A Valid 998 Offer Does Not Require an Acceptance Line

Written by: Michelle L. Burton

In October 2013 the Fourth District Court of Appeal further clarified the requirements for a valid Code of Civil Procedure section 998 offer in Rouland v. Pacific Specialty Insurance Company.1

During extremely heavy rains of 2005, a portion of Lars and Lisa Rouland’s (Plaintiffs) home, which is located close to Bluebird Canyon in Laguna, California, suffered damage when the ground slid away from underneath the right corner of the home and dislodged a footing. The support of the home was compromised and it was in danger of collapsing. Pacific Specialty Insurance Company (PSIC) insured Plaintiffs’ home at the time of the loss. The homeowner’s policy contained the standard exclusions for subsidence, earth movement, wear and tear and damage resulting from slow leaking pipes. The policy also did not cover land or repairs made to land, including repairs made to stabilize land beneath the home. When PSIC denied their claim, Plaintiffs filed an insurance bad faith case against PSIC. The Roulands alleged PSIC failed to pay a covered claim after their home was damaged in a landslide.

PSIC moved for summary judgment and prevailed on its coverage position. Plaintiffs appealed and made a coverage argument to circumvent the exclusions contained in the policy. Plaintiffs argued the damage to the home resulted not from hundred year rains which caused numerous other landslides across the state and in close proximity to Plaintiffs’ home, but from hidden decay in a sewer pipe that caused the pipe to leak and in turn the hillside to collapse. Plaintiffs argued they had coverage under the Additional Coverage Section of the policy which provided coverage for a collapse caused by hidden decay. Although intended to be limited to decay in the structure itself, the actual hidden decay language contained in the policy did not contain a limitation that the decay occur within the structure making the language somewhat ambiguous.

In opposing PSIC’s motion for summary judgment, which was heard prior to the parties’ exchange of expert witness information, Plaintiffs’ counsel included declarations from undesignated experts who opined hidden decay in a sewer pipe rather than rain was the efficient proximate cause of the loss. Based on the declarations and policy language, the court of appeal reversed finding a triable issue of fact existed as to the efficient proximate cause of the loss. Following reversal, PSIC immediately deposed Plaintiffs’ experts. Notably, preparing for these depositions required PSIC to incur substantial expert fees of its own in evaluating, and developing its rebuttal to, the opinions expressed in the summary judgment declarations. The credibility of Plaintiffs’ initial experts was ultimately undermined, however, when it emerged at their depositions: they were personal friends of Plaintiffs’ counsel and had no foundation for their opinions. Their opinions were also based on review of a photograph provided by Plaintiffs’ counsel and they had not actually inspected the pipe before executing their declarations. When the parties officially designated experts in the case, Plaintiffs did not identify any of their original experts and instead served PSIC with a slew of newly designated experts.

The parties were unable to settle the case and proceeded to a jury trial. Pre-trial Plaintiffs demands were in excess of five million dollars. Prior to trial, PSIC served Lars Rouland with an offer to compromise pursuant to Code of Civil Procedure section 998 in the sum of $95,000.00. PSIC also served Lisa Rouland with an offer to compromise in the sum of $30,000.00. PSIC’s offers stated: “If you accept this offer, please file an Offer and Notice of Acceptance in the above-entitled action prior to trial or within thirty (30) days after the offer is made.”

After a five week trial in Orange County in front of the Honorable Gail Andler, the jury found the Roulands did not suffer a loss covered under PSIC’s policy and the trial court entered judgment in favor of PSIC. PSIC timely filed its Memorandum of Costs. The Memorandum of Costs included $331,562.55 in expert fees per Code of Civil Procedure section 998. Expert costs were high due to Plaintiffs’ designation of a different set of experts than those originally relied upon for the opposition to PSIC’s summary judgment motion, designation of a plethora of non- retained experts by Plaintiffs, and the complicated technical issues that required hydrologists, geotechnical and construction experts.

The Roulands filed a motion to strike PSIC’s Memorandum of Costs arguing the 998 offers were defective because they did not contain an “acceptance line” on which Plaintiffs or their counsel could sign to signify their acceptance of the offers. The Roulands further asserted that because a jury verdict “well in excess” of $3 million would have been “reasonable,” PSIC’s offers, which totaled $125,000, were merely “token gestures” made without any expectation of acceptance. The trial court rejected this argument and found the expert fees were reasonable and necessary, but agreed the offer was defective under Puerta v. Torres2 because it failed to strictly comply with the dictates of Section 998. The court therefore granted Plaintiffs’ motion to strike the expert witness fees, and PSIC appealed. The issue was whether the method provided for acceptance in PSIC’s offers satisfied the requirement of Code of Civil Procedure section 998(b) that the offer contain a provision that allows the accepting party to indicate acceptance by signing a statement to that effect.

In an opinion by Justice Aronson, the Fourth District Court of Appeal, Division 3, reversed the trial court’s ruling and found PSIC’s 998 offers complied with statutory mandates. Section 998(b) requires the offer to “include a statement of the offer, containing the terms and conditions of the judgment or award, and a provision that allows the accepting party to indicate acceptance of the offer by signing a statement that the offer is accepted. Any acceptance of the offer, whether made on the document containing the offer or on a separate document of acceptance, shall be in writing and shall be signed by counsel for the accepting party or, if not represented by counsel, by the accepting party.” As noted in Puerta v. Torres,3 the legislature added this provision to Section 998 in 2006 to eliminate uncertainty by removing the possibility that oral acceptance of an offer might be valid.

The Roulands argued PSIC’s acceptance provision failed to satisfy section 998’s acceptance provision requirement for two reasons: (1) it had no line for them to accept the offers by signing them “as included in Judicial Council form CIV-090,” and (2) it “had no language … which stated that [the Roulands] shall accept the offer[s] by signing a statement that the offer[s are] accepted.”

Citing Martinez v. Brownco Construction Co.,4 the court first noted the principal purpose of Section 998 is to encourage settlement by providing parties a financial incentive to make and accept reasonable settlement offers. The appellate court acknowledged that although recent decisions regarding proper 998 offers agree that failing to comply with the acceptance provision requirement invalidates the offer, they do not provide clear guidance on how to satisfy that requirement, holding only that the offer must include “some indication” of the appropriate manner of acceptance. (See, Puerta v, Torres5; Perez v. Torres6; Boeken v. Philp Morris USA Inc.7)

Also citing Whatley-Miller v. Cooper,8 the court noted that nothing in the statute’s language requires an offer to include either a line for the party to sign acknowledging its acceptance or any specific language stating the party shall accept the offer by signing an acceptance statement. Strict compliance with statutory mandates of Section 998, or the use of particular “magic language,” is not required. (Citing Berg v. Darden9.) Rather, the offer’s acceptance provision must simply specify the manner in which the offer is to be accepted and the only statutory requirements for a valid acceptance mandate a written acceptance signed by the accepting party or its counsel. The judiciary may not impose any additional requirements or limitations that do not appear on the face of the statute. (Citing Cadlerock Joint Venture, L.P. v. Lobel10.) The court concluded that accepting the Roulands’ formalistic requirements potentially could invalidate written acceptances of section 998 offers and therefore undermine its statutory purpose.

On its face, it seems using the Judicial Council Form is the easy solution to avoid challenges to a 998 offer. However, as the Judicial Council Form notes, it “is designed to be used only in civil actions involving a single plaintiff and a single defendant….” It is also designed to only be used when a plaintiff makes a 998 offer to a defendant. Therefore, the Judicial Council Form cannot be used for all 998 offers, and Rouland confirms this Form is not mandatory, and does not provide the exclusive means of meeting the statute’s requirements. This opinion, however, clarifies the required content for a valid specially prepared 998 offer. It will be interesting to see the final resolution of this almost eight year battle once it is remitted to the trial court. At the end of the opinion, in a somewhat troubling statement the court of appeal noted, “the trial court’s finding that PSIC’s offers were reasonable and that the expert fees PSIC sought were reasonable speak to whether the statue’s requirements were satisfied. They do not equate to an exercise of the trial court’s judicial discretion that PSIC should recover all or some of its expert witness fees.” Thus, it appears compliance with Section 998 does not equate to an automatic award of expert fees.

Michelle L. Burton is the Managing Partner of Shoecraft ♦ Burton, LLP, a boutique civil litigation firm in San Diego, California which specializes in complex insurance coverage litigation, placement and risk, professional liability, business law, and construction disputes. She successfully represented Pacific Specialty Insurance Company against the claims brought by Lars and Lisa Rouland both at trial and on appeal, which resulted in the published decision discussed herein.

  1. Rouland v. Pacific Specialty Insurance Company (2013) 220 Cal.App.4th 280
  2. Puerta v. Torres (2011) 195 Cal.App.4th 1267
  3. Puerta v. Torres, supra, 195 Cal.App.4th at 1271, 1273
  4. Martinez v. Brownco Construction Co. (2013) 56 Cal.4th 1014
  5. Puerta v, Torres, supra, 195 Cal.App.4th at 1273
  6. Perez v. Torres (2012) 206 Cal.App.4th 418, 425-426, fn. 6
  7. Boeken v. Philip Morris USA Inc. (2013) 217 Cal.App.4th 992, 1003
  8. Whatley-Miller v. Cooper (2013) 212 Cal.App.4th 1103, 1110
  9. Berg v. Darden (2004) 120 Cal.App.4th 721, 731-732
  10. Cadlerock Joint Venture, L.P. v. Lobel (2012) 206 Cal.App.4th 1531, 1549

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