Why would a policyholder, a plaintiff, or their counsel want to ask questions of a policyholder’s liability insurer or its lawyers when the answers are already known and in all likelihood, neither the insurer nor its lawyers will respond to even one single question? Because they work. It doesn’t matter that the questioner knows why.
By analogy, chemists are Pfizer developed a new drug, which during human testing produced a side effect on men that was neither expected nor intended, but was very welcome and extremely valuable. The new drug was named Viagra. Questionnaires are like Viagra – they produce results, even though the user has no idea how or why.
There are two primary goals of using the Questionnaires available here: 1) clarity of the insurer’s coverage position; and 2) encourage prompt settlement of all disputes. This Questionnaire was intended to achieve the first goal but unexpectedly has often achieved the second goal, which turns out to be far more valuable than the first.
Three Possible Responses and Their Consequences
A liability insurer that has reserved its rights to later deny coverage to its policyholder and to the plaintiff which received this Coverage Questionnaire will be forced to among three very public decisions: 1) answer truthfully; 2) lie; or 3) hide.
The Questionnaire expressly withholds consent and authority for ethically conflicted dependent counsel to represent the policyholder: “I do not give my informed written consent nor my authorization for dependent counsel to represent me.” An ethical lawyer must inform a policyholder “of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences” of representing the policyholder when the lawyer has a “financial relationship with another entity [such as an insurer that] would be affected substantially by resolution of the matter” “in which the interests of the [insurer and the policyholder] potentially conflict and “shall not accept compensation for representing a client from one other than the client [such as an insurer] unless . . . [the lawyer] obtains the client’s informed written consent.” (Rule 3-310(A)(B)(C)(F) (emphasis added, ellipses omitted).) “Corruptly or wilfully and without authority appearing as attorney for a party to an action or proceeding constitutes a cause for disbarment or suspension.” (Bus. & Prof. Code § 6104 (emphasis added).)
- Answer Truthfully:
Liability insurers are required to respond to inquiry: “Upon receiving any communication from a [policyholder] that reasonably suggests that a response is expected, every [insurer] shall immediately, but in no event more than fifteen (15) calendar days after receipt of that communication, furnish the [policyholder] with a complete response based on the facts as then known by the [insurer].” (Cal. Code. Regs. § 2695.5(b) (ellipses omitted).)
Truthful responses will inform the policyholder whether the insurer accepts full coverage, denies all coverage, or a little bit of both. “Upon receiving proof of claim, every insurer shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part. Where an insurer denies a claim, in whole or in part, it shall do so in writing and shall provide to the [policyholder] a statement listing all bases for such denial and the factual and legal bases for each reason given for such denial which is then within the insurer’s knowledge. Where an insurer’s denial is based on a specific policy provision, the written denial shall include reference thereto and provide an explanation of the application of the provision to the claim.” (Cal. Code Regs. § 2695.7(b)(1) (ellipses omitted).)
Clarity of a reserving insurer’s coverage position is critical for a policyholder to be able to protect herself from a reserving insurer. “Through reservation, the insurer gives the insured an opportunity to take any steps that it may deem reasonable or necessary in response.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61, fn. 27 (ellipsis omitted).)
Truthful responses may result in the insurer’s waiver of some coverage defenses and are also likely to challenge dependent counsel to properly analyze potential conflicts of interest between the reserving insurer and the policyholder. (See, Ethical Compliance Questionnaire.)
The foregoing regulation, common courtesy, and exposure to bad faith liability should deter any false response from any insurer.
Any false written response from a reserving insurer will made a record of admissible evidence to support claims of waiver, bad faith, and punitive damages by the policyholder against the insurer.
Despite the regulatory obligation to respond truthfully and completely to this Questionnaire, some insurer may opt to simply ignore the Questionnaire or refuse to answer. Should this happe, the policyholder may telephone the claim agent, orally read each question, complete the Questionnaire by check the appropriate boxes, and send the completed Questionnaire to the insurer, inviting it to correct any perceived errors. If the claim agent refuses to respond by telephone, the Questionnaire and the insurer’s refusal to respond may be used as a deposition outline in the event of coverage litigation. Finally, the policyholder may complaint to this regulatory violation to the Consumer Communications Bureau, California Department of Insurance, 300 South Spring Street, South Tower Los Angeles, CA 90013, (800) 927-4357, whereupon the department of insurance should commence an investigation.
Satisfy Pleading Prerequisite:
Sending this Coverage Questionnaire, obtaining a satisfactory response, or confirming the insurer’s refusal to respond may be necessary prerequisites to filing suit. In one notable opinion, a court sustained without leave to amend a policyholder’s coverage complaint that lacked factual specific allegations. “We conclude the facts alleged by [the policyholder] do not support its claim of a conflict of interest with [the insurer]. . . . [The policyholder] argues . . . without giving any explanation about how [and] offers a host of allegations about how [the insurer] will control the litigation without describing how this is occurring. . . . [The policyholder] is alleging conclusions without substance, not facts. As Gertrude Stein famously said about Oakland, there is no there there.” (Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 31-32.)
Possible Settlement and Resolution of All Disputes
Most plaintiffs and policyholder simply want to resolve their liability dispute. Neither usually want to complicate the liability dispute with a related coverage contest nor an ethical imbroglio with potentially conflicted dependent counsel. Some liability insurers want to delay resolution of a liability dispute to earn income on retained money so that they may pay settlements years in the future with 50-60 cent dollars. Some dependent counsel want to prolong resolution of a liability dispute to continue earning fees.
But a policyholder that sends a Coverage Questionnaire may incite a reserving insurer to promptly settle all disputes.
Three Things Reserving Insurers Fear:
Liability insurers are professional litigators. All day, every day, liability insurer claim agents manage hundreds of thousands of civil claims and lawsuits, employing the mathematics of probability and the law of large numbers on the claims side of the house, just as they do in the underwriting department. These professionals know how to maximize profits by evaluating liability and damages on a case by case basis and accepting the risk that a failure to settle may occasionally result in a large loss, but may often result in a last minute settlement on favorable terms.
But while claims agents a confident regarding the management of litigation within familiar parameters, insurance professionals are fundamentally conservative, cautious soles who fear three things: 1) bad faith liability; 2) the unknown; and 3) making bad law.
- Some liability insurers seem to manage the risk of bad faith liability by systematically failing to pay policy benefits unreasonably, waiting to see who protests effectively, and then shifting claims management of problematic claims to more sophisticated claims personnel, usually resulting in favorable negotiated settlements that avoid bad faith litigation.
- Liability insurers’ claims departments tend to have a hierarchical structure in which simple, predictable claims are handled by low level personnel, while more and more complicated claims are reassigned up the chain of command to the ultimate authority: Home Office Claims. Claims that fall outside the norm tend to attract more sophisticated scrutiny and are more likely to be settled promptly than are mundane claims. Thus, sending a Coverage Questionnaire is very likely to garner attention at the highest levels of claims management.
- Making bad law is the kind of loss that keeps on losing and is exponentially worse for liability insurers than losing a gigantic verdict. Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 shook the liability insurance industry when it invalidated the then widely held belief that the two primary promises of a liability policy were triggered by the same legal standard. Gray held that the duty to defend is broader than the duty to indemnify and is triggered whenever a claim is asserted that is “potentially” covered for indemnity. Gray also launched the notion of issuing a reservation of rights and held that a conflict of interest created by an insurer’s denial of coverage does not excuse the insurer of its duty to defend. “[W]e find no merit that our ruling will require defense of an action in which the interests of insurer and insured are so opposed as to nullify the insurer’s fulfillment of its duty of defense. . . . [I]f the insurer adequately reserves its right to assert the noncoverage defense later, it will not be bound by the judgment. If the injured party prevails, the insurer can raise the noncoverage defense previously reserved.” (Id. at 278-79 (ellipses omitted).) The holding of Gray has been adopted uniformly across the nation and has required liability insurers to pay for the defense of claims that previously would not have been defended, costing perhaps billions of dollars. But Gray left unanswered the question of by whom a policyholder’s defense should be conducted when an insurer reserved its rights. Thus, Gray established bad law for the insurance industry.
Eighteen years later, the liability insurance industry was again rocked in San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 which issued a two part holding that (1) “the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both. (And 2), in the absence of such consent, the insurer must pay the reasonable cost for hiring independent counsel by the insured. The insurer may not compel the insured to surrender control of the litigation.” (Id. at 375 (citations and ellipses omitted).) The holding of Cumis is slowly taking hold in much of the nation. (See, 50 State Survey: Do Conflicts of Interest Arising from a Liability Insurer’s Reservation of Rights Require Payment of Independent Counsel?) Again, the Cumis rule established bad law that may cost the liability insurance industry billions of dollars. While Cumis is widely considered to be a “landmark” case, a close reading reveals that it actually makes no new law: the opinion simply surveys preexisting law which is dispensed in a Reader’s Digest form that is easily understood by all who read it, thus gaining notoriety. But Cumis left unanswered the question of what caliber of conflicts of interest disqualify dependent counsel from ethically representing
In the thirty-three years since Cumis was published, California courts have answered the question left unexplored in the Cumis opinion: What is the applicable legal standard by which dependent counsel are disqualified from ethically representing a policyholder by conflicts of interest created by a liability insurer’s reservation of rights? A dozen of so reported California opinions over the past three decades have consistently answered this question: “[W]hen the reservation of rights is based on coverage disputes that have nothing to do with the issues being litigated in the underlying action there is no conflict of interest, and no duty to appoint independent counsel.” (Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1470 (citation omitted); see, Cumis Attorney Disqualification Test – When Does the Right to Independent Counsel Vest? at DutytoDefend.com.) However, there is no Reader’s Digest version of this well established Cumis attorney disqualification test and therefore little popular recognition of the test. Liability insurer fear making bad law that might give this test notoriety. Accordingly, litigated cases that threaten to give this test notoriety tend to get settled quickly for substantial sums.