Plead Into Coverage Properly



“The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.”[1] Thus, a plaintiff is empowered to influence whether a liability insurer owes a duty to defend or indemnify its policyholder. A plaintiff may ethically and legally plead into or out of coverage. While there are limits to what a plaintiff may properly plead, “the fundamental interest which the [law] is designed to protect [is] the interest in freedom from unjustifiable and unreasonable litigation.”[2] Lawyers may not plead claims that are “totally and completely without merit.” Nonetheless, the courts caution that only claims that they “believe are legally tenable” should be pled. Witnesses may not commit perjury and attorneys may not suborn perjury.[3]

A Plaintiff May Influence Coverage

“[T]he insured is entitled to a defense if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy.”[4] “[F]acts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy. This is so because current pleading rules liberally allow amendment.”[5] “[T]he insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. [A] bare potential or possibility of coverage [is] the trigger of a defense duty.[6] “[T]he duty may exist even where coverage is in doubt and ultimately does not develop.”[7] “Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor.”[8] Significant public policy considerations are served by encouraging “insurers to defend and settle cases for which insurance coverage is uncertain. In so doing, it transfers from the injured party to the insurer the risk that the insured may not be financially able to pay the injured party’s damages.”[9]

A Plaintiff’s Influence on Coverage Is Limited

California courts have enunciated that “the third party plaintiff cannot be the arbiter of coverage.”[10] The breadth of the duty to defend “is no license to ‘plead around’” bars to coverage. Usually “the court in the third party suit does not adjudicate the issue of coverage. [M]odern procedural rules focus on whether, on a given set of facts, the plaintiff, regardless of the theory, may recover. Thus the question of [coverage] does not normally formulate an issue which is resolved in that litigation.”[11]

However, issues of fact or law that are decided in a liability dispute may also influence the outcome of a coverage dispute by the doctrine of collateral estoppel. “An insurer that has been notified of an action and refuses to defend on the ground that the alleged claim is not within the policy coverage is bound by a judgment in the action as to all material findings of fact essential to the judgment of liability of the insured. The insurer is not bound, however, as to issues not necessarily adjudicated in the prior action and can still present any defenses not inconsistent with the judgment against the insured.”[12] “[T]he insured may be collaterally estopped from relitigating any adverse factual findings in the third party action, notwithstanding that any fact found in the insured’s favor could not be used to its advantage.”[13] “We reiterate the rule that an insurer that timely and adequately reserves its right to deny coverage and that does not subsequently intentionally waive its reservation of rights is not collaterally estopped by a judgment in favor of a third party against its insured.”[14]

Permissible Pleading Is Limited

The right of a plaintiff to plead claims has limits. “In the context of [a] civil suit, it [is a] legally tenable claims for relief that the law seeks to protect.”[15] No California reported opinion litigates and holds whether it is proper for a plaintiff to intentionally plead into or out of coverage. Instead, courts tend to decide cases on the law as applied to the facts as they are presented by the litigants. Still, statutes and case law limit the scope of proper pleading.

“Every trial court may order a party, the party’s attorney, or both to pay any reasonable expenses, incurred by another party as a result of bad-faith [filing and service of a complaint] that are [totally and completely without merit].”[16] “By presenting to the court a pleading, an attorney is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances: (1) It is not being presented primarily for an improper purpose. (2) The claims are warranted by existing law or by a nonfrivolous argument for the modification of existing law. (3) The allegations and other factual contentions have evidentiary support.”[17]

An element of malicious prosecution is that “the prior action was brought without probable cause.”[18] “[W]hen the facts known by the attorney are not in dispute, the probable cause issue is properly determined by the trial court under an objective standard; it does not include a determination whether the attorney subjectively believed that the prior claim was legally tenable.”[19] “[T]he adequacy of an attorney’s research is not relevant to the probable cause determination.”[20] “[T]the probable cause element is always properly determined by the court.”[21]

Although an objective standard applies to probable cause, the Court cautioned that “[i]nasmuch as an attorney who does not have a good faith belief in the tenability of an action will normally assume that a court is likely to come to the same conclusion, the [law] will continue to deter attorneys from filing actions which they do not believe are legally tenable.”[22]

“[A]n appeal could properly be found frivolous only if any reasonable attorney would agree that the appeal is totally and completely without merit. [A]ny definition of frivolousness must be read so as to avoid a serious chilling effect on the assertion of litigants’ rights. . . . Counsel and their clients have a right to present issues that are arguably correct, even if it is extremely unlikely that they will win.”[23]

The Lesson of Horace Mann

In J.C. Penney the Supreme Court concluded that “there is no coverage [for child molestation] as a matter of law.”[24] Shortly thereafter, in Horace Mann,[25] the high Court considered a virtually identical child molestation case, but in which a plaintiff had attempted to “plead around” the bar of J.C. Penney by also alleging certain “parasexual” misconduct.

The insurer argued that because the policyholder had pled nolo contendere to one count of child molestation that was not covered as a matter of law, the policyholder’s “other alleged misconduct was directly related to the uninsurable molestation [and] therefore [the insurer] has no duty to defend or indemnify [the policyholder] against the other allegations of misconduct. ¶ The flaw in [the insurer]’s reasoning is its unsupported assumption that the other alleged misconduct necessarily was part of the molestation. Indeed, the evidence supported the potential for liability apparent on the face of the complaint and, with it, [the insurer]’s duty to defend.”[26] “[W]e cannot say that such conduct does not raise a possibility of a duty to indemnify under the policy of insurance. ¶ If the parties to a declaratory relief action [have a] dispute, then factual issues exist precluding summary judgment in the insurer’s favor. Indeed, the duty to defend is then established.”[27]

Notwithstanding the Court’s holding, it cautioned that “[o]ur decision is no license to ‘plead around’ J.C. Penney. We do not sanction relabelling child molestation as negligence in order to secure insurance coverage for the plaintiff’s injuries. ¶ Some may consider the result in this case to be unfortunate. But courts cannot allow legal reasoning to yield to emotionalism when determining the extent of an insurance carrier’s defense duty.”[28]

The lesson of Horace Mann is that California courts will tolerate plaintiffs intentionally pleading into or out of coverage because of a strong public policy that citizens come to court to resolve disputes, subject to the limit that no one should assert claims that are “totally and completely without merit.” But despite this relaxed limit, attorneys should not assert claims that they believe are legally untenable.

The Lesson of Swift

In Swift, a trade disparagement case, the Supreme Court clarified “the principles governing the scope of a commercial general liability insurer’s duty to defend an insured against a claim alleging disparagement.”[29] “We hold that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff’s product or business and (2) clearly derogates that product or business. Each requirement must be satisfied by express mention or by clear implication.”[30] The Court concluded that “because the facts and pleadings were not sufficient to support a possible claim of disparagement, there was no duty to defend under the Hartford policy.”[31] The lesson of Swift is that a complaint must allege facts sufficient to support a substantive claim for relief in order to trigger an insurer’s duty to defend that claim. This concept implies that an insurer does not have to defend an unmeritorious claim and may represent a disturbing departure from the notion that an “insurer may have a duty to defend even when it ultimately has no obligation to indemnify, either because no damages are awarded in the underlying action against the insured, or because the actual judgment is for damages not covered under the policy.”[32]

Practice Pointers

Plaintiff’s Perspective

A plaintiff’s lawyer may choose to plead into a YES, a NO, or a MAYBE.[33] For example, in a fender bender, a strategic choice may arise whether a plaintiff should plead: 1) negligence only (clearly covered); 2) assault and battery only (clearly not covered)[34]; 3) both (drawing a reservation of rights)[35]; or 4) seeking punitive damages (with no Cumis conflict[36], but claiming clearly non-covered damages.)[37]

Pleading into YES is likely to yield an insurer’s concession of full coverage with the benefit of assured collection but the detriment of a potentially vigorous or lengthy defense effort.[38] Pleading into NO is likely to yield an insurer’s denial of all coverage with the possible benefit of an underfunded and lackluster defense effort but the possible detriment of a no reliable source of recovery. Pleading into MAYBE is likely to yield an insurer’s reservation of rights with all of its complications. In addition to the variables of a vigorous or lack luster defense effort, the prospects of cooperating with the policyholder[39] and receiving an assignment of insurance rights[40] from an abused policyholder deserve careful consideration.

Policyholder’s Perspective

The policyholder may seek to urge the plaintiff to plead a NO into MAYBE, or a MAYBE into a YES. If the defendant is impecunious, perhaps the plaintiff can be dissuaded from pursuing any non-covered claims and be persuaded to make a prompt policy limit settlement offer.[41] The very existence of a coverage dispute may create incentives for the policyholder to confess covered wrongdoing.[42] “The insured, of course, would also seek a verdict holding him not liable but, if found liable, would attempt to obtain a ruling that such liability emanated from . . . conduct within his insurance coverage.”[43]

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

[2] Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 882 (Sheldon Appel) (quotation marks omitted.)

[4] Montrose I, supra, 6 Cal.4th at 299.

[5] Id. at 296.

[6] Id. at 300.

[7] Id. at 295 (ellipsis omitted).

[8] Montrose I, supra, 6 Cal.4th at 299-300.

[9] Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 503.

[10] Montrose I, supra, 6 Cal.4th at 296.

[11] Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 279 including fn.18 (Gray) (ellipses omitted).

[12] Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 561-562; Garamendi v. Golden Eagle Ins. Co. (2004) 116 Cal.App.4th 694, 717-18 (ellipsis omitted).

[13] Montrose Chem. Corp. of Calif. v. Superior Court (1994) 25 Cal.App.4th 902, 910.

[14] J.C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1018 (J.C. Penney).

[15] Sheldon Appel, supra, 47 Cal.3d 885 (ellipsis omitted.)

[16] Code Civ. Proc. § 128.5

[17] Code Civ. Proc. § 128.7(b).

[18] Sheldon Appel, supra, 47 Cal.3d at 871 (ellipsis omitted.)

[19] Id. at 881 (ellipses omitted.)

[20] Id. at 883.

[21] Id. at 884 (ellipsis omitted.)

[22] Id. at 881-82.

[23] Id. at 885 (ellipses and quotation marks omitted.)

[24] J.C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1019.

[25] Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076.

[26] Id. at 1082 (ellipses omitted).

[27] Id. at 1086 (ellipses omitted).

[28] Id. at 1086-87 (ellipses omitted).

[29] Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 284.

[30] Ibid.

[31] Id. at 299.

[32] Id. at 287.

[34] See, Gray, supra, 65 Cal.2d 263.

[35] “[I]n a ‘mixed’ action, in which some of the claims are at least potentially covered and the others are not, the insurer has a duty to defend. [W]hen a complaint states different causes of action against the insured, one of which is within coverage and others of which may not be, the insurer is bound to defend.’” (Buss v. Superior Court (1997) 16 Cal.4th 35, 47-48 (ellipses omitted).)

[36] “No conflict of interest shall be deemed to exist as to allegations of punitive damages.” (Civ. Code § 2860(b).

[37] See, Peterson v. Superior Court (1982) 31 Cal. 3d 147.

[41] Policy Limit Settlement Offer Properly – PP" href="">How to Make a Policy Limit Settlement Offer Properly

[43] Gray, supra, 65 Cal.2d at 279.

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