MAPPING THE UNINSURED AND UNDERINSURED WILDERNESS: Liability Coverage for Uninsured and Underinsured Motorists. Neil Schonert

Transcription

1 MAPPING THE UNINSURED AND UNDERINSURED WILDERNESS: Liability Coverage for Uninsured and Underinsured Motorists I. Introduction Neil Schonert II. III. IV. Determining Initial UM/UIM Limits Calculating UIM Limits Beginning the UM/UIM Claim V. Exclusions VI. Determining Coverage A. Nexus to Insured Party B. Actual or Virtual Contact with Injured Party C. Business Policies VII. VIII. IX. Stacking Set Offs Arbitration Issues A. Time Limits for Arbitration B. Offers Prior to Arbitration 1

2 I. Introduction While it may come as a shock to many attorneys, not every driver follows every rule set out in the Illinois Vehicle Code. Oddly enough, drivers throughout Illinois and the United States drive vehicles that are not properly insured or, worse, that are not insured at all. Thankfully, auto policies contain coverage to compensate an insured for personal injuries or property damages arising out of accidents caused by uninsured or underinsured vehicles. Unlike traditional liability policies that protect an insured individual when the insured is the tortfeasor, uninsured and underinsured motorist coverage provides a source of recovery for an insured when the tortfeasor has no liability insurance or inadequate liability insurance. An uninsured motorist ( UM ) is, unsurprisingly, a motorist without liability insurance. UM coverage covers bodily injury for the insured caused by an at fault driver with no insurance. It also covers bodily injury caused by a hit and run driver or a driver who fails to provide identifying information. Additionally, UM can include a vehicle that initially had liability insurance at the time of the accident but whose insurer became insolvent or denied coverage. An underinsured motorist ( UIM ) is an at fault motorist whose liability limits are less than the liability limits of the injured insured party. UIM coverage pays the difference between your UIM limits and the liability limits of the at fault driver if those limits are lower than the insured s UIM limits. 2

3 For background, bodily injury liability coverage, which is at issue with UM/UIM coverage, is the coverage that an insurer pays for another person s bodily injury or death in an accident that the insured may be found legally liable to pay. See Automobile Insurance Definitions, Illinois Department of Insurance, available at In typical liability cases, the insured is protected when she is the tortfeasor in the injury. In UM/UIM claims, however, the insurer becomes the insured s source of recovery when she is not the tortfeasor at issue. Even so, the legal issues for either normal liability recovery and UM/UIM recovery are similar as policies and law behind both are intended to return an injured party to the position she would have found herself had adequate recovery been available. II. Determining Initial UM/UIM Limits Under Illinois law, UM and UIM coverage must be equal in amount to the UM coverage under the policy. 215 ILCS 5/143a 2(1). Thus, even on the most basic coverage UM/UIM limitations will at least amount to $25,000. Illinois minimum limits increased at the start of 2015, and the state now requires $25,000 per person and $50,000 for total accident (from $20,000 and $40,000, respectively). Under Illinois law, when the insured has policy limits in excess of statutory limits the insurer must provide UM/UIM insurance coverage in excess of the minimum amounts allowed by law as well. Thus, if the insured has liability limits of $200,000, their UM/UIM limits are usually required to also equal $200,000. See 215 ILCS 5/143a 2. [NOTE: when an individual tortfeasor has liability insurance but it is 3

4 below the limits set by statute the individual is treated as uninsured rather than underinsured]. Rejecting UM/UIM Coverage The only way to avoid UM/UIM coverage in matching excess liability limits is for the insured to make a written election specifically rejecting the excess UM coverage. Schultz v. Ill. Farmers Ins. Co., 237 Ill. 2d 391, 403 (2010); 215 ILCS 5/143a 2(2). Similarly, a new rejection is not required following a renewal of a policy where the insured originally rejected excess UM/UIM coverage. Even when a policy renewal includes the addition of a new vehicle, if the policy contract is unchanged then the original rejection still applies. Alshwaiyat v. Am. Serv. Ins. Co., 2013 IL App (1st) , III. Calculating UIM Limits UIM coverage only applies when the tortfeasor s insurance limits are less than the injured insured s limits. The UIM limits are thus the injured insured s limits minus the tortfeasor s limits. For example, imagine Driver A has the $25,000 liability limits (the statutory minimum liability insurance), and Driver B has policy limits of $200,000. If Driver A causes an accident injuring Driver B for $125,000, Driver B can collect from her UIM coverage the remaining $100,000 for her injury. Injured Insured s Liability $200,000 Limit Less Tortfeasor s Liability $25,000 Insurance Available UIM Coverage $175,000 4

5 However, if the above scenario is repeated but Driver B has $100,000 limits, Driver B will only be able to collect $75,000 from her UIM coverage. This is because UIM limits are the highest limit of liability available under a policy (here, $100,000) minus the amount paid by the legally responsible tortfeasor (here, $25,000). This scenario leaves Driver B with $25,000 of her $125,000 injury uncovered by UIM. Injured Insured s Liability $100,000 Limit Less Tortfeasor s Liability $25,000 Insurance Available UIM Coverage $75,000 For example, in Doyle v. State Farm Mut. Auto. Ins. Co., 333 Ill. App. 3d 81 (3rd Dist. 2002), an insured attempted to increase his UIM limits beyond his personal limits less that of the tortfeasor s limits to cover the total cost of his injuries. A father and son were each separately insured with $100,000 policies. The son was injured at a cost of near $130,000 and the at fault party had a $25,000 limit. The insured son initially argued he could collect $100,000 through his UIM coverage after receiving the full $25,000 from the at fault party s insurer based on a limit of $200,000 from combining or stacking his $100,000 limit with his father s $100,000. The Third District denied as, per the son s unambiguous policy, the insurer was required to pay in UIM benefits... the highest limit of liability of any one policy minus the amount paid by the party legally responsible for the injury. Id. at 84. (emphasis added). Thus, like the above examples, the insurer only was only 5

6 required to pay out $75,000 to the insured the UIM limit less the recovery from the tortfeasor. Injured Son s Liability Limit $100,000 Less Tortfeasor s Liability $25,000 Insurance Available UIM Coverage $75,000 Injured Son s Total Injury $130,000 Less Tortfeasor s Liability $25,000 Insurance Less Injured Son s Available $75,000 UIM Coverage (Total Costs Covered) ($100,000) Remaining Uncovered $30,000 Injury Cost IV. Beginning The UM/UIM Claim The first step for an insurer when evaluating a claim involving uninsured or underinsured motorists is to evaluate the insurance agreement. Determining whether the insurer has a duty to defend, has a duty to indemnify, or has exclusions available based on the type of claim. Such an evaluation can resolve the instant matter efficiently. Following an accident, the first step is to determine the type of coverage, if any, the parties have and whether the insurance available covers the accident. Insurance agreements will detail which damages or action the insurer will pay for that the insured has become legally responsible for the duty to indemnify and which actions the insurer will provide the insured with a legal defense the duty to defend. 6

7 V. Exclusions Exclusions serve the purpose of taking out persons or events otherwise included within the defined scope of coverage. Gen. Ins. Co. of Am. v. Robert B. McManus, Inc., 272 Ill. App. 3d 510, 514 (1st Dist. 1995). Exclusions generally focus on either the insured and her actions, or on the type of vehicle involved in the claim. Exclusions set forth in agreements are typically given their plain and ordinary meaning. Language is liberally construed against the insurer when the language is ambiguous. Ryan v. State Farm Mut. Auto. Ins. Co., 397 Ill. App. 3d 48, 51 (1st Dist. 2009). Thus, courts must accord terms contained in the policy their plain and ordinary meaning and apply those terms as written unless such application contravenes public policy. Pekin Ins. Co. v. Willett, 301 Ill. App. 3d 1034, 1037 (2nd Dist. 1998). For example, in Gen. Ins. Co. of Am. v. Robert B. McManus, Inc., 272 Ill. App. 3d 510, 514 (1st Dist. 1995), the insurance agreement contained a Prior Acts Exclusion which held that coverage shall not apply to claims or suits arising as a result of acts, errors, or omissions which occurred prior to the policy s effective date, Because the events in questions occurred when the insured acted in 1989 and not when the resulting harm was evident after 1991, the Prior Acts Exclusion was held unambiguous and therefore applicable to the claim. The court granted the declaratory judgment in the insurer s favor. Id. at 512. The insurance agreement can also identify specific vehicles that do not qualify as uninsured or underinsured vehicles. UM/UIM exclusions frequently mirror liability coverage with exclusions including exceptions for criminal acts or 7

8 compensated deliveries. These can also include other vehicles owned by the insured or the insured s family, vehicles owned by the federal government, or vehicles operated on rails, among others. Also, if another state s law applies, exclusions that violate Illinois public policy may be allowed if the other state s courts have held such exclusions permissible. See United Farm Family Mut. Ins. Co. v. Frye, 381 Ill. App. 3d 960, 966, (4th Dist. 2008) (owned vehicle exclusion is allowed under Indiana law and therefore Illinois court applied to case even though similar exclusion found in violation of Illinois public policy). VI. Determining Coverage Generally, an insurer s duty to defend is broader than its duty to indemnify. [I]f the underlying complaints allege facts within or potentially within policy coverage, the insurer is obliged to defend its insured even if the allegations are groundless, false, or fraudulent. United States Fid. & Guar. Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 73 (1991). An insurer can only refuse to defend an action against its insured when it is clear from the face of the underlying complaints that the allegations fail to state facts which bring the case within, or potentially within, the policy s coverage. Id. determined: To impose liability on an insurer for UM/UIM coverage, two issues must be 1) There must be a nexus or relationship between the insured party and the covered vehicle, and 8

9 2) There must be actual or virtual physical contact between the injured party and the covered vehicle. DeSaga v. West Bend Mut. Ins. Co., 391 Ill. App. 3d 1062, 1071 (3rd Dist. 2009). A. Nexus to Insured Party Determining the nexus or relationship between the insured and the vehicle for UM/UIM purposes is straightforward. Auto insurance policies cannot define insured more narrowly for uninsured and underinsured coverage than it does for liability coverage. Basically, mandatory UM/UIM insurance covers the policyholder, family members, and permissive users, with users covering both drivers and passengers. Schultz v. Ill. Farmers Ins. Co., 237 Ill. 2d 391, 397 (2010). Thus, while insurance providers and the insured are free to contract and define terms, the insurer does not have the freedom to draft policy that circumvents statutory protections. Importantly, if words in a contract are susceptible to multiple reasonable interpretations they are deemed ambiguous and will be construed in favor of the insured and against the insurer. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d 90, (1992). In State Farm v. Progressive Northern Insurance, 2015 IL App (1st) (March 27, 2015), the First District was required to determine whether a student attending an out of state college was a relative for purposes of being covered under his parents UIM policies. The policies stated: Relative means a person related to you or your spouse by blood, marriage or adoption who resides primarily with you. It includes your unmarried and unemancipated child away at school. 9

10 The insured wanted to rely on the father s two policies and the stepmother s one policy to cover costs of the student s injury caused by an underinsured motorist. The insured argued that the student was covered under the child away at school phrase in the policy. The insurer argued that the phrase child away at school must be read in conjunction with the phrase resides primarily with you. The insurer argued that because the student resided in Colorado, was registered to vote there, and had a Colorado driver s license he did not reside primarily with his Illinois parents. The court disagreed, holding that the language defining relative was ambiguous as it could reasonably be interpreted as being either conjunctive or disjunctive. Also, nothing in the policy required a child who was away at school have the intent to return to his parents residence to ensure coverage. Thus, as the student was the insured s child who was away at school, he was a relative for purposes of UIM coverage under his father s and stepmother s policies IL App (1st) , 111. B. Actual or Virtual Contact with Injured Party Based on the language in the policy, UM and UIM coverage can protect the insured and family members regardless of whether they are operating vehicles, passengers, walking, riding bicycles, or even sitting. Grinnell Mut. Reinsurance Co. v. Haight, 697 F.3d 582, 586 (7th Cir. 2012). Once it has been determined who is insured under the liability section of a policy, the insurer may not deny UM or UIM coverage to an insured. DeSaga, 391 Ill. 10

11 App. 3d at 1070; see also Heritage Ins. Co. of America v. Phelan, 59 Ill. 2d 389, 395 (1974); Schultz, 387 Ill. App. 3d at 628. Based on this reasoning, courts have determined that determining actual or virtual contact with the vehicle cannot differ between UM/UIM coverage and liability coverage. In DeSaga, the decedent was hit by a car and killed after parking his car on the shoulder of the road to remove debris from the roadway. Plaintiff sought benefits related to UIM coverage. The insurer consented that there was a nexus between the insured decedent and the vehicle issue 1 in the coverage analysis as the decedent was a party to the contract. However, the insurer argued that the decedent was not occupying his vehicle nor was in contact with his vehicle at the time of his death issue 2 in the coverage analysis and therefore his death did not fall under the UIM coverage of the policy. The court disagreed and found there was virtual physical contact with the vehicle and the decedent, and thus the decedent occupying his vehicle, because the decedent left his car with the intention of returning, had his hazard lights on, and was doing the responsible thing in attempting to remove debris from the road. DeSaga, 391 Ill. App. 3d at The Seventh Circuit has even held that an individual was covered by a policy s UIM coverage for injuries sustained while riding in a vehicle that was not a covered automobile. The policy contained definitions for who constituted the insured specifically for UIM coverage, and these definitions contained no requirement that the insured be occupying a covered auto as set forth in the liability coverage portion of the policy. Grinnell Mut. Reinsurance Co. v. Haight,

12 F.3d 582, 590 (7th Cir. 2012). As detailed above, such ambiguities in an insurance agreement will always be construed against the insurer. C. Business Policies Importantly, however, corporations cannot have covered family members for UM/UIM claims. Econ. Preferred Ins. Co. v. Jersey Cnty. Constr., 246 Ill. App. 3d 387, 388 (4th Dist. 1993). No ambiguity is created through reference to family members in a business s policy, meaning that UM/UIM coverage does not extend to the family members of business employees. Id. While the rule that corporations cannot have family members is the standard rule, in Pekin Ins. Co. v. Estate of Goben, 303 Ill. App. 3d 639 (5th Dist. 1999), the court held that an ambiguity in a partnership s auto policy allowed for the coverage of a partner s family members. The court drew a distinction between corporations, which have legal existences separate from any shareholders, officers, or directors, and partnerships, which have no legal existence outside of their partners. Also, the partnership s auto policy listed the partners names DBA (doing business as) by the partnership name. The court found such facts created an ambiguity in the policy, which, construed against the insurer, caused the partner to be an insured under the policy, and consequently allowed his family member to be covered under the policy. VII. Stacking 12

13 Anti stacking provisions in policy contracts are constitutionally allowed for UIM coverage. Stacking is the attempt to stack, or combine, multiple policies in order for the insured to recover for the total injury. Thus, stacking requires both the existence of multiple polices and policies that are applicable to the same loss. Without anti stacking provisions set forth in the policies the insured can collect under each policy until there is a full recovery. See 215 ILC 5/143a 2(5) An anti stacking provision can provide: Limits of Coverage The amounts shown in the Declarations are the limits of liability for Uninsured Motorist which apply subject to the following: [...] 4. We will pay no more than the limits shown in the Declarations of this policy regardless of the number of vehicles insured, insured persons, claims, claimants, policies or vehicles involved in the occurrence. The limits provided by this policy may not be stacked or combined with the limits provided by any other policy issued to you or a family member by any member company of the Farmers Insurance Group of Companies. Boatright v. Ill. Farmers Ins. Co., 2013 IL App (5th) U, 9 (clause found ambiguous based on use of term member company ). Reasonableness is the basic standard for determining whether a court will refuse to enforce an anti stacking provision. [T]he touchstone is whether the [antistacking] provision is subject to more than one reasonable interpretation, not whether creative possibilities can be suggested. Johnson v. Davis, 377 Ill. App. 3d 602, 607 (5th Dist. 2007). In Hall v. Burger, 277 Ill. App. 3d 757 (4th Dist. 1996), the court found that a policy stating [i]f this policy and any other vehicle insurance policy issued to you by this Company apply to the same accident, the maximum limit of our liability under 13

14 all the policies will not exceed the highest applicable limit of liability under any one policy,'" was unambiguous and applicable to a situation with underinsured tortfeasors. Id. at 762; see also 215 ILCS 5/143a 2(5) (basic legislative decree allowing prohibition of stacking in UIM policies). Doyle v. State Farm Mut. Auto. Ins. Co., 333 Ill. App. 3d 81 (3rd Dist. 2002), is also of interest for more than calculating UIM benefits. In Doyle an insured son was injured in excess of $130,000. The insured son and his insured father had separate policies with $100,000 limits. The insured father argued that his son was entitled to more than $75,000 the limit following the $25,000 recovery from the tortfeasor by aggregating his $100,000 limit with his insured son s separate $100,000 limit, recovering a $50,000 pro rata share from each. The policy stated: "1. If the insured sustains bodily injury as a pedestrian and other underinsured motor vehicle coverage issued by us or any other insurer applies: [...] a. the total limits of liability under all such coverages shall not exceed that of the coverage with the highest limit of liability[.] The most we will pay any one insured is the lesser of: a. the difference between the 'each person' limit of this coverage and the amount paid to the insured by or for any person or organization who is or may be held legally liable for the bodily injury caused by an underinsured motor vehicle." The insured father argued the policies language allowed for prorating the $100,000 limit, and that this proration was not stacking. However, the Court dismissed this argument finding that the language anti stacking language in the policy was unambiguous, stating that [s]tacking by any other name is still stacking. Id. at

15 However, when a policy s anti stacking provisions are deemed ambiguous stacking will be allowed. In Yates v. Farmers Automobile Insurance Ass'n, 311 Ill. App. 3d 797 (5th Dist. 2000), the court allowed stacking of UIM coverage based on ambiguous language in the policy s anti stacking provision. The policy in question covered two vehicles, and included proper anti stacking language limiting liability to what was on the policy s declaration page. The declaration page identified two vehicles, listed their premiums, and listed their limits under each vehicle ( 50/100 ). The declarations page also included the statement: COVERAGE IS PROVIDED WHERE A PREMIUM AND A LIMIT OF LIABILITY OR THE WORD INCLUDED ARE SHOWN FOR COVERAGE. (emphasis added). The court found this provision ambiguous, because, although the policy included anti stacking language, the declarations page included a premium and a limit of liability under each vehicle. This created contradictory coverage, thereby creating ambiguity. Id. at 800; see also Pekin Ins. Co. v. Estate of Goben, 303 Ill. App. 3d 639 (5th Dist. 1999) (declarations page referred to by UIM anti stacking clause listed two separate vehicles with separate provisions created ambiguity over whether anti stacking referred to each vehicle or only one). VII. SET OFFS Like anti stacking provisions, set offs attempt to limit the total amount of recovery. Unlike anti stacking provisions that attempt to stop the total UM/UIM limits from increasing, set offs decrease the UM/UIM limit available by accounting for multiple sources of recovery, including worker s compensation, additional tortfeasors, or Medicare. 15

16 Set offs are generally permitted, and insurers are statutorily allowed to set off the amount they are required to pay to insured by the amounts the insured has recovered from other sources, including the legally liable parties. 215 ILCS 5/143a(4). Such set off provisions are meant to prevent a double recovery by the insured in excess of their policy limits. However, set off provisions in policies must be read in conjunction with the insured s reasonable expectations, with the public policy behind the UM statute, and with the coverage intended by the insured s policy. Hoglund v. State Farm Mut. Auto. Ins. Co., 148 Ill.2d 272, (1992); see also Cummins v. Country Mut. Ins. Co., 178 Ill.2d 474 (1997). This doctrine limits the use of set offs to instances where the insured will potentially obtain a double recovery. In Hoglund, a passenger in an uninsured vehicle where both drivers were atfault suffered $200,000 in injuries. She received $100,000 from the other driver s liability insurance, and she sought relief from her UM coverage, which had limits of $100,000, because the driver of her vehicle was not insured. The injured passenger s insurer denied any liability and claimed the $100,000 payment from the other driver s insurer was a complete set off. Hoglund s insurance policy read as follows: Limits of Liability [...] 2. Any amount payable under this coverage shall be reduced by any amount paid or payable to or for the insured: a. by or for any person or organization who is or may be held legally liable for the bodily injury to the insured; b. for bodily injury under the liability coverage; or c. under any worker s compensation, disability benefits, or similar law. [...] Conditions 16

17 [...] 3. Our Rights to Recover Our Payments [...] b. Under uninsured motor vehicle coverage: (1) we are subrogated to the extent of our payments to the proceeds of any settlement the injured person recovers from any party liable for the bodily injury. (emphasis added). The Illinois Supreme Court acknowledged that based on the policy language alone, the insured s potential recovery would be completely set off. Importantly, the Court noted, the purpose behind the statutorily mandated UM provisions is so that the insured will be placed in substantially the same position as if the wrongful uninsured driver had been minimally insured. The Court, however, also held that the exculpatory language in the policy must be read in conjunction with the policyholder s reasonable expectations and it must also be read in conjunction with the public policy behind the uninsured motorist statute and the coverage intended by the insurance policy itself. Hoglund, 148 Ill.2d at 278. The Court found that a latent ambiguity existed in the policy based on extrinsic facts of the case at hand. Because the $100,000 payment was provided by the insured motorist without reference to the uninsured motorist, the court found that her insurer was claiming credit for money paid by another party for that fault, which [was] unrelated to the fault of the uninsured motorists. The Court held that had the motorcycle driver been insured Hoglund would have been entitled to recovery from both the motorcycle driver s insurer and the other driver s insurer. Not allowing Hoglund to recover UM benefits would frustrate the purpose of mandated UM coverage by not placing Hoglund in substantially the 17

18 same position as if the wrongful uninsured driver had been minimally insured. Because the latent ambiguity in the set off provision allowed for a reasonable interpretation that the insured s policy allowed for recovery, and when viewed in the light of extrinsic evidence, the insurer was not allowed to set off the insured s UM coverage based on the payment from the separate at fault driver. IX. Arbitration Issues When disputes arise over payments for damages from UM/UIM claims, Illinois law mandates arbitration for resolving UM/UIM claims. 215 ILCS 5/143a (2014); see also Brooks v. Cigna Prop. & Cas. Cos., 299 Ill. App. 3d 68, 72 (1st Dist. 1998). During arbitration, an insured in Illinois must prove that she is legally entitled to recover by proving the elements to her claim necessary to entitle her to recover damages. Allstate Ins. Co. v. Elkins, 77 Ill.2d 384, 390 (1979). Policies can state that the insured will pay all sums which the insured... shall be legally entitled to recover as damages from the owner or operator of an uninsured automobile. See id., 77 Ill. 2d at Such a provision allows insurers to present evidence that the UM/UIM driver used due care or dispute the extent of damages, if any. Its existence also arms the insurer with affirmative defenses during arbitration, such as workers compensation exclusivity or contributory negligence. See Little v. Econ. Preferred Ins. Co., 286 Ill.App.3d 372 (5th Dist. 1997) (asserting contributory negligence defense); Atlantic Mut. Ins. Co. v. Payton, 289 Ill.App.3d 866 (1st Dist. 1997) (asserting defense that UM claim was barred based on workers compensation exclusivity). 18

19 A. Time Limits for Arbitration Also, policies often contain requirements that arbitration be commenced within a set time period following the disputed UM/UIM accident, typically 2 years. To commence a UM/UIM claim before the limitations period set forth in an insurance policy, an insured must unequivocally request arbitration, not merely mention an intention of pursuing a UM/UIM claim. Country Preferred Ins. Co. v. Whitehead, 2012 IL , 40; Rein v. State Farm Mut. Auto. Ins. Co., 407 Ill. App. 3d 969, 978 (1st Dist. 2011). Such limitation periods for demanding arbitration in UM/UIM claims do not violate public policy. B. Offers Prior to Arbitration Also, an insurer cannot arbitrarily request arbitration over UM/UIM claims. 215 ILCS 5/154.6 (2014). Unreasonable acts in violation of the act include [c]ompelling policyholders to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them without just cause. An insurer must prove its initial offer was reasonable by providing evidence it investigated the claim and considered numerous factors, including the insured s age, injury, current health, and potential for future medical treatment. O'Connor v. Country Mut. Ins. Co., 2013 IL App (3d) , 16. The insurer in O Connor offered $40,000 to settle the insured s UIM claim. The insured estimated her damages to be much higher and demanded a settlement of nearly $100,000. After arbitration where the arbitrators entered an 19

20 award nearing the insured s requested amount, the insured sued her insurer for failing to use objective criteria in evaluating her claim. The insurer was then required to have two claims attorneys and outside counsel testify as to the steps used in evaluating the claim and determining that $40,000 offer was reasonable. 20