Introduction

When a policyholder tells a liability insurance company that an injured plaintiff claims damages, technically the policyholder makes two claims: 1) a third party claim by the injured plaintiff for damages; and 2) a first party claim by the policyholder for defense and indemnification for the plaintiff’s claim. California law variously requires that an insurer deny a claim “immediately,” “promptly,” and within 40 days. However, some courts have permitted insurers to deny coverage up to two years after accepting the defense and on the eve of trial. As a result, many litigants are confused about California law regarding when a liability insurer must reserve its rights.

Nothing in the cases that allow a liability insurer to assert a late reservation rights suggests that the courts were aware of insurance regulations requiring an “immediate” reservation of rights nor did these courts discuss whether the insurer had fulfilled its duty to investigate a claim promptly.

Practice Pointer

Policyholders seeking to secure insurance coverage should promptly reject a liability insurer’s late assertion of a reservation of rights as untimely, inadequate, and unlawful, and not acquiesce meekly to whatever position the insurer takes. The discrepancy between the statutory and regulatory requirement that reservations of rights be asserted promptly and poor judicial enforcement may be the result of poor lawyering. Counsel representing policyholders should cite the legislative requirements to courts when seeking to limit the scope of a reservation of rights. One recent case found that a “cut and paste” reservation of rights was ineffective because it failed to adequately advise its policyholder of the basis upon which coverage might be denied.[1]

Regulatory Duty to Accept or Deny Coverage Within 40 Days

California insurance regulations provide that “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. [It] shall do so in writing and shall provide to the claimant [plaintiff or policyholder] a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge [and] provide an explanation of the application of the provision, condition or exclusion to the claim [being denied].”[2]

Failure to Deny Coverage Usually Waives Defenses[3]

“[I]f a liability insurer, with knowledge of a ground of noncoverage assumes and conducts the defense without [a] reservation of rights, it is thereafter precluded from setting up such ground of noncoverage. [T]he insurer’s unconditional defense constitutes a waiver and an estoppel.”[4] This rule emphasizes two elements: (1) knowledge of grounds to deny coverage; and (2) defending without a reservation. A purpose of a reservation of rights is to empower the policyholder to takes steps to protect herself from the insurer.[5] Late notice of a reservation of rights undermines this purpose.

Duty to Investigate Before Denying a Claim

A liability insurer has a duty to investigate a claim before denying it.[6] “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.”[7] An insurer that fails to conduct a timely and thorough investigation may be charged with the knowledge it would have discovered had it investigated properly. “Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact”[8] “If a ground for asserting lack of coverage under an insurance policy could have been discovered by the insurer through reasonable investigation, that ground is waived if the insurer fails to state it at the time a request for coverage is tendered by the insured; consequently, the insurer may not belatedly raise that ground if the reason upon which the insurer initially denied coverage is found to have no merit or if the insurer did not deny coverage at the outset.”[9]

A Liability Insurer Must Fulfill Its Duty to Defend Immediately

A liability insurer must defend “immediately.” “To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend.”[10]

A Liability Insurer Has a Duty to Promptly Explain Its Coverage Denial

An insurance statute prohibits and insurer from knowingly failing to acknowledge and act reasonably promptly upon communications, failing to adopt and implement reasonable standards for the prompt investigation of claims arising, failing to affirm or deny coverage within a reasonable time, not attempting to effectuate prompt, fair, and equitable settlements, failing to inform of the coverage under which payment has been made, failing to settle claims promptly, and failing to provide promptly a reasonable explanation in relation to the facts or applicable law, for the denial of a claim.[11]

Estoppel, Waiver, and Forfeiture

A liability insurer may lose the rights otherwise available to it by one of three separate legal standards: (1) when the insurer voluntarily relinquishes a known right (waiver); (2) when the policyholder detrimentally relies on a reasonable belief that the insurer would provide coverage (estoppel); and (3) when the courts prohibit an insurer from asserting a right as a matter of public policy (forfeiture).[12] Reported California opinions have limited an insurer’s reservation of rights on the basis of waiver and estoppel, but none have enforced a forfeiture.

Waiver and estoppel must be plead.[13] “Waiver refers to the act, or the consequences of the act, of one side. Waiver is the intentional relinquishment of a known right after full knowledge of the facts and depends upon the intention of one party only. Waiver does not require any act or conduct by the other party. Thus, [t]he pivotal issue in a claim of waiver is the intention of the party who allegedly relinquished the known legal right. [E]stoppel is applicable where the conduct of one side has induced the other to take such a position that it would be injured if the first should be permitted to repudiate its acts.”[14]

Waiver rarely creates a viable basis to defeat a reservation of rights. “In virtually every case discussing the waiver issue, the courts have found that there was no waiver if the insurer made a reservation of rights at any time, even if years after the defense was undertaken.”[15] “[T]he courts have repeatedly held that an insurer does not waive or relinquish any coverage defenses it fails to assert at the time of its acceptance of a tender of defense, even when it does not make any express and full reservation of rights for a substantial period of time after the defense has been accepted.”[16]

Inconsistent Judicial Enforcement

Notwithstanding that an insurer must defend “immediately”, must deny a claim within 40 days, and explain its denial “promptly”, several courts have allowed insurers to assert a reservation of rights after significant delays. In one case, the court found no waiver of the insurer’s right to deny coverage after a delay of 2 years before first asserting a reservation of rights.[17] In another case, the court found that an insurer did not waive coverage defense despite a nine-month delay in sending a reservation of rights letter after acceptance of defense.[18] In yet another, the court found that an insurer did not waive coverage defenses despite a fifteen-month delay in reserving its rights.[19] However, in one case, the court found that the insurer was estopped to deny coverage after a delay of 2 1/2 years, which was only three weeks before the trial. This court identified detriment to the policyholder because it had a right to independent counsel, who had no time to prepare for trial.[20]

^[1] In Harleysville Group Insurance v. Heritage Communities, Inc. Opinion No. 27698 (S.C. Jan. 11, 2017), the court stated: “It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage. [G]eneric denials of coverage coupled with furnishing the insured with a verbatim recitation of all or most of the policy provisions (through a cut-and-paste method) is not sufficient. Although a reservation of rights may protect an insurers interests, it also is intended to benefit the policyholder by alerting the policyholder to the potential that coverage may be inapplicable for a loss; that conflicts may exist as between the policyholder and the insurer; and, that the policyholder should take steps necessary to protect its potentially uninsured interests. A reservation of rights letter must give fair notice to the insured that the insurer intends to assert defenses to coverage or to pursue a declaratory relief action at a later date. Thus, [t]he general rule precluding an insurer from raising new grounds contesting coverage in a subsequent action is justified in this context.” (citations, quotation marks, and ellipses omitted.)

^[2] Code of Regs. § 2695.7(b) (ellipses omitted).

^[3] See Insurer Silence May Concede Full Coverage, and Estoppel, Waiver, and Forfeiture.

^[4] Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754 (ellipses omitted).

^[5] “Through reservation, the insurer gives the insured an opportunity to take any steps that it may deem reasonable or necessary in response.” (Buss, supra, 16 Cal.4th at 61 fn.27 (ellipsis omitted).)

^[6] See Duty to Investigate.

^[7] Alta Cal. Regional Center v. Fremont Indemnity Co. (1994) 25 Cal.App.4th 455, 459 (Alta).

^[8] Civ. Code § 19.

^[9] Alta, supra, 25 Cal.App.4th at 459.

^[10] Buss v. Superior Court (1997) 16 Cal.4th 35, 48 (Buss); Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.

^[11] Ins. Code § 790.03(h)(2-5,9,12,13).

^[12] See, Estoppel, Waiver, and Forfeiture.

^[13] The policyholder “cannot escape the consequences of failing to plead the affirmative defenses of waiver and estoppel. We conclude, therefore, that [the insurer] is not estopped from denying coverage.” (Insurance Co. of the West v. Haralambos Beverage Co. (1987) 195 Cal. App. 3d 1308, 1322 (ellipsis omitted).)

^[14] Old Republic Ins. Co. v. FSR Brokerage (2000) 80 Cal. App. 4th 666, 678 (citations and quotation marks omitted).

^[15] Garamendi v. Golden Eagle Ins. Co. (2003) 113 Cal App 4th 861, 889 (ellipses omitted.)

^[16] Ringler Assocs. Inc. v. Maryland Cas. Co. (2000) 80 Cal.App.4th 1165, 1189 (Ringler).

^[17] In Ringler, other insurers provided a defense and contributed to settle the claims. Maryland Casualty also agreed to defend and soon “commenced investigation of the claims, but when the adjuster sought specifics of the claims, the policyholder’s counsel “told the claims adjuster to ‘stop talking with’ the plaintiffs’ attorney about the nature and extent of the allegations in the case.” The court found that Maryland Casualty’s assertion of non-coverage was valid, and that when the insurer asserted late reservations of rights, “[n]either [the policyholder] nor its counsel objected to or contested this reservation of rights at that time.” (Id. at 1174.)

^[18] In American Motorists Ins. Co. v. Allied-Sysco Food Services, Inc. (1993) 19 Cal.App.4th 1342, 1350 an insurer promptly agreed to defend under a reservation of rights under certain primary policies, but did not specifically reserve its rights under excess policies. The court rejected the policyholder’ “argument that [the insurer’s] failure to send a reservation-of- rights letter regarding the excess policies suggests it believed it owed [the policyholder] coverage . . . [The insurer’s] silence on this matter cannot be held against it”

^[19] In National Union Fire Ins. Co. v. Siliconix, Inc. (N.D.Cal.1989) 726 F.Supp. 264, 270, the insurer indicated that it “was ‘investigating this claim under a reservation of rights’ and that it had some “coverage questions” about two months after accepting the defense, but it consented to an paid for the policyholder’s defense through independent counsel. However, the insurer did not “fully reserve” its right for 15 months. Despite the delay, the court found no intentional relinquishment of a known right to support waiver and no prejudice to policyholder, whose independent counsel knew of the coverage questions from a early date.

^[20] Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810, 1839.