Line Dividing Cooperation from Collusion – PP


Distinguishing cooperation from collusion would probably be unnecessary except that insurers and their lawyers are fond of accusing a policyholder of collusion for cooperating with a plaintiff. Ironically, insurers contractually require cooperation from their policyholders,[1] but bridle at the prospect that the policyholder might also cooperate with the plaintiff. But justice condones that the insurer and its policyholder cooperate to achieve their shared goals in a liability dispute of defeating or minimizing a plaintiff’s liability claim equally as it condones that the policyholder and the plaintiff cooperate to achieve their shared goals in a coverage dispute of defeating the insurer’s denial of coverage.


The word “cooperation” derives from the Latin for “work together.” “Cooperation” means “an act or instance of working or acting together for a common purpose or benefit.” Young mothers urge their children to cooperate. Governments pressure warring factions to cooperate. Trial courts push parties and their lawyers to cooperate. Liability insurer contractually require their policyholders to cooperate.[2] Plaintiffs and defendants may also cooperate.[3] “Collusion” is often understood to be a secret agreement for an unlawful purpose.[4] The difference between the two is found in the truth. No California statute, regulation, or reported opinion prohibits policyholders and plaintiffs from cooperating. But California law does recognize that a limit exists past which cooperation ventures into fraud. Neither the insurer nor the policyholder may commit collusion in the name of cooperation. “Of course, as stated some years ago by Judge Cardozo, a cooperation clause may not be expanded to require the assured ‘to combine with the insurer to present a sham defense.’”[5] “What we have here, at bottom, is an effort by [the policyholder] to concoct a bad faith claim out of whole cloth . . . by collusion between the claimants and the insured, with the ‘ingenious assistance of counsel.’”[6]


“The insurer is entitled to know from its assured the true facts (of which he may have knowledge) underlying an accident and upon which the injured person bases his claim in order that it may determine for itself, in the light of such information, whether it should contest or attempt to settle the claim. . . . [T]he general rule [is] that under a cooperation clause the assured is required to give a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense. . . . ‘The company is entitled, however, to an honest statement by the insured of the pertinent circumstances surrounding the accident, as he remembers them. Lacking that, the company is deprived of the opportunity to negotiate a settlement, or to defend upon the solid ground of fact. Nothing is more dangerous than a client who deliberately falsifies the facts.’”[7]

“The principles of fraud and collusion are self-evident and require no extended discussion. The facts and circumstances which will lead a court to conclude that either are present are limited only by the imagination of those who would cheat and deceive.”[8] Reported opinions confirm that actionable collusion is rare and the facts which support it are extreme. “One court suggested an example when it stated that a ‘cognizable claim of fraud or collusion would [require a showing that the third party claimant] had no substantial claim or chance of recovery and that the [insured] had permitted a judgment in [the claimant’s] favor which was disproportionate to his injuries; [and that the insurer] had no notice of this in time to intervene.’”[9]


1.   Collusion Defense

Collusion is a limited defense by which even a defaulting insurer may avoid being bound by a settlement entered into by its policyholder.[10] The collusion defense usually arises where the insurer has wrongfully failed to defend. Despite the insurer’s breach, the abandoned policyholder may not settle on arbitrary terms by which procedural due process is not satisfied. The purpose of the defense is to “strike a proper balance between the competing interests of the insurer and the abandoned insured when there is a dispute as to the bona fides of a settlement made by the insured.”[11] Through the collusion defense the courts “provide to the [defaulting] insurer some measure of procedural due process in order to protect against the consequences of a fraudulent or collusive settlement.”[12]

2.   Violation of Cooperation Clause

Similarly, an insurer may avoid coverage if its policyholder has violated the cooperation clause of a policy in a fashion that causes substantial prejudice by preventing the insurer from conducting a defense.[13] “[T]he insurer is ordinarily released from its contract by the total and unjustifiable refusal of cooperation by the insured including unjustifiable refusal of the insured to permit the insurer to make any defense.”[14] “[A]n insurer . . . must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in the insured’s favor.”[15]

3.   Tangent of Two Defenses

“[T]he purpose of the cooperation clause is ‘to protect the insurer’s interests and to prevent collusion between the insured and the injured party.’”[16] “Collusive assistance in the procurement of a judgment . . . constitutes a breach of the cooperation clause.”[17]


Those parties who decide to cooperate should remain mindful that their conduct, conversations, and communications will be closely scrutinized by suspicious insurers and their lawyers. But the threat of scrutiny should not diminish the parties ardor to cooperate. The threat of scrutiny should enforce the parties ardor to cooperate properly by working early and often to not cross the line from cooperation to collusion. Fortunately the line is clearly visible and easy to avoid. The specific ways in which a policyholder and a plaintiff may cooperate without colluding vary depending upon the coverage position taken by an insurer.

1.   “Yes” – The Insurer Concedes Full Coverage

When a defendant’s liability insurer responds to a notice of suit that it concedes full coverage, two points of conflict may emerge: a punitive damage claim and the policy limit. As a rule, neither of these conflicts require the insurer to pay for independent counsel.[18] The language of Civil Code §2860 notwithstanding, the interest of the insurer and the policyholder may in fact conflict when the plaintiff asserts a punitive damage claim and if the fair value of the plaintiff’s claim for monetary damages exceeds the defendant’s policy limit.[20]

A.  Punitive Damage Claim

If plaintiff who wins a punitive damage claim[21] may risk losing coverage for compensatory damages. Punitive damage awards are not covered by liability insurance as a matter of public policy.[22] If the defendant is found to be liable for an intentional tort, the insurer may be excused from paying compensatory damages.[23] If the defendant is impecunious, it may be a strategic error for a plaintiff to prosecute a punitive damage claim.

B.  Damage Claim Exceeds the Policy Limit

If a plaintiff claims to have suffered monetary damages in excess of the defendant’s policy limit, a potential conflict of interest may arise. The potential conflict may become actual if the plaintiff offers to settle within policy limits. “[A] conflict of interest arises between insurer and insured when a third party claim is made in excess of the policy limits. In such a situation, it will always be to the insured’s advantage to have settlement effected within policy limits; the insurer, in deciding whether to compromise a claim, must consider the insured’s best interests as much as its own.”[24]

2.   “No” – The Insurer Denies All Coverage

When a defendant’s liability insurer responds to a notice of suit that it denies all coverage, it may be prevented from enforcing several contract provisions designed for its protection, it loses control of the conduct of the defense[25] and loses control of settlement.[26] Both the policyholder and the plaintiff may analyze coverage to determine whether the insurer’s denial of coverage is right, wrong, or fixable.[27] If analysis reveals that the insurer’s denial of coverage is correct, the insurer’s denial is not wrongful. If analysis reveals that the insurer’s denial of coverage is fixable, the policyholder and the plaintiff may decide to agree to procedures, such as arbitration before they take steps to urge the insurer to change its “no” to a “maybe”. If analysis reveals that the insurer’s denial of coverage is wrong, the policyholder and the plaintiff may decide to agree upon both procedural and substantive steps to resolve the liability dispute as the develop supporting evidence[28] in the coverage dispute. “To be sure, a stipulated or consent judgment which is coupled with a covenant not to execute against the insured brings with it a high potential for fraud or collusion. ‘With no personal exposure the insured has no incentive to contest liability or damages. To the contrary, the insured’s best interests are served by agreeing to damages in any amount as long as the agreement requires the insured will not be personally responsible for those damages.’”[29]

3.   “Maybe” – The Insurer Reserves Rights to Later Deny Coverage

Cooperation without collusion is most likely to occur when the insurer says “maybe”. The plaintiff may decide to pleading into coverage.[30] Both litigants may decide to testify into coverage.[31] If the insurer agrees to defend under a reservation of right to deny indemnify, the policyholder and the plaintiff may cooperate to ask and seek answers for the following questions:

•           Should the plaintiff continue to pursue non-covered claims?

•           Should the policyholder urge the insurer to limit the scope of or completely withdraw its reservation of rights? How may the plaintiff coordinate this effort?

•           If the insurer has hired dependent counsel but not offered to pay for independent counsel, should the policyholder urge the insurer to reconsider, and if so, how? For example, some insurer agree to pay for independent counsel only if an intentional tort is alleged.

•           If the insurer has hired dependent counsel should the policyholder challenge dependent counsel’s ethics? Plaintiff’s counsel may make a defendant aware of ethical concerns by a series of pointed questions during deposition.

•           If the insurer refuses to provide independent counsel, should the policyholder insist dependent counsel comply with RPC, Rule 3-310?

•           If the insurer refuses to provide independent counsel, should the policyholder withhold authority to appear under Bus. & Prof. Code § 6104 and/or withhold consent under Rule 3-310?

•           If the insurer refuses to provide independent counsel, should the policyholder move to disqualify dependent counsel?

•           If the insurer has sued for declaratory relief, should the policyholder move to stay?

•           If the insurer refuses to provide independent counsel, should the policyholder sue the insurer, and if so when?

•           If the insurer refuses to provide independent counsel, should the policyholder sue dependent counsel, and if so when?

[5] Valladao v. Fireman’s Fund Indem. Co. (1939) 13 Cal.2d 322, 329 (Valladao).

[6] J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 18.

[7] Valladao, supra, 13 Cal.2d at 329.

[8] Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 530 (Pruyn).

[9] Pruyn, supra, 36 Cal.App.4th at 530, fn. 27, quoting from Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 806 (emphasis added).

[11] Pruyn, supra, 36 Cal.App.4th at 527.

[12] Id. at 530.

[14] O’Morrow v. Borad (1946) 27 Cal.2d 794, 800.

[15] Billington v. Interinsurance Exchange (1969) 71 Cal. 2d 728, 737-38.

[16] The Cooperation Clause and Communications between Insurers and Their Insureds (

[17] Span, Inc. v. Associated Internat. Ins. Co. (1991) 227 Cal. App. 3d 463, 483.

[18] “No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.” (Civil Code § 2860)

[20] See, Policy Limit Settlement Offer Properly – PP" href="">How to Make a Policy Limit Settlement Offer Properly – MoL

[21] “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant. . . .‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff . . . . ‘Fraud’ means an intentional misrepresentation.” (Code of Civ. Proc. § 3294.)

[22] The “insurer cannot under the public policy of this state indemnify the insured against liability for his own willful wrong. That policy is a part of every insurance contract and is expressed in section 533 of the Insurance Code, which codifies the general rule that an insurance policy indemnifying the insured against liability due to his own willful wrong is void as against public policy.” (City Products Corp. v. Globe Indem. Co. (1979) 88 Cal.App.3d 31, 37.) An exclusion for punitive damages is implied if none appears in the policy. (Ohio Cas. Ins. Co. v. Hubbard (1984) 162 Cal.App.3d 939, 946.)

[23] “When the defendant commits an intentional tort, the prohibition of [Ins. Cd.] section 533 presents an additional reason for disallowing indemnification of . . . the punitive damages, as well as indemnification of the remainder of the plaintiff’s recovery [compensatory damages].” (Peterson v. Superior Court (1982) 31 Cal. 3d 147, 158.)

[24] Barney v. Aetna Casualty & Surety Co. (1986) 185 Cal.App.3d 966, 976.

[28] See, Develop Admissible Evidence – PP

[29] Pruyn, supra, 36 Cal.App.4th at 518, quoting from Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998, 1023.

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