“No” – Insurer Denies All Coverage – MoL


When a policyholder asks a liability insurer for help with a plaintiff’s lawsuit, the insurer must promptly answer: “Yes”, “No”, or “Maybe”.[1] A “No” answer must give a detailed written explanation, and urge the policyholder to fight back.[2] Saying that there is no coverage for a liability dispute (in which the policyholder and plaintiff are adversaries) creates a second, usually related coverage dispute (in which the policyholder and plaintiff may become allies).

This Memorandum is the first part of a triad (a Practice Pointer subjectively explores strategic options: an Action Guide provides forms) that objectively gathers legal authority that a cooperating policyholder and plaintiff may consider in deciding how to respond to an insurer that says “No”.

This Memorandum assumes that the insurer at least has a duty to defend. It objectively collects California law that establishes that when a liability insurer denies all coverage the policyholder and the plaintiff may: 1) cooperate with each other, if they want to; 2) easily determine whether the denial is right,[3] wrong, or fixable; 3) enforce duties owed by the insurer; 4) control of the defense and settlement because a breaching insurer may not enforce several protective contractual provisions; 5) plead into coverage properly; 6) testify into coverage truthfully; 7) protect confidential communications; and 8) maximize recovery of Cumis fees from the defaulting insurer. Readers should consider all of these issues before asking an insurer to reconsider its wrongful denial.

Cooperation Between Policyholder and Plaintiff

“Why can’t we all just get along?”[4] When an insurer denies all coverage, the first strategic decision a policyholder and plaintiff should make is whether or not to work together to advance their common interests to secure insurance coverage.

A denial of all coverage for a liability dispute creates a second and often related coverage dispute. While the policyholder and the plaintiff oppose each other in the liability dispute, they may share common goals in the coverage dispute. Thus, these enemies may also become allies, within well defined limits. Like international relations, the US may have lots of reasons to be mad to China, but the US and China can readily agree that North Korea should not have nukes. It can get complicated and messy, but it’s worth the effort. When an insurer denies coverage, traditional relationships among the participants in civil litigation may change dramatically.[5] The defendant may develop an incentive to cooperate with the plaintiff.[6] California law is clear that while a plaintiff and a defendant are natural enemies in a liability dispute, they may cooperate with each other in a coverage dispute, but they may not collude. Like fine art, collusion is difficult to describe in words, but one knows it when one sees it.[7] Many California reported opinions have examined cases alleging collusion.[8] While collusion is a limited defense available to insurers,[9] the dividing line between proper cooperation and improper collusion is clear in California law.[10] The bottom line is that the plaintiff, the policyholder, and their counsel may freely cooperate to advance common interests.[11]

Costs and Benefits of “No”

Advantages of “No”

The fact that an insurer wrongfully denies all coverage and is in breach of its duty to defend confers upon the policyholder significant power, which power may be lost if the insurer belatedly agrees to defend:

•     The policyholder, not the insurer, may control the defense;[12]

•     The policyholder, not the insurer, may control settlement;[13]

•     Independent counsel may recover attorneys fees at full rates;[14]

•     The lawsuit can be settled with favorable rebuttable presumptions;[15]

•     The lawsuit may be adjudicated with favorable conclusive presumptions;[16] and

•     If the defendant is impecunious, the liability dispute may be settled for less than it would if coverage were available.

Disadvantages of “No”

The disadvantages of an insurer wrongfully denying all coverage include:

•     The policyholder must fund the defense;

•     The policyholder must fund a settlement or judgment; and

•     The plaintiff risks non-collection.

Analyze the Duty to Defend

A liability insurer that denies all coverage bears no liability for its decision unless its denial is wrongful. Determining whether an insurer has a duty to defend is relatively simple.[17] A proper analysis consists of “comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend. [T]he existence of a duty to defend turns not upon the ultimate adjudication of coverage. Hence, the duty may exist even where coverage is in doubt and ultimately does not develop.”[18] On a motion for summary adjudication that an insurer has a duty to defend, the policyholder’s initial burden of proof easily shifts effectively requiring the insurer to prove a negative: “[O]nce the insured has established potential liability, the insurer must assume its duty to defend unless and until it can conclusively refute that potential. Necessarily, an insurer will be required to defend a suit where the evidence suggests, but does not conclusively establish, that the loss is not covered.”[19]

Is the Insurer’s Denial Right?

An insurer bears no contractual or tort liability for refusing to defend a plaintiff’s claim that is not of the nature and kind[20] potentially covered by its liability policy. If a policyholder and/or plaintiff analyze available evidence and compare it to the language of an insurer’s policy to conclude that there is no potential for coverage, then each should accept this conclusion and should not waste their time trying to convince an insurer nor a court to accept non-existent coverage.

Is the Insurer’s Denial Fixable?

Sometimes a plaintiff’s complaint is not clear whether it is asserting a potentially covered claim. Although the insurer has a duty to investigate whether extrinsic facts exist that may trigger potential coverage, frequently the policyholder or the plaintiff volunteer new facts in the hopes of securing coverage. “[T]he duty [to defend] 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.”[21] Thus, it is possible to trigger a duty to defend by informing the insurer of relevant facts that do not appear in the plaintiff’s complaint.[22] The plaintiff may provide clarity that the claim is potentially covered by pleading into coverage properly.[23]

Is the Insurer’s Denial Wrong?

Some liability insurers deny a defense hoping that: 1) the insurer can later cure its breach without consequences; 2) the policyholder will give up; or 3) some other insurer will defend.[24] Complex business litigation, construction defect cases, title insurance claims, and a variety of other so-called “mixed” actions[25] are some common types of cases that some insurers may wrongfully fail to defend.

Legal Consequences of a Wrongful Denial

“An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract. The insurer should not be permitted to profit by its own wrong.”[26]

Insurer Duties Invoked by Saying “No”

Insurance is a regulated industry. “[A] contract entered into between two parties of unequal bargaining strength, expressed in the language of a standardized contract, written by the more powerful bargainer to meet its own needs, and offered to the weaker party on a ‘take it or leave it’ basis carries some consequences.”[27] These consequences include statutes, regulations, and case law that impose duties upon insurers for the protection of policyholders.

Duty of Good Faith

“There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. This principle is applicable to policies of insurance.”[28]

Duty to Investigate[29]

One of many defined “unfair methods of competition and unfair and deceptive acts or practices in the business of insurance [is] [f]ailing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.”[30] “Upon receiving notice of claim, every insurer shall immediately begin any necessary investigation of the claim.”[31]

Duty to Explain Coverage Denial

A denial of coverage “shall [be] in writing and provide a statement listing all factual and legal bases for each reason given for such denial. [If] a claim is based on a specific policy provision, condition or exclusion, the written denial shall provide an explanation of [its] application.”[32]

Duty to Respond to Inquiry

“Upon receiving any communication from a [policyholder], regarding a claim, that reasonably suggests that a response is expected, every [insurer] shall immediately furnish the [policyholder] with a complete response.”[33]

Temporary Power of the Policyholder and the Plaintiff

The power conferred by a defaulting insurer upon policyholders and plaintiffs may be fleeting. If the insurer reconsiders its denial and agrees to defend, it may thereafter acquire rights that is loses while it is in default. Thus, policyholders and plaintiffs may consider reaching irrevocable agreements while an insurer is in breach of its duty to defend. They may not be able to enter into such agreements after an insurer has cured its breach.

Control of the Defense and Settlement

Control of the defense and settlement of a lawsuit may shift depending on whether the insurer is providing a defense.[34] “When the insurer provides a defense to its insured, the insured has no right to interfere with the insurer’s control of the defense. On the other hand, if the insurer wrongfully refuses to defend, leaving the insured to his own resources to provide a defense, then the insurer forfeits the right to control settlement and defense. In that event, the insured is free to settle the lawsuit on his own.”[35]

A Breaching Insurer Loses Contractual Protections

“It is a well-recognized rule that the insurer may not repudiate the policy, deny all liability, and at the same time be permitted to stand on a provision inserted in the policy for its benefit.”[36] “Application of the waiver rule to disputes over whether coverage exists is designed as an incentive to compel an insurance company to fulfill its duty to thoroughly investigate a claim before denying coverage.”[37] A standard liability policy includes many provisions intended for the insurer’s protection, including a notice provision, a cooperation clause, a no voluntary payment provision, and a no action clause. While a policyholder must always give an insurer notice of a claim in order to get thing rolling, an insurer in breach of its duty to defend may be precluded from enforcing some of these advantageous provisions against the policyholder, particularly the no voluntary payment provision and the no action clause including an “actual trial” requirement.[38] The latter provision often has language that requires the policyholder to proceed to final judgment by an actual trial, unless the insurer consents to settlement, thus limiting some procedural methods of alternative dispute resolution.

Plead Into Coverage Properly

Plaintiffs who choose to may plead into coverage by asserting provable allegations in the language of the defendant’s policy[39] within well defined limits.[40]

Testify Into Coverage Truthfully

The policyholder and the plaintiff may truthfully testify into coverage by understanding the potential impact of admissible evidence on both the liability dispute and the coverage dispute. Of course witnesses must give truthful testimony.[41] A claim that dependent counsel committed legal malpractice by advising a policyholder to give false testimony may be barred by the doctrine of unclean hands.[42] Still, policyholders and plaintiff should consider the impact on coverage while giving truthful testimony.[43]

Protect Confidentiality

Notwithstanding the fact that a policyholder and a plaintiff are adverse to each other in a liability dispute, the may have shared goals. They are entitled to protect confidential communications from disclosure to an insurer or its counsel pursuant to the common interest doctrine.[44] This right to protected confidential communication in the coverage dispute parallels the same right in a liability dispute. The policyholder, the insurer, and their lawyers may protect shared confidential information regarding the liability dispute from discovery by the plaintiff. Equally, the policyholder the plaintiff, and their lawyers may protectshared confidential information regarding the coverage dispute from discovery by the insurer and its lawyers.

Maximize Cumis Fee Rate

Independent counsel are often entitled to be paid by the policyholders insurer at full rates[45] and at a regular intervals.[46] The rate limitation provision of Civil Code § 2860[47] is inapplicable unless the insurer agrees unconditionally that it has a duty to defend and that a disqualifying conflict of interest exists.[48] Thus, an insurer that belatedly agrees to provide a defense may be required to pay independent counsel’s full rates, not the reduced rates charged by dependent counsel. “[B]y its terms, section 2860 applies only where a ‘conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel for the insured. [Where] no Cumis conflict exist[s], the statute was inapplicable. Hence, [it is error] to limit the hourly attorney fee rate [the insurer] was required to pay in defending the [policyholder] in the [liability] action.”[49] However, no California reported opinion addresses whether an insurer that wrongfully refuses to defend but later recants and agrees to defend may then invoke the protections of Civil Code § 2860.

[1] “[E]very insurer shall immediately accept [“Yes”] or deny the claim, in whole [“No”] or in part [“Maybe”].” (Code of Reg. § 2695.7(b) (text in parentheses added).)

[2] Every insurer that denies a third party claim, in whole or in part, or disputes liability or damages shall do so in writing [including] a statement that [the policyholder] may have the matter reviewed by the California Department of Insurance.” (Ibid. (ellipses omitted).)

[3] If the determination is made that the insurer’s denial is factually and legally correct, neither the policyholder nor the plaintiff should waste time, money, effort, or stress trying to change its mind.

[4] Rodney King.

[5] Reservation of Rights Changes Traditional Relationships" href="http://dutytodefend.com/reservation-of-rights-changes-traditional-relationships/">Reservation of Rights Changes Traditional Relationships

[13] Control of Settlement" href="http://dutytodefend.com/control-of-settlement/">Control of Settlement

[18] Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295 (ellipses omitted).

[19] Id. at 298-99 (emphasis added, ellipsis omitted).

[20] “We look to the nature and kind of risk covered by the policy as a limitation upon the duty to defend; we cannot absolve the carrier from the duty to defend an insured for loss of the nature and kind against which it insured.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275 (Gray).)

[21] Scottsdale Ins. Co. v. MV Transp. (2005) 36 Cal.4th 643, 654. (citation omitted, emphasis added).

[24] “[W]here more than one insurer owes a duty to defend, a defense by one constitutes no excuse of the failure of any other insurer to perform.” (Wint v. Fidelity & Cas. Co. of New York (1973) 9 Cal.3d 257, 263; Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1005.) “No insurer shall delay or deny settlement of a first party claim on the basis that responsibility for payment should be assumed by others.” (Cal. Code Regs § 2695.7(e).)

[25] “[A] ‘mixed’ action [is one] in which some of [multiple] claims are at least potentially covered and the others are not.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 47.)

[26] Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660 (Comunale) (ellipsis omitted).

[27] Gray, supra, 65 Cal.2d at 269 (emphasis added).

[28] Comunale, supra, 50 Cal.2d at 658 (citation omitted).

[30] Ins. Code § 790.03(h)(3).

[31] Code of Regs. § 2695.5(e)(3) (ellipsis omitted).

[32] Code of Regs. § 2695.7(b) (ellipses omitted).

[33] Code of Regs. § 2695.5(b) (ellipsis omitted).

[35] Safeco Ins. Co. v. Superior Court (McKinney) (1999) 71 Cal.App.4th 782, 788-89 (citations, quotation marks, and ellipses omitted).

[36] Kershaw v. Maryland Casualty Co. (1959) 172 Cal.App.2d 248, 257 (ellipsis omitted).

[37] Alta Cal. Regional Center v. Fremont Indemnity Co. (1994) 25 Cal.App.4th 455, 465.

[42] “[T]he doctrine of unclean hands precludes an action for legal malpractice predicated upon injuries caused when [a client] followed the advice of his lawyer to lie at a deposition.” (Blain v. Doctor’s Co. (1990) 222 Cal.App.3d 1048, 1052.)

[47] “The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” (Civ. Code § 2860(c).)

[48] “[I]n the absence of a stipulation or unconditional agreement between the insurer and insured, unless and until there has been a judicial determination of an insurer’s duty to defend and the existence of a conflict of interest, the provisions of Civil Code section 2860 are inapplicable.” (Handy v. First Interstate Bank (1993) 13 Cal.App.4th 917, 926.); See, Civil Code § 2860 – Rate Limitation Is Not Retroactive – MoL

[49] County of San Bernardino v. Pacific Indem. Co. (1997) 56 Cal.App.4th 666, 693 (citations and ellipses omitted).

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