Introduction

In the evolving landscape of insurance litigation, the time-limited, policy limits demand has emerged as a high-stakes challenge for insurers, defense counsel, and claims professionals alike. These demands – often issued early with strict deadlines and complex conditions – can expose insurers to extra-contractual liability and bad faith claims if not thoughtfully analyzed within the context of state-specific law. This article outlines best practices for responding to such demands, drawing from statutory frameworks, case law, and practical insights shared during a recent Goldberg Segalla webinar.

Understanding the Demand

A time-limited, policy limits demand is a claimant’s offer to settle a liability claim within the insured’s policy limits, contingent on acceptance within a specified timeframe. These demands are often used in cases involving clear liability and high damages, where the risk of an excess judgment looms large.

While intended to streamline resolution and avoid unnecessary litigation, these demands are increasingly used as bad faith “setups” – strategically crafted to trigger insurer missteps and maximize recovery through litigation.

Why It Matters: The Duty of Good Faith

Insurers and policyholders alike are bound by the implied covenant of good faith and fair dealing, which requires each to act honestly and fairly in their dealings with each other, ensuring that neither party undermines the benefits of the agreement for the other.  In the context of a time-limited, policy limits demand, this duty requires insurers to give equal consideration to the insured’s interests and not gamble with the insured’s potential excess exposure in order to preserve the insurer’s policy limits. Failure to reasonably evaluate or respond to a time-limited demand can result in:

• Excess Judgments Beyond Policy Limits: When an insurer fails to accept a reasonable time-limited demand, it risks being held liable for the full amount of a judgment that exceeds the insured’s policy limits. Courts have consistently ruled that insurers must prioritize the insured’s financial protection. If they don’t, they may be responsible for the entire judgment, even if it surpasses the policy’s coverage.
• Bad Faith Litigation: A poorly handled or ignored time-limited demand can trigger a bad faith lawsuit. These claims often allege that the insurer failed to act reasonably or in good faith when evaluating or responding to the demand. Even if the insurer ultimately prevails, the litigation can be costly, time-consuming, and damaging to its reputation.
• Consequential or Punitive Damages: In some jurisdictions, insurers found to have acted in bad faith may be ordered to pay damages well beyond the policy limits. These can include punitive damages meant to punish misconduct or consequential damages that reflect the broader harm caused by the insurer’s failure to settle.
• Regulatory Scrutiny and Reputational Harm: Beyond legal and financial consequences, mishandling these demands can erode trust with policyholders, brokers, and the legal community. A reputation for failing to act in good faith can lead to lost business, increased regulatory scrutiny, and long-term damage to the insurer’s brand.

Red Flags and Setup Tactics

Claimants’ counsel may employ tactics designed to “trip up” insurers. Common red flags include:

• Low Limits, High Exposure, and Clear Liability: These three elements often lay the foundation for a potential bad faith setup. When the damages clearly exceed the policy limits and liability is not in dispute, claimants’ counsel may issue a time-limited demand early in the process to pressure the insurer into a quick settlement. If the insurer delays or denies the demand, it creates a strong foundation for a bad faith claim. This tactic is especially common in auto accident cases with minimal coverage and catastrophic injuries.
• Strict or Unreasonably Short Deadlines: Demands that require a response within 5–10 days are a major red flag. These “short fuse” demands are designed to limit the insurer’s ability to conduct a proper investigation or consult with the insured. Courts may view failure to respond within these tight windows as unreasonable even if the insurer was acting in good faith. Some jurisdictions, like Missouri and Georgia, have enacted statutes to counteract this tactic by mandating minimum response periods (e.g., 30–90 days).
• Premature Demands: These are issued before the insurer has had a reasonable opportunity to investigate the claim. Often, they arrive with little or no supporting documentation – just a generic letter demanding policy limits. As noted in the webinar, these “cut-and-paste” demands are increasingly common and are often sent before the insurer even knows the full extent of the injuries or liability.
• Specific, Burdensome Conditions: Some demands include requirements that are difficult or impossible to meet within the given timeframe, such as providing a certified copy of the full policy, affidavits of no other insurance, or physical delivery of a settlement check. These conditions are often used to create technical noncompliance, which can then be used to argue that the insurer rejected the demand.
• Mirror Image Rule Traps: Under this tactic, the claimant insists that the insurer’s acceptance must exactly match the terms of the demand with zero deviations allowed. Any change, even a clarification or a request for more time, may be treated as a counteroffer and thus a rejection. In Pierce v. Banks(Georgia, 2023), a settlement was invalidated because the check was issued five days earlier than the specified date and included a bank-standard 180-day validity stamp.
• Qualified or Conditional Releases: Some demands include vague or open-ended conditions, such as “subject to no other insurance” or “subject to lien resolution.” These can be impossible for the insurer to guarantee, effectively making the demand non-viable. If the insurer accepts but cannot fulfill these conditions, it may still be accused of rejecting the demand. It is essential to identify and object to such conditions in writing.

State-Specific Statutes: A Patchwork of Rules

Several states have enacted statutes to regulate time-limited demands, each with unique requirements:

• California: Applies only to pre-suit demands in auto, homeowners, and premises liability claims. Provides for a minimum of 30 days to respond following receipt of the demand (33 days if sent by mail), and for the demand to be supported by “reasonable proof” of injuries.
• Missouri: Demands must remain open for 90 days and include detailed medical and employment authorizations.
• Georgia: Establishes a “safe harbor” for immaterial term disputes and mandates a minimum 30-day response window.
• Florida: Provides a 90-day window to tender limits and requires good faith conduct from both parties.

Best Practices for Responding

1. Immediate Action

• Notify the insured in writing with a copy of the demand.
• Document the response deadline in the claim system.
• Alert excess carriers and internal stakeholders.

2. Evaluate Thoroughly

• Assess liability, damages, and available defenses.
• Review supporting documentation (medical records, bills).
• Consult local counsel for jurisdiction-specific guidance.

3. Communicate Strategically

• Confirm receipt with claimant’s counsel.
• Request clarification or extensions in writing without rejecting the demand.
• Avoid language that could be construed as a counteroffer or rejection.

4. Document Everything

• Record the insured’s position on settlement.
• Specifically inform insured of any coverage issues or reservations of rights.
• Maintain a clear audit trail of all communications and evaluations.

Special Considerations

• Multiple Claimants – Consider Interpleader Actions or Global Settlements: When multiple claimants are involved and policy limits are insufficient to fully compensate all parties, insurers face a heightened risk of bad faith exposure. In cases such as these, it is imperative to explore interpleader actions – a mechanism to deposit policy limits with the court and allow judicial allocation. Alternatively, insurers should pursue global settlements through mediation to resolve all claims simultaneously.
• Excess Carriers – Engage Early and Avoid Coercive Tactics: The relationship between primary and excess insurers can become strained when a time-limited demand threatens to pierce the primary layer. Excess carriers should be notified early and included in strategy discussions. However, they must avoid coercive or collusive conduct to force a settlement. If the primary insurer fails to settle within limits when it reasonably could have, it may be held liable for the full judgment, even beyond its policy.
• Consent to Settle Clauses – Navigate Carefully to Preserve Privilege and Avoid Waiver: Some policies, especially in professional liability lines, include consent to settle clauses requiring the insured’s approval before resolving a claim. If the insured refuses to consent, the insurer must document its evaluation and the insured’s position thoroughly. Disclosing this refusal to the claimant’s counsel can risk breaching attorney-client privilege and fundamentally impair a working tripartite relationship, so communications must be handled with care. In some cases, the policy may limit the insurer’s liability to the policy limits if consent is unreasonably withheld.
• Professional Liability Policies – Statutory Protections May Not Apply: Many state statutes governing time-limited demands apply only to specific policy types (e.g., auto, homeowners, premises liability). Professional liability policies may fall outside these statutes, leaving insurers to navigate common law standards. This makes it even more critical to consult local counsel to determine whether a demand is enforceable and how to respond appropriately.

Consequences of Missteps

Failure to properly respond can lead to:

• Extra-contractual damages (e.g., $2.9M verdict on a $30K demand in Geico v. Whiteside)
• Loss of coverage defenses
• Treble damages under unfair trade practices statutes

Conclusion

Time-limited policy limits demands are no longer rare anomalies – they are a routine and risky feature of modern insurance litigation. By acting swiftly, evaluating thoroughly, and communicating clearly, insurers and defense counsel can mitigate exposure and uphold their duty of good faith.