Code of Civil Procedure section 998 is a powerful tool that promotes settlements in California.  When a party sends a section 998 offer for a monetary amount, the other side has 30 days to respond to it.  If the offer is rejected or the 30-day period lapses, there can be heavy consequences.

If a defendant rejects a plaintiff’s section 998 demand and fails to obtain a better result from a jury, the plaintiff is entitled to an additional 10% interest on the judgment amount from the date of the offer.  The plaintiff is also entitled to certain litigation costs and the court may even order the defense to pay the plaintiff’s post-offer expert witness fees.  Especially in medical malpractice cases where every element of a case must be determined by expert testimony, expert fees are often extremely high.  In short, the penalties in rejecting a reasonable section 998 offer can be, and often are, severe.

However, issuing offers under Code of California Civil Procedure section 998 takes careful consideration.  If the plaintiff sends a demand that’s too high, it will be difficult to better the amount of the demand at trial.  If the plaintiff send a demand that’s too low, the plaintiff is stuck with that amount as a final settlement should the defense accept it.   Send an offer that’s too late, and the plaintiff may miss out on the benefits of an early 10% interest rate and incurred expert fees.

The most dangerous error, however, is sending a section 998 demand too early.  If the plaintiff sends a demand that’s too early, the defense may have an argument that the offer is invalid and ineffective as a matter of law because the defense did not have an adequate opportunity to evaluate the case.  Under such a scenario, the defense does not suffer any of the consequences in rejecting the section 998 demand.

However, on June 26, 2019, the California Court of Appeal in the Second Appellate District (Los Angeles area) issued its opinion in Lewis v. Ukran (COA # B290128).  In Lewis, a van driver turned in front of a motorcycle, severely injuring the motorcycle driver.  Seven months after the filing a lawsuit, the motorcyclist sent a section 998 demand to settle for $950,000.  The defense did not accept the offer.   After a bench trial, the court awarded the motorcyclist over $1.6 million. On appeal, the Court of Appeal found it was appropriate for the trial court to also award the 10% annual interest on the $1.6+ million.  While the motorcyclist had not provided a clear response articulating the amount of his damages, the Court of Appeal found: “Although [the motorcyclist’s] responses to [] interrogatories addressing lost earning capacity may have lacked detail, [the defense] had adequate time to evaluate Lewis’s offer.”  In short, seven months was enough time to evaluate the case, but the defense simply “failed to do so.”

Also important in the decision is the Court’s determination that the defense bears the burden of producing evidence in reducing future damages to present value.  Insurance companies and defense lawyers often try to obtain discounts off of a plaintiff’s future injuries by arguing that interest rates exceed inflation rates.  In other words, they argue that future damages should be discounted and reduced because (they argue) that a plaintiff can invest their money today, making it more valuable than money in the future.

This is a flawed, but unfortunately effective, defense.  Obviously, as the devastating 2008 economic downturn taught us, investments carry risks and there is no guarantee that such hypothetical investments will work out favorably.  Moreover, the defense often exaggerates and embellishes investment rates while downplaying inflation rates, leading to a very high and misleading net discount rate.  Lastly, even when the defense utilizes correct inflation rates, the specific inflation rate of future medical expenses often far outpaces the general inflation rate.

Fortunately, the Lewis court held that the burden of producing evidence of reducing to present cash value lies with the defense.  If the defense does not produce evidence or a method of calculation surrounding the inflation rate or the discount rate, then the factfinder “must make a lump sum award that is not adjusted for either factor.”  In short, the Court of Appeal stated: “we hold a defendant seeking reduction to present value of a sum awarded for future damages has the burden of presenting expert evidence of an appropriate present value calculation, including the appropriate discount rate, to enable the fact finder to make a rational determination on the issue.”

Look, I know that all of this talk of “998 offers” and “discount rates” and interest and inflation rates is extremely complicated and confusing, even in a relatively simple auto crash case such as in Lewis.  However, these issues are critical to discuss with your attorney to develop an effective strategy on your case throughout the litigation process.  While we prepare as if every case is going to go to trial, most cases end up settling.  To get the best possible settlement, understanding and utilizing the section 998 procedure is critical.

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