liability insurance policy is a contract that makes two primary promises: 1) to defend against a third party’s claims that a policyholder is legally liable for a plaintiff’s loss; and 2) to pay a judgment if the claim is valid and is covered by the policy. The policyholder pays premiums and immediately gets back peace of mind that if at some time in the future an accident occurs, the insurer will take care of it. A liability policy is like a marriage proposal by a sailor on leave to a virgin: a current promise to make future commitments if certain conditions come to pass.

When a policyholder gets sued and needs the protection of a liability policy, regulations require that “every insurer shall immediately accept [“Yes”] or deny the claim, in whole [“No”] or in part [“Maybe”].”[1] “Yes” is like getting married. “No” is like getting dumped. “Maybe” is like the soldier promising to respect the virgin in the morning.

The duty to defend is the liability insurer’s obligation to pay for a lawyer to manage the judicial process of resolving a third party plaintiff’s monetary claim against a policyholder.[2] It is like the process of a courtship that may or may not result in marriage during which a trusting relationship will or will not be forged.

The duty to indemnify is the insurer’s obligation to pay the plaintiff’s civil judgment against the policyholder. It is like the hard work of providing a home, putting food on the table, and raising the children.

These two primary duties differ from one another in tempo, breadth, and method of discharge. The duty to defend is triggered as soon as a plaintiff makes a claim that is potentially covered for indemnity, ends when the claim is resolved, and can be discharged only by the insurer hiring an ethical lawyer to shepherd the policyholder through the legal process of resolving a claim. In contrast, the duty to indemnify ripens only at the end of claim if the plaintiff’s lawsuit results in a judgment that is actually covered under all of the complex terms of the policy, and is discharged by the singular act of the insurer writing a check. The difference is like the sailor asking the virgin to surrender her virtue by 1) promising to return after the war; or 2) first taking vows and delivering his fortune to her.

A reservation of rights is warning by the insurer to the policyholder that the insurer accepts its duty to defend while deferring any decision whether it will deny its duty to indemnify. It is like the sailor demanding sex while refusing to break up with a mistress on the side.

An insurer that wrongfully fails to defend may lose control of its policyholder’s defense, control of settlement and the ability to enforce otherwise valuable contractual protections. It is like sticking the sailor with the bill for the reception after the wedding has been called off.

A disqualifying conflict of interest is an ethical dilemma for dependent counsel who is selected, directed, and paid by the insurer, but who owes fiduciary duties directly to the policyholder.[3] A reservation of rights always[4] creates disqualifying conflicts of interest for dependent counsel unless the reservation of rights has “nothing to do with”[5] the plaintiff’s liability dispute. “The insurer may not compel the insured to surrender control of the litigation.”[6] Since the insurer has made a promise to defend but is not licensed to practice law itself, dependent counsel’s “ethical conflict of interest warrant[s] payment for the insureds’ independent counsel.”[7] A disqualifying conflict justifies the bride-to-be in refusing pre-marital sex and breaking off the engagement because the sailor has a mistress.

A limited contractual duty to cooperate obligate the policyholder to appear and testify truthfully at deposition and trial, but no reported opinion has otherwise enforced this provision against a policyholder. In contrast, a policyholder may properly cooperate with a plaintiff to protect their shared interests to secure insurance coverage, notwithstanding their concurrent differences in a liability dispute. However, a policyholder and a plaintiff may not collude to falsely create liability or damages. It is like relations among those involved in a broken courtship becoming Machiavellian.

A plaintiff derives power from the right to narrow or expand the scope of claims by pleading into or out of coverage and to give truthful testimony that may impact coverage. A policyholder derives similar power from truthful testimony and from the initial right to manage one’s own defense. The attorney-client relationship is created and terminated by the agreement of the parties, including a client’s right to fire an attorney at any time with or without cause. Attorney duties owed to a client include the duty of full disclosure, undivided loyalty, strict confidentiality, and competent representation. As a result, dependent counsel is vulnerable to ethical challenges by a policyholder. Exercising this power is like the virgin demanding answers about the sailor’s dalliance with a mistress.

A policyholder who distrusts a reserving insurer or its lawyers may develop a written record of admissible evidence chronicling the behavior of both by requesting that each complete a questionnaire. It is like publishing compromising photographs of the sailor on leave.


[1] Code of Regs. § 2695.7(b) (ellipses omitted, text in parentheses added).

[2] “We summarize familiar principles pertaining to an insurers duty of defense. 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, and it may apply even in an action where no damages are ultimately awarded. 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. But the duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered. Moreover, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability. The defense duty arises upon tender of a potentially covered claim and lasts until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage. When the duty, having arisen, is extinguished by a showing that no claim can in fact be covered, it is extinguished only prospectively and not retroactively. On the other hand, in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. This freedom is implied in the policy’s language. It rests on the fact that the insurer has not been paid premiums by the insured for [such] a defense. . . . [T]he duty to defend is contractual. The insurer has not contracted to pay defense costs for claims that are not even potentially covered. From these premises, the following may be stated: If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurers duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.” (Scottsdale Ins. Co. v. MV Transp. (2005) 36 Cal.4th 643, 654-55 (citations and quotation marks omitted).)

[3] “The mandatory rule of disqualification . . . – analogous to the biblical injunction against ‘serving two masters’ (Matthew 6:24) – is such a self-evident one that there are few published appellate decisions elaborating on it.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 286.)

[4] “[W]hen coverage is disputed, the interests of the insured and the insurer are always divergent.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 (Cumis).)

[5] “[W]hen the reservation of rights is based on coverage disputes that have nothing to do with the issues being litigated in the [plaintiff’s liability] action . . . there is no [disqualifying] conflict of interest.” (Long v. Century Indemnity Company (2008) 163 Cal.App.4th 1460, 1470.)

[6] Cumis, supra, 162 Cal.App.3d at 375.

[7] Ibid.

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