A liability insurer that reserves rights to deny coverage and creates a disqualifying conflict of interest must provide to its policyholder a vigorous defense. “In actions in which the insurer lacks an economic motive for a vigorous defense of the insured, or in which the insurer and insured have conflicting interests, the insurer may not compel the insured to surrender control of the litigation.” The insurer must defend immediately, defend entirely, and adequately fund the defense. An insurer that concedes full coverage may conduct a diminished defense because only the insurer’s assets are at risk. But a conflicted insurer that challenges coverage may not.
An Insurer Must Defend Immediately
The Supreme Court has made clear that a liability “insurer must defend immediately.” The meaning of the word “immediately” set forth in this stringent requirement is specified by insurance regulations. Insurance is a regulated industry subject to statutory and regulatory standards of conduct.
The submission to a liability insurer of an invoice for defense fees and costs charging for legal services performed by independent counsel constitutes a first party claim on behalf of the policyholder to the insurer for policy benefits to discharge the insurer’s express promise to defend. Unless independent counsel’s invoice is rejected in its entirety, an insurer must pay it as a claim for policy benefits within 30 days. If a liability insurer denies any portion of independent counsel’s invoice, it must immediately issue a statement detailing all factual and legal bases for denying any portion of a claim. The insurer must thoroughly investigate each invoice for defense costs and clearly document the claim file. No insurer may offer to pay an unreasonably low sum on any invoice.
An Insurer Must Defend Entirely
“‘An insurer contracts to pay the entire cost of defending … claim[s]’ that are at least potentially covered.” “To defend immediately, it must defend entirely. It cannot parse the claims, dividing those that are at least potentially covered from those that are not.”
An Insurer Must Fund the Defense
Because an insurer is not licensed to practice law, it cannot discharge its promise to defend by itself. Instead, it must delegate the task of defending its policyholder to an attorney. The insurer’s duty requires it “to provide counsel with adequate funds to conduct the defense of the suit.”
Policyholders Have a Reasonable Expectation of a Vigorous Defense
Just as a health insurance policyholder is entitled to an operation that the insurer can afford, a liability policyholder has bargained for and is entitled to a defense that the insurer can afford. A liability policyholder’s right to a defense is not limited to what the policyholder can afford. The insurer’s superior expertise and resources to mount and fund a defense is a primary reason why many policyholder’s purchase liability insurance. Most “Mom and Pop” defendants are sued only once in a lifetime. When the insurer denies coverage either outright or by a reservation of rights, the policyholder’s assets remain at risk to lose what it took a lifetime to build. The policyholder has a reasonable expectation of a vigorous defense effort because the policyholder often risks bankruptcy. Policyholders at risk are entitled to mount a vigorous defense to try to minimize their exposure for a potentially non-covered judgment or settlement.
The Role of the Law of Large Numbers in Claims Management
The business of insurance is based on the law of large numbers. The law of large numbers is a theory of statistical probability that states that the larger the number of events, the more accurate will be the prediction of the likelihood of the outcome of such events. Underwriters implement the law of large numbers to render reliable events that are entirely random on an individual basis, such as mortality tables.
The law of large numbers to equally applicable to claims management. Because liability insurers defend millions of cases annually, they may statistically determine whether the money saved by restricting the defense in a large number of cases justifies an occasional settlement or verdict that is larger than it would have been by paying for a more vigorous defense. For example, insurers regularly employ outside counsel guidelines by which insurers limit all aspects of litigation including discovery, legal research, and staffing by dependent counsel.
The Impermissible Diminished Defense
Insurers may not restrict the vigor of their policyholder’s defense whenever the policyholder remains at risk. “Under no circumstances can such guidelines be permitted to impede the attorney’s own professional judgment about how best to competently represent the insured. If the attorney’s representation is to be limited in any way that unreasonably interferes with the defense, it is the insured, not the insurer, who should make that decision.”
 “A disqualifying conflict exists if insurance counsel had . . . incentive to attach liability to [the insured].” (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131; “Conflict of interest between jointly represented clients occurs whenever their common lawyer’s representation of the one is rendered less effective by reason of his representation of the other.” (Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706, 713); See, Article: Disqualifying Conflicts of Interest.
 Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 648 (emphasis added).
 “[T]he insurer has a prophylactic duty to defend. . . . That is because to defend meaningfully, it must defend immediately, and to defend immediately, it must defend entirely.” (Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 60 (Aerojet).)
 Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 882 (Merritt).
 Buss v. Superior Court (1997) 16 Cal.4th 35, 48 (Buss); Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.
 “Upon acceptance of the claim in whole or in part . . . every insurer . . . shall immediately, but in no event more than thirty (30) calendar days later, tender payment.” (Cal. Code Reg. §2695.7(h).)
 “[E]very insurer . . . shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim. . . . Where an insurer denies [a claim], it shall do so in writing and shall provide to the claimant 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.” (Cal. Code Reg. §2695.7(b).)
 “Every insurer shall conduct and diligently pursue a thorough, fair and objective investigation.”(Reg. §2695.7(d).)
 “[E]very insurer . . . shall clearly documented in the claim file” (Cal. Code Reg. §2695.7(b).)
 “No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low.” (See, Reg. §2695.7(g).)
 Aerojet, supra, 17 Cal.4th at 59.
 Buss, supra, 16 Cal.4th at 49.
 Merritt, supra, 34 Cal.App.3d at 882.
 Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1009, fn.9.