Introduction

Liability insurers have contractual, implied, statutory, regulatory, and common law duties to their policyholders. The business of insurance is governed by statute, regulations, and case law. “Unlike most other contracts, insurance is characterized by elements of public interest and fiduciary responsibility. [I]nsurance policies are purchased for peace of mind and security in the event of an accident or other catastrophe.”[1] A liability insurance policy is a “contract of adhesion [that is] a standardized contract prepared entirely by one party to the transaction for the acceptance of the other [that] due to the disparity in bargaining power must be accepted or rejected by the [policyholder] on a ‘take it or leave it’ basis.”[2] To help level the playing field, the law imposes on liability insurer a host of duties, summarized here.

Express, Contractual Promises

A liability policy contract makes two primary promises: to pay on behalf of its policyholder a judgment and to pay for a lawyer to control the policyholder’s defense. These promises create the insurer’s duty to indemnify and duty to defend

Contractual Duty to Indemnify

Liability policy contracts include an “insuring clause” that may say, for example, that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” This language is so broad, that read alone it might provide coverage for virtually everything. However, the phrase “to which this insurance applies” effectively incorporates the remainder of the policy contract that limits its scope and complicates analysis of what is or is not covered. A promise to indemnify does not become ripe until judgment is entered against a policyholder. “Upon an indemnity against liability, the [policyholder] is entitled to recover upon becoming liable [to an injured plaintiff by entry of judgment].”[3] A liability insurer agrees to be bound by a judgment entered against its policyholder as to the fact of the policyholder’s liability to a plaintiff and the amount of the plaintiff’s damages, even though the insurer is not a party to the liability lawsuit, thus forfeiting a measure of procedural due process. The promise to indemnify does not take effect until the end of a lawsuit and requires only the time necessary to write a check.

Contractual Duty to Defend

A liability policy’s insuring clause will typically say that the insurer “will have the right and duty to defend the insured against any ‘suit’.”[4] “By its very nature the duty assumed by [the insurer] to defend its assured against suits must necessarily be classified as a delegable duty, understood by all parties as such, for [the insurer] had no authority to perform that duty itself and, in fact, was prohibited from appearing in the California courts. Since a carrier is not authorized to practice law, it must rely on independent counsel for the conduct of the litigation.”[5] Only a licensed attorney can actually conduct a policyholder’s defense.[6]

“An insurer must defend its insured against claims that create a potential for indemnity under the policy. The duty to defend is broader than the duty to indemnify. Determination of the duty to defend depends, in the first instance, on a comparison between the allegations of the complaint and the terms of the policy. If any facts suggest a claim potentially covered by the policy, the insurer’s duty to defend arises. Imposition of an immediate duty to defend is necessary. The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability. Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor.”[7] The promise to defend must be discharged at the beginning of a lawsuit.

No Contractual Duty To Investigate

A liability policy contract typically says that the insurer “may, at our discretion, investigate any ‘occurrence’”, but a standard policy makes no express promise to investigate.

No Contractual Duty To Settle

A liability policy contract typically says that the insurer “may, at our discretion settle any claim or ‘suit’”, but a standard policy makes no express promise to settle.

Implied Duty Of Good Faith And Fair Dealing

“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”[8] The fundamental principle of the implied covenant of good faith and fair dealing is “that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.”[9] A breach of the duty of good faith and fair dealing may expose the insurer to tort damages. The main reason the law imposes tort liability for breach of contract is that a policyholder whose claim is wrongfully denied cannot obtain a substitute in the marketplace; i.e., “an insured will not be able to find another insurance company willing to pay for a loss already incurred.”[10] The duty of good faith and fair dealing is breached where an insurer delays or denies payment of policy benefits unreasonably (i.e., without any reasonable basis for its position) or without proper cause.[11] The purpose of the duty of good faith and fair dealing is to require an insurer to “careful and serious consideration to the interests and position of the assured. The carrier cannot exclusively preoccupy itself with its own interests but must also weigh the real interests of the assured.”[12] “[G]ood faith requires [the insurer] to consider the interests of the assured equally with its own.”[13]

Implied Duty to Investigate

Although a standard policy makes no express promise to investigate a claim, statutes, regulations, and common law imposes on insurers a duty to investigate. Insurers must “adopt and implement reasonable standards for the prompt investigation of claims.”[14] “Upon receiving notice of claim, every insurer shall immediately begin any necessary investigation of the claim.”[15] “For the insurer to fulfill its obligation not to impair the right of the insured to receive the benefits of the agreement it is essential that an insurer fully inquire into possible bases that might support the insured’s claim. The insurer may not deny a claim without thoroughly investigating it. [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”[16] An insurer which fails to adequately investigate its duty to defend many not attempt to justify its breach of the duty to investigate “by hindsight.”[17] “An insurance company may not ignore evidence which supports coverage.”[18]

Implied Duty to Settle

Notwithstanding a clear contractual provision which makes an insurer’s obligation to settle discretionary, the law imposes on insurers an implied duty to settle when it is reasonable to do so in order to protect the policyholder from a risk of a higher judgment. “This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach.”[19] “[A]n insurer’s ‘good faith,’ though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer’s refusal to accept a reasonable settlement offer. [R]ecovery may be based on unwarranted rejection of a reasonable settlement offer and the absence of evidence, circumstantial or direct, showing actual dishonesty, fraud or concealment is not fatal to the cause of action.”[20] “[A] formal settlement offer is not an absolute prerequisite to a bad faith action in the wake of an excess verdict when the claimant makes a request for policy limits and the insurer refuses to contact the policyholder about the request.”[21] “[I]t is well established that an insurer’s tort liability for failure to accept a reasonable settlement offer can arise only with respect to third party, or liability, coverage.”[22]

“A delay in payment of benefits due under an insurance policy gives rise to tort liability only if the insured can establish the delay was unreasonable”[23] An insurer must “settle claims promptly, where liability has become apparent.”[24] “[A]n insurer potentially can be liable for unreasonably coercing an insured to contribute to a settlement fund.”[25] A liability insurer must “keep abreast of the progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers.”[26] An insurer must not condition settlement on not

“submitting any complaint to the California Department of Insurance.”[27]

Additional Implied or Imposed Duties

“Other duties and obligations may attach if ‘necessary to assure the provision to [insured] of a proper defense by the insurer.”[28]

Duty to Adopt Standards

Insurers are required “to adopt and implement reasonable standards for the prompt investigation and processing of claims.”[29] Insurance regulations “delineate minimum standards [t]o promote the good faith, prompt, efficient and equitable settlement of claims.”[30] Regulatory standards for prompt, fair and equitable settlements include that: “Upon receiving proof of claim, every insurer, shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part. The amounts accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety. (1) Where an insurer denies a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such denial and the factual and legal bases for each reason given for such 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, the written denial shall include reference thereto and provide an explanation of the application of the provision to the claim.”[31]

Duty of Disclosure

A liability insurer must “acknowledge and act reasonably promptly upon communications”[32], “affirm or deny coverage of claims within a reasonable time”[33], and “inform insureds of the coverage under which payment has been made,”[34] but must not misrepresent “pertinent facts or insurance policy provisions”[35], advise “a claimant not to obtain the services of an attorney”[36], or mislead “a claimant as to the applicable statute of limitations.”[37]

“[T]he insurer’s fiduciary obligations were consistent with those of the attorney retained to represent the insured, and as a result the insurer should have informed the insured of the conflict of interest and of the opportunity to have independent counsel.”[38]

Every liability insurer that issues a reservation of rights to later deny coverage to its policyholder has an affirmative duty to initiate advising the policyholder of the right to independent counsel if the reservation creates a disqualifying conflict of interest.[39]

Duty to Maintain Records

“Every [insurer’s] claim files shall contain all documents, notes and work papers (including copies of all correspondence) which reasonably pertain to each claim in such detail that pertinent events and dates of the events can be reconstructed and the licensee’s actions pertaining to the claim can be determined.”[40] Insurers “shall immediately acknowledge receipt of [a notice of claim with] a notation made in the insurer’s claim file.”[41] “The amounts [of claims] accepted or denied shall be clearly documented in the claim file”[42] “[I]nformation obtained in a telephone conversation or personal interview [shall be] documented in the claim file.”[43]

Duty to Train Claims Agents

“All [insurers] shall provide thorough and adequate training regarding the regulations to all their claims agents [and] certify that their claims agents have been trained [except] duly licensed attorneys.”[44] Insurers “must provide training to insurance adjusters regarding these regulations and certify that he or she has read and understands these regulations.”[45] The insurer’s “claims adjusting manual [must] contain a copy of these regulations.”[46]

Duty of Clear of Contract Language

“In interpreting an insurance policy we apply the general principle that doubts as to meaning must be resolved against the insurer and that any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.”[47]

Duty to Not Sue for Dec Relief

An insurer which sues its own insured to defeat coverage for an third party action which is still pending may be liable for malicious prosecution.[48]

Duty to Not Discriminate

“No insurer shall discriminate in its claims settlement practices based upon the claimant’s age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, or physical disability, or upon the territory of the property or person insured.”[49]

^[1] Cates Const., Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 44 (Cate) (citations, quotation marks, and ellipses omitted); Medina v. Safe-Guard Products, Int’l, Inc. (2008) 164 Cal.App.4th 105, 111.

^[2] Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 882.

^[3] Civ. Code § 2778(1).

^[4] See, Duty to Defend, Duty to Defend: Step by Step Analysis, Trial Brief: – A Comprehensive Overview of the Law of the Duty to Defend, and Various Policy Defense Language.

^[5] See, Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 880-81 (Merritt).

^[6] “No person shall practice law in California unless the person is an active member of the State Bar.” (Bus. & Prof. Code § 6125.)

^[7] Scottsdale Ins. Co. v. MV Transp. (2005) 36 Cal.4th 643, 654-655 (citations, quotation marks, and ellipses omitted.)

^[8] Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683; see, Duty of Good Faith and Fair Dealing.

^[9] Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573.

^[10] Cates, supra, 21 Cal.4th at 44.

^[11] Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072-1073.

^[12] Merritt, supra, 34 Cal.App.3d at 875.

^[13] Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 990.

^[14] Ins. Code § 790.03(h)(3).

^[15] Cal. Code Regs. § 2695.5(e)(3).

^[16] Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819 (ellipses omitted).

^[17] Mullen v. Glens Falls Ins. Co. (1977) 73 Cal.App.3d 163, 173.

^[18] Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 721.

^[19] PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312.

^[20] Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 16 fn.5 (ellipses omitted).

^[21] Boicourt v. Amex Assur. Co. (2000) 78 Cal.App.4th 1390, 1399.

^[22] Rappaport-Scott v. Interinsurance Exch. of the Auto. Club (2007) 53 Cal.Rptr.3d 245, 249.

^[23] Brehm v. 21st Century Ins. Co. (2008) 166 Cal.App.4th 1225, 1237; Fleming v. Safeco Ins. Co. of America, Inc. (1984) 160 Cal.App.3d 31, 37.

^[24] Ins. Code § 790.03(h)(12).

^[25] J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 15.

^[26] Merritt, supra, 34 Cal.App.3d at 882.

^[27] Cal. Code Regs. § 2695.7(o).

^[28] Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 191.

^[29] Ins. Code § 790.03(h)(3); “Every insurer shall adopt and communicate to all its claims agents written standards for the prompt investigation and processing of claims.” (Cal. Code Regs. § 2695.6(a).)

^[30] Cal. Code Regs. § 2695(1).

^[31] Id. at § 2695.7(b)(1) (ellipses omitted).

^[32] Ins. Code § 790.03(h)(2).

^[33] Id. at § 790.03(h)(4).

^[34] Id. at § 790.03(h)(9).

^[35] Id. at § 790.03(h)(1).

^[36] Id. at § 790.03(h)(14).

^[37] Id. at § 790.03(h)(15).

^[38] State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1235-1236.

^[39] See, Duty to Advise of Right to Independent Counsel.

^[40] Cal. Code Regs. § 2695.3(a).

^[41] Id. at § 2695.5(e)(1) (ellipses omitted.)

^[42] Id. at § 2695.7(b) (ellipses omitted.)

^[43] Id. at § 2695.7(l) (ellipses omitted.)

^[44] Id. at § 2695.6(b).

^[45] Id. at § 2695.6(b)(3).

^[46] Id. at § 2695.6(b)(2)(A).

^[47] Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269.

^[48] Hillenbrand, Inc. v.Insurance Company of North America (2002) 104 Cal App 4th 784.

^[49] Cal. Code Regs. § 2695.7(a).