“No” – Insurer Denies All Coverage – AG


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

In the Memorandum, readers learned that the policyholder and the plaintiff may: 1) cooperate with each other, if they want to; 2) easily determine whether the denial is right, 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.

In the Practice Pointer, readers considered whether before asking the insurer reconsider: 1) the coverage dispute should drive the liability dispute; 2) the parties should execute procedural agreements while the insurer is in default; 3) to offer to settle within the insurer’s policy limit; 4) to plan on executing an assignment and covenant; 5) to sign a privilege non-waiver agreement; 6) to anticipate and minimize in-fighting by negotiating a confidential recovery distribution agreement; and 7) tying all of this together with a coordination agreement.

This Action Guide provides suggested forms by which cooperating policyholders and plaintiffs may implement the decisions they have made.

Assumed Facts

When a liability insurer says “No”, denying all coverage for a plaintiff’s complaint, the factual basis for its decision is usually limited to: 1) the allegations of the complaint; 2) the language of its policy; and 3) the fruits of its investigation, if any. Many plaintiffs lawyers draft the complaint with only the liability dispute in mind, without anticipating a coverage dispute. Other than acknowledging receipt of a complaint, some insurers do not communicate with their policyholder, the plaintiff, their lawyers, nor anyone else before denying coverage – this notwithstanding their duty to investigate.[3] Possible motivations for such an obvious breach of duty may include that: 1) some policyholders simply give up; 2) another insurer may accept the duty to defend thereby limiting exposure for the breach; 3) some policyholders effectively conduct the insurer’s investigation for it by supplying additional information and urging the insurer to reconsider its denial of coverage, thereby giving it a chance to cure without consequence; 4) a coverage dispute sometimes applies pressure on the plaintiff to settle for less; 5) and pressure on the policyholder to contribute toward a settlement.

Assumed Goals

The duty to defend is triggered by “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”[4], convincing an insurer to change its mind usually requires: 1) supplying extrinsic facts that trigger the duty to defend; 2) changing the allegations of the plaintiff’s complaint; or 3) sophisticated legal argument. Empty threats of “bad faith” rarely do the trick.

Policyholders and plaintiffs who desire to convince an insurer which has denied all coverage to change its mind are extremely unlikely to change a “No” to a “Yes”. Instead, usually the most one can hope for is for the insurer to change a “No” to a “Maybe” – which means that the coverage dispute will continue. Anticipating that the coverage dispute may result in litigation that will last long after the liability dispute has been resolved, a goal that policyholders and plaintiffs should consider is to prepare for the coverage fight and to maximize the likelihood that coverage will be afforded and to start this process from a very early stage.

Policyholders and plaintiffs should:

Cooperate with each other;

Avoid collusion;

Anticipate how the liability and coverage disputes should end at the earliest possible time;

Protect privileged communications from adversarial discovery;

Plead into coverage properly;

Testify into coverage truthfully;

Avoid an embarrassing and damaging “future flip”;

Require the insurer to promptly pay full rates to independent counsel;

Settle the liability dispute with insurer funds;

Minimize the risk of insurer reimbursement claims.

Cumis Retainer Agreement


An insurer that initially denies all coverage, is then asked to reconsider its denial may decide to agree to defend under a reservation of rights. Its reservation of rights is likely to create disqualifying conflicts of interest[6] that require it to pay for independent counsel. Thus, independent counsel should execute a written, non-privileged retainer agreement with the policyholder with a view toward satisfying many goals:

Comply with Rule 3-310;

Demonstrate to conflicted dependent counsel how to comply with Rule 3-310;

Clarifying that independent counsel has no direct financial relationship with the insurer;

Grant a lien on the insurer’s obligation to pay for independent counsel;

Establish normal full hourly rates;

Charge 10% interest on unpaid balances;

Explain the nature of the insurer’s duty to defend;

Obtain informed written consent to representation;

Educate a judge in the coverage dispute; and

Educate a jury in the coverage dispute.

Privilege Non-Waiver Agreement


Anticipating that an insurer that initially denied all coverage will agree to defend under a reservation of rights pursuant to which a coverage dispute will continue, policyholders and plaintiffs should discuss and decide whether to take steps to protect their communication from discovery by the insurer and its lawyers. A classic definition of “collusion” is “a secret arrangement between two or more persons, whose interests are apparently conflicting, to make use of the forms and proceedings of law in order to defraud a third person, or to obtain that which justice would not give them, by deceiving a court or its officers”[8] Thus, many litigants may question whether parties who are likely to be accused of collusion should even attempt “secrecy”. A perfectly good option is to be completely transparent. But “if an insurer denies coverage to the insured, the insured’s contractual obligation to notify the insurer ceases.”[9] Plaintiffs and policyholders a legally entitled to protect confidential communication from discovery by the common interest doctrine.[10] Suspicion and shenanigans can be effectively foreclosed by in camera inspection by the court without necessarily opening them up to the insurer and its lawyer. Thus, policyholders, plaintiffs, and their counsel should discuss executing a written privileged non-waiver agreement (which these parties may openly disclose) with a view toward satisfying many goals:

Recite the factual history that lead to the execution of the agreement;

Protect confidential communications from disclosure to the insurer and its lawyers;

Waive potential conflicts of interest;

Educate a judge in the coverage dispute; and

Educate a jury in the coverage dispute.

Confidential Recovery Distribution Agreement


The moment when an insurer has denied all coverage and noone knows whether any insurer will or will not provide a defense, fund a settlement, breach further duties, or pay a big bad faith judgment, is a very good time for the future potential beneficiaries of insurer payments to work out among themselves on a rational, objective basis, just what each will do in the future to earn an insurer pay-off and just exactly how they should share in the booty. If these discussions are postponed until all the work has been done, an insurer is about to pay a lot of money, and all of the hopeful recipients of that money are staring at a pot of gold, chaos is likely to ensue. Raw greed among too many lawyers and their clients is ugly to watch. If the plaintiff has a liability lawyer and a coverage lawyer and the policyholder has a liability lawyer and a coverage lawyer, and each wants 40% of everything the insurer will pay, collectively they will demand 160% of whatever the insurer is paying, leaving the client(s) – not only with no recovery whatsoever, but a debt of 60% of the insurer’s payoff – notwithstanding the fact that the clients are the ones who suffered the injury that prompted the liability dispute and the coverage dispute.[12] There should be some rational alternative. Thus, policyholders, plaintiffs, and their counsel should dispassionately discuss and execute at a very early stage a recovery distribution agreement with a view toward satisfying many goals:

Recite the factual history that lead to the execution of the agreement;

Limit the number of lawyers involved;

Fairly compensate the plaintiff for genuine loss;

Fairly compensate the policyholder for a genuine loss;

Fairly reward the plaintiff’s lawyer for successfully prosecuting the liability dispute;

Fairly compensate independent counsel for defending the liability suit;

Fairly reward coverage counsel for securing coverage;

Enunciate clearly who has what power to make decisions in the future;

Require parties to sign necessary documents in the future;

Waive potential conflicts of interest; and

Educate a judge in the coverage dispute during an in camera review.

Assignment and Covenant


As discussed elsewhere, an assignment coupled with a covenant not to execute is both a time honored mechanism by which injured policyholders and plaintiffs may protect themselves from damage occasioned by a defaulting insurer, and a source of suspicion and scorn by insurer, their lawyers and some courts. Thus, the terms and timing of an assignment and covenant can impact the outcome of a coverage dispute and should be negotiated carefully. An assignment sells the policyholder’s assignable rights to the injured plaintiff. A covenant limits or forgoes execution by the plaintiff on the policyholder’s other personal assets. The agreement cannot release the policyholder of liability, for to do so may extinguish the policyholder’s obligation to the plaintiff that gives value to the pursuit of the defaulting insurer. Some of the policyholder’s rights are personal and may be extinguished if an assignment is attempted. Thus, policyholders, plaintiffs, and their counsel should dispassionately discuss and execute the terms of an assignment with a view toward satisfying many goals:

Recite the factual history that lead to the execution of the agreement;

Consider suing the policyholder’s dependent counsel;

Decide whether and if so when and how much the policyholder must pay;

Resolve security interests filed against the policyholder’s property;

Assign assignable rights;

Grant a lien on non-assignable rights;

Promise to pursue defaulting insurers and lawyers;

Negotiate and resolve who shall be paid how much among the contracting parties (in conjunction with a recovery distribution agreement);

Clearly prioritize attorney and other liens;

Educate a judge in the coverage dispute; and

Educate a jury in the coverage dispute.

Coordination Agreement


Cooperating policyholders and plaintiffs may consider, negotiate, and execute some or all of the foregoing contracts. But notwithstanding the large number of other agreements, additional issues among the parties may need to be negotiated. Thus, policyholders, plaintiffs, and their counsel should dispassionately discuss, negotiate, and execute the terms of a coordination agreement with a view toward satisfying many goals:

Recite the factual history that lead to the execution of the agreement;

Promise to cooperate with each other;

Supercede any inconsistencies among other related agreements;

Agree to confidentiality;

Decide whether to amend the complaint and if so how;

Decide whether to file a cross-complaint and if so for what claims;

If a policy has “wasting” limits consumed by costs of defense, decide what impact such a reduction may have upon a policy limit settlement offer;

If there are multiple insurers, express how each may settle independently of other insurers;

Stipulate to streamline procedural elements of an adjudication;

Contemplate converting an assignment and covenant to an option;

Agree to prosecute a coverage action; and

Agree to prosecute a legal malpractice action.

Then Respond to the Insurer

Only after a policyholder and a plaintiff have discussed all of the foregoing documents should either of them respond to an insurer’s wrongful denial of all coverage. When asked to reconsider its denial of coverage, the insurer agree to defend under a reservation of rights. If so, it may[15] earn the right to control the defense and settlement, thereby limiting the litigants’ opportunity to reach some of all of the agreements mentioned here.

[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] See, Duty to Investigate

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

[5] See, Cumis Counsel Retainer

[6] See, Disqualifying Conflicts of Interest

[7] See, Privilege Non-Waiver Agreement

[8] Span, Inc. v. Associated Internat. Ins. Co. (1991) 227 Cal. App. 3d 463, 484; Hone v. Climatrol Industries, Inc. (1976) 59 Cal.App.3d 513, 522, fn. 4 (emphasis added.)

[9] Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 238 (citations omitted.)

[10] See, Common Interest Doctrine

[11] See, Confidential Recovery Distribution Agreement

[12] This conduct in not an imagined hypothetical, but sadly is common. See, Dilution: A Monetary Curse

[13] See, Assignment and Covenant

[14] See, Coordination Agreement

[15] No reported California opinion clearly states whether an insurer that wrongfully denies all coverage and then recants, agreeing to defend under a reservation of rights may thereafter control the defense and settlement.

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