherein most policyholders rarely, if ever, read their insurance policies. (The question remains, of course, as to whether they would gain any greater understanding if they did fulfill what courts often term "a duty to read.")

Typically, in the property/casualty context, first party claims involve only the company and the policyholder, the policyholder's loss of property in some form, and a demand that the insurer pay the loss. In third-party claims, however, a non-party to the insurance policy alleges a loss (property damage or bodily injury, for example) and demands that the insured assume liability for it. Assuming coverage exists, the insurance company has a contractual duty to defend and indemnify the insured. A company's failure to act in the best interest of its insured can bring serious problems, including the two dreaded words, "bad faith."

In third-party claims, one of the most vital types of information is the amount of money available to compensate the victim(s). The amount of money potentially available is so important to some liability insurers that they guard this "policy limits" information as if its disclosure endangers national security. Nondisclosure, though, may lay a foundation for bad faith, the subject of this commentary on disclosure.

Why Insurers Need to Be Careful Responding to Policy Limits Requests

A demand for policy limits information often occurs shortly after an accident or "occurrence" in which someone suffers harm, blames another, and seeks compensation. Usually, an attorney or public adjuster contacts the insurance company asking for policy limits. Persons experienced at the process ask for all policies, including umbrella and excess. By failing to disclose the information, or if it is only partly disclosed, an insurance company enjoys a tactical advantage of forcing the third-party claimant to negotiate in the dark and make a demand without benefit of knowing what is potentially available.

To disclose or not to disclose, therefore, is the point where an insurance company's interests and the policyholder's may diverge. Whereas, nondisclosure favors the insurer's economic interests, disclosure may serve the policyholder's best interest because it:

  1. aids purposeful settlement discussions;
  2. is an essential component of evaluating a case;
  3. may discourage a seriously injured victim from demanding more than the policy limits; and
  4. may prevent litigation.

Policy Limits Demands and Settlement Demands

A demand for policy limits is not a settlement demand; rather, it is what the plaintiff asserts she must have to settle a case. If the settlement demand is within policy limits, the insurer rejects the demand, litigates the case, experiences a judgment in excess of policy limits but refuses to indemnify its own insured for the full judgment, the insurer invites a lawsuit for bad faith refusal to settle. Most likely, this is where insurers are most sensitive to potential bad faith claims.

But, can failure to provide policy limits information in the absence of litigation establish a case for bad faith? Two cases addressing this question are the foundation of this article: Powell v. Prudential P&C Ins. Co., 584 So. 2d 12 (Fla. 1991), and Boicourt v. Amex Assur. Co., 78 Cal. App. 4th 1390 (Cal. 2000), a bicoastal duo of cases that must signal caution to insurers.

Powell v. Prudential

First, in Powell, an auto insured by Prudential and driven by Powell's daughter struck two pedestrians, one of whom was seriously injured. Shortly after the accident, the victim's attorney sent a letter to Prudential asking for policy limits. Getting no response, he sent a second letter, certified this time, and informing Prudential:

… the inducement for my client to settle within policy limits is with a view toward prompt and immediate resolution….

Prudential did not respond, so the attorney sent a third letter. Prudential neither responded nor advised its own insured Powell of the correspondence. Five weeks later, Prudential's adjuster tendered the policy limits. The victim's attorney rejected the offer and filed suit.

The trial court awarded $250,000 to the plaintiff, an amount 25 times greater than policy limits, so Powell sued for bad faith. On appeal, the issue of whether failure to reveal policy limits at the pre-litigation stage can serve as a basis for bad faith was answered affirmatively by the court.

The lack of a formal offer to settle does not preclude a finding of bad faith. Although an offer of settlement was once considered a necessary element of a duty to settle, an offer to settle is not a prerequisite to the imposition of liability for an insurer's bad faith refusal to settle, but is merely one factor to be considered. Moreover, liability may be predicated on a refusal to disclose policy limits. The refusal to inform a claimant of the policy limits deprives the claimant of a basis for evaluating the case, thus hindering settlement.

Boicourt v. Amex

In Boicourt, decided 9 years later, following an accident, an injured passenger in a vehicle sought policy limits information from the insurer, Amex. Despite a California law requiring an insurer to contact the insured and get permission to disclose policy limits when demanded by a claimant, Amex never consulted its insured during three attempts over a 5-month period by the injured party's attorney to determine policy limits. In fact, the adjuster informed the attorney that the company policy prohibited disclosure.

Five months after litigation began, Amex offered to settle for $100,000. The offer was rejected, but the plaintiff made no settlement demands after filing the lawsuit. Subsequently, trial resulted in a stipulated judgment of $2.985 million against the driver (the owner's son) and $15,000 against the father-owner. The son assigned his rights to Boicourt in return for a contract not to execute.

On appeal, the California court followed the Powell precedent closely but concentrated more directly on the conflict of interest between insurer and insured, concluding, "A conflict of interest can indeed develop without a formal settlement offer being made by the claimant," to wit:

First, there is a conflict between the insured's peace of mind and the elephantine lethargy endemic to many large organizations, certainly including many insurance companies….

Second, there is the negotiating advantage an insurer gains for itself (but not for the insured) when it forces a claimant to make any settlement offer either (a) without benefit of knowledge of policy limits or (b) only after incurring the expense of filing litigation and sending out some initial discovery.

The court noted that Amex's blanket rule against disclosing policy limits also saves administrative costs. Of course, one might reasonably infer that adhering to a policy of nondisclosure, with or without a formal rule, has the same effect of protecting the company's economic interests at the expense of its policyholders. As the court describes the advantage sought by the insurer:

It is the same sort of tactical one-upmanship that baseball managers try to obtain when they put in a right-handed pitcher to face a right-handed hitter, when chess players elect the white pieces, or when football captains elect to receive the ball after winning the toss. It doesn't always win the game, but it gives the player a slight edge in the competition. In negotiation, unlike chess, there is a slight advantage to the party who receives an offer over the party who first makes one, because the latter operates in a universe with less information: namely, what the other party thinks about the value of the transaction.

Lessons Learned

Insurers deal with policy demands and other aspects of claim administration daily. This day-to-day experience teaches that many claimants cannot afford attorneys to litigate on their behalf to force disclosure of the information; consequently, their claims may settle for substantially less than their true value, thereby benefiting the insurer. On the other hand, some claimants who can afford it may decide that litigation is the most viable option when the insurer fails to provide policy limits.

What this means for the policyholder is that because the insurer failed to make a key disclosure, she must set aside significant blocks of time for discovery, court appearances, stressful agony, and a prospect of an excess judgment. Further, once litigation commences, a policyholder establishes as a matter of public record that she has been a defendant in a lawsuit involving what is often very damning details of the underlying occurrence.


An insurer's failure to reveal policy limits at the pre-litigation stage can serve as a basis for bad faith actions. Moreover, while insurers may generally anticipate such actions from third parties, and since failure to disclose policy limits may be construed as resolving a conflict of interest favoring the insurance company's economic interests over those of its policyholders, an insurer also is vulnerable to bad faith allegations from its own insureds. Silence, then, does not gain the insurer any fair advantage.

This article was originally published in October 2008.

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