Case Study #1: Employment Claim – D&O Policy

9/25/15
[Injured Plaintiff’s Settlement Offer]
Total known damages $351,854.78

8/3/16
Although [Insurer] has accepted the defense of the [Corporate policyholder] to the [Injured plaintiff] Complaint pursuant to a reservation of rights, [Insurer] does not believe that the issuance of the reservation of rights creates an impermissible conflict which triggers the application of Civil Code section 2860. Accordingly, [Insurer] has continued to retain attorney [Dependent Counsel #1] to represent the [Corporate policyholder] with respect to the [injured plaintiff] Complaint.

8/22/16
Litigation Management Plan [by Dependent Counsel]
Demands: $600,000
Settlement Value: $125,000

Insurer notified policyholders that it would contribute $100,000 to settlement, but that policyholder would have to pay the remainder.

11/5/16 [Saturday]
Dear [Dependent Counsel #1]:
Would you please promptly acknowledge receipt of this letter and then complete and return the attached Ethical Compliance Questionnaire with explanations for your responses?
When you have done so, the Board of [Corporate policyholder] will be happy to consent to have you represent [Corporate policyholder]. However, until the Board confirms it in writing, you do not have the Board’s consent nor authority to appear in court on [Corporate policyholder]’s behalf.

11/5/16
Dear [Dependent Counsel #2]:
Would you please promptly acknowledge receipt of this letter and then complete and return the attached Ethical Compliance Questionnaire with explanations for your responses? When you have done so, I will be happy to consent to have you represent me. However, until I confirm it in writing, you do not have my consent nor my authority to appear in court on my behalf.

11/7/16
[Policyholder]: I am in receipt of the email below with the attached questionnaire. This questionnaire was, apparently, pulled from a website at dutytodefend.com. While there are certain requests in this questionnaire that are appropriate (i.e., the request to share correspondence with the carrier regarding this litigation, which we have endeavored to do before this request was made), this questionnaire is not required to be answered under Rule 3-310 (Avoiding the Representation of Adverse Interests). You have previously retained coverage counsel who can, probably more appropriately, respond to some of the questions set forth in the questionnaire.
To avoid any confusion:
1. We are not going to respond to the attached “Ethical Compliance Questionnaire”.
2. It is our understanding, given the Board’s instruction set forth in your email below, that this firm is not to take any further action in this matter on behalf of [Corporate policyholder] until the Board instructs, in writing, otherwise. If this was not the Board’s intent, please clarify the Board’s position. Please let me know how [Corporate policyholder] would like to proceed in this matter.
11/7/16
[Policyholder],
You’ll be receiving a letter later today from our coverage counsel. [Dependent counsel #2] will not be completing this questionnaire. [Insurer]

11/7/16 [Letter from Coverage Counsel to Policyholders]
[Insurer] must once again reiterate in the strongest possible terms that your cooperation with [Dependent Counsel #1]’s office, with [Dependent Counsel #2]’s office, and with [Insurer] in the defense of the [injured plaintiff] Action is critical. [Insurer] reserves the right to deem any continued failure to cooperate with [Insurer], [Dependent Counsel #1] and [Dependent Counsel #2] a material breach of the Cooperation Condition that could lead to the forfeiture of coverage for you and [Corporate policyholder] under the [Insurer] Directors and Officers Liability policy. . . . These demands [Questionnaires] are entirely improper and do nothing to advance [Corporate policyholder]’s defense to the [injured plaintiff] Action. While [Insurer] remains willing to discuss any concerns you or [Corporate policyholder] may have, [Dependent Counsel #1], [Dependent Counsel #2], and [Insurer] will be not be completing the proposed “Questionnaires” as submitted. . . . Your recent conduct and threatened refusal to permit attorney [Dependent Counsel #1] to represent [Corporate policyholder], and threatened refusal to permit attorney [Dependent Counsel #2] to represent you, in the [injured plaintiff] Action is in violation of your and [Corporate policyholder]’s duty to cooperate under the [Insurer] Directors and Officers Liability policy. Such conduct is substantially prejudicing [Insurer]’s ability to defend you and [Corporate policyholder] against [injured plaintiff’s] claims and must cease immediately.

11/9/16
Dear [Dependent counsel #1],
Thank you for your email dated 11/7/16. Please let me assure . . . that on a personal level, I like you. You are obviously intelligent and confident.
[Corporate policyholder] does not want to fight you. However, either by not answering questions in the questionnaire nor understanding the concerns of [Corporate policyholder] – you are drawing “a rigid line in the sand.” How can [Corporate policyholder] have confidence in your legal representation? Isn’t there some way, we can talk and understand one another better?
By copying this email to [Insurer], [Corporate policyholder] is asking [Insurer] what it intends to do about [Corporate policyholder]’s defense? If [Dependent counsel #1] cannot discuss conflict of interest issues, let alone make appropriate disclosures, perhaps someone else will.
We understand [Insurer] claims it gets to control our defense. Perhaps [Insurer] can find a competent, ethical lawyer, with excellent communication skills, who can also provide a solid defense?
I still believe that [Corporate policyholder] cannot give you informed written consent to represent it until you complete and return the questionnaire.
Respectfully,

11/10/16
[Insurer]
I have your [coverage] lawyer’s email, but I would like to keep this between those of us who are directly affected – policyholder and insurance company.
Cooperation
[Corporate policyholder] and I are cooperating and we will continue to do so. I read [Coverage counsel]’s list. We promptly sent to [Insurer] legal papers; we gave [Insurer] our records and other information; we offered to enforcement our rights against Doorman, but [Insurer] refused; We attended a mediation, but apparently you do not want me to testify at deposition or trial. If you honestly believe that we are not cooperating in any way specified by our policy, please let us know and we will be happy to work with you to rectify them.
[Coverage counsel] implies that [Corporate policyholder] and I must accept lawyers whom we believe have unfulfilled ethical obligations to us. We have asked nicely for information but have received none.
I do not see any language in our policy requiring us to accept your lawyers when [Insurer] has reserved its rights and they refuse to talk to us about conflicts of interest. If there is such language, please point it out.
[Corporate policyholder] and I Will Accept Ethical Lawyers
You and your lawyers say that even though [Insurer] has reserved its right to deny all coverage to us on any conceivable ground, now or in the future, [Insurer] is in charge of our defense and that [Corporate policyholder] and I have no voice. That’s harsh.
As a practical matter, we don’t know any lawyers in [this] County, so if the law says that we have to take your lawyers, we are happy to do so – so long as they demonstrate that they are ethical. Is that too much to ask?
Apparently not. “[W]hen coverage is disputed, the interests of the insured and the insurer are always divergent. The attorney should not be placed in the position of divided loyalties. Such an arrangement would be adverse to the best interests of the insured, the insurer, the attorney, and the profession.” [T]he Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375.) Since I’m not a lawyer, if what this Court says is not the law, please explain why.
Dependent Counsel’s Duty of Disclosure
Please see a Memorandum of Law titled: “Duty of Disclosure” from DutytoDefend.com.
Cumis Test
Please see a Memorandum of Law titled: “Cumis Test” from DutytoDefend.com.
Forfeiture
[Corporate policyholder] and I respectfully decline [Coverage counsel]’s invitation that we withdraw our claim for coverage. Instead we insist upon all of our rights. Would [Insurer] like to withdraw its reservation of rights?
While we are on the topic, we learned on line that insurance companies are regulated and one of those regulations gives [Insurer] 40 days to decide whether to reserve rights. [Insurer] could have asked for and gotten more time if it asked for it, but it did not.
Here is the regulation: “[E]very insurer shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part. Where an insurer denies a first party claim, in whole or in part, it shall do so in writing and shall provide to the [policyholder] a statement listing all bases for such denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge. Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing.” (Cal. Code Regs. § 2695.7(b) (ellipses omitted).)
To a non-lawyer, this regulation says “use it of lose it.” [Corporate policyholder] and I reject [Insurer]’s purported reservations of rights letter as untimely, inadequate, and unlawful. If [Insurer] agrees and expressly withdraws all reservations of rights and expressly agrees to provide full coverage, then [Corporate policyholder] and I will gladly turn over to it any your lawyers full control of the defense and settlement with our continuing full cooperation.
Only One Question Divides Us
Since we are cooperating and will continue to do so, and because we are willing to accept any ethical lawyer [Insurer] chooses, we think that the only question that divides us is whether [Insurer]’s dependent counsel is required to comply with the Canons of Ethics. We think they do. [Insurer] seems to think they do not.
Maybe you are right and the lawyers have no fiduciary duties to us, do not face discipline from the State Bar, do not face civil liability to us, and do not risk losing revenue for violating Rule 3-310. But maybe you are wrong.
[Corporate policyholder] and I would like [both Dependent counsel] to tell us why they don’t have to answer our questions. This is like High School algebra class: maybe your answer is correct, but I want to see your work.
Olive Branch
Neither [Corporate policyholder] nor I want to fight with [Insurer] or any of its many lawyers. We ask humbly that you engage us in good faith dialogue to try to find a solution to the one question that divides us.
Thank you.

11/11/16 [Dependent counsel #1]
Given the Board’s instruction that we do not have its consent to continue to represent [Corporate policyholder] in [Injured plaintiff]’s lawsuit, we will be proceeding with a motion to withdraw as [Corporate policyholder]’s counsel in this matter. I expect to have that motion filed next week. [Corporate policyholder] will be served with the motion to withdraw. In the interim, we will advise [Injured plaintiff]’s attorney of our intention to file this motion, and request that all discovery matters be put on hold pending the court’s approval of the motion to withdraw.Dr. Kroplick: Given the Board’s instruction that we do not have its consent to continue to represent [Corporate policyholder] in Ms. Dorman’s lawsuit, we will be proceeding with a motion to withdraw as [Corporate policyholder]’s counsel in this matter. I expect to have that motion filed next week. [Corporate policyholder] will be served with the motion to withdraw. In the interim, we will advise Ms. Dorman’s attorney of our intention to file this motion, and request that all discovery matters be put on hold pending the court’s approval of the motion to withdraw.

11/11/16
Good afternoon, Everyone.
After speaking with [Injured plaintiff’s attorney] directly, I am pleased to report that this claim has been settled for the amount of $550,000.00 on behalf of [Corporate policyholder] and [Individual policyholder], with [Injured plaintiff] releasing all claims against Defendants, each party to bear their own costs and fees, without the need for any non-monetary consideration from [the policyholders].
[Insurer]

Elapsed time from sending Questionnaires, 11/5 to settlement, 11/11 – six days.

Please enter your email address in order to view this page.
Your email address will not be sold to or shared with third parties.
DutytoDefend.com