USE NOTE: The following downloadable Trial Brief is a comprehensive overview of the law of the duty to defend.

&IndependentAtty&, Bar #

&BLANK&

Attorneys for Plaintiff,

&Client&

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF LOS ANGELES

&Client&

Plaintiff,

vs.

&InsCo&, &DependentCounsel& AND DOES 1-250,

Defendants.

CASE NO.

PLAINTIFF'S TRIAL BRIEF

A COMPREHENSIVE OVERVIEW OF THE LAW OF THE DUTY TO DEFEND

TABLE OF CONTENTS

INTRODUCTION

SUMMARY OF EVIDENCE

LEGAL DISCUSSION

I.	The Nature of Liability Insurance

1.	Insurance Is Regulated

2.	Liability Insurers Make Two Primary Contractual Obligations

3.	Liability Insurers Have Statutory and Regulatory Obligations

A.	Adopt and Implement Standards

B.	Communication

C.	Cooperate and Assist

D.	Accept or Deny Claims

E.	Try to Settle

F.	Maintain Records

G.	Train Personnel

4.	Liability Insurers Have Implied Common Law Obligations

A.	Duty of Good Faith and Fair Dealing

B.	Duty to Investigate

C.	Duty to Evaluate Claims Objectively

D.	Duty To Not Coerce Compromises

E.	Duty to Equally Protect Policyholder's Interests

F.	Duty to Process Claims Promptly

G.	Duty to Pay Claims As They Become Clear

II.	The Nature of the Duty to Defend

1.	The Insurer Must Provide Ethical Counsel to Discharge the Duty to Defend

2.	The Insurer Must Not Prejudice The Policyholder's Defense

3.	The Duty to Defend Is Broad By Its Nature

4.	The Duty to Defend Arises When Suit Is Filed

5.	The Duty to Defend Must Be Discharged Immediately

6.	The Legal Test to Determine Whether the Insurer Has a Duty to Defend

7.	Each Of Multiple Insurers Must Fulfill the Duty to Defend

III.	The Nature of a Reservation of Rights

1.	A Reservation of Rights Avoids Waiver Of Disputed Coverage

2.	Insurers Frequently Reserve Rights In Mixed Actions

3.	A Reservation of Rights May Be Limited By Express Waiver

4.	A Reservation of Rights Always Creates Some Conflicts of Interest

5.	No Disqualifying Conflict Arises If Reserved Coverage Issues Are

Limited To Those That Have Nothing To Do With the Liability Suit

6.	Disqualifying Conflicts Arise If Any Reserved

Coverage Issue Is Related to the Liability Suit

7.	The Requirements to Seek Settlement Reimbursement

8.	The Requirements to Seek Defense Reimbursement

IV.	The Nature of the Attorney Client Relationship

1.	All Lawyers Owe Their Clients Four Principle Duties

A.	Duty of Undivided Loyalty

B.	Duty of Full Disclosure

(1) Duty to Initiate Disclosure

(2) Duty to Respond to Inquiry

(3) Duty to Communicate Settlement Opportunities

(4) Duty of Candor

C.	Duty of Confidentiality

D.	Duty of Competent Representation

2.	Dependent Counsel Jointly Represents the Insurer and the Policyholder

3.	Dependent Counsel Must Analyze Reservations of Rights

4.	Dependent Counsel Must Make Written Disclosure of

Potential Conflicts Created By Reservations of Rights

5.	Dependent Counsel Must Obtain Informed Written Consent to

Jointly Represent the Policyholder and The Reserving Insurer

6.	The Ethical Duties of Independent Counsel

V.	Liability Insurers Have Six Substantive Decisions

1.	Should the Liability Insurer Provide a Defense?

2.	Should the Liability Insurer Reserve Its Rights?

3.	Should the Liability Insurer Provide Independent Counsel?

4.	Should the Liability Insurer Sue to Dispute

Coverage While Liability Suit Is Pending?

5.	Should the Liability Insurer Seek Reimbursement of Defense Costs

6.	Should the Liability Insurer Seek Reimbursement of Settlement Costs

VI.	Civil Code §2860 Has Limited Application

VII.	Plaintiffs May Recover Damages From &InsCo&

For Breach Of The Duty to Defend the Action

1.	Cost of Defense

2.	Cost of Settlement

3.	Emotional Distress

4.	Cost of Mitigation

5.	Prejudgment Interest

VIII. Plaintiffs May Recover Damages From &InsCo& For Breach Of

The Duty of Good Faith and Fair Dealing

1.	Damage to Business

2.	Brandt Fees

3.	Punitive Damages

TABLE OF AUTHORITIES

FEDERAL CASES

United States v. Stepney

(2003 N.D. Cal.) 246 F.Supp.2d 1069

STATE CASES

Anderson v. Eaton

(1930) 211 Cal. 113

Assurance Co. of America v. Haven

(1995) 32 Cal.App.4th 78

Austero v. National Cas. Co. of Detroit, Mich.

(1978) 84 Cal.App.3d 1

B & E Convalescent Ctr. v. State Comp. Ins. Fund

(1992) 8 Cal.App.4th 78

Beck v. State Farm Mut. Auto. Ins. Co.

(1976) 54 Cal.App.3d 347

Blue Ridge Ins. Co. v. Jacobsen

(2001) 25 Cal.4th 489

Brandt v. Superior Court

(1985) 37 Cal.3d 813

Brehm v. 21st Century Ins. Co.

(2008) 166 Cal.App.4th 1225

Buss v. Superior Court

(1997) 16 Cal.4th 35

California Ins. Guar. Ass'n v. Wood

(1990) 217 Cal.App.3d 944

California Shoppers, Inc. v. Royal Globe Ins. Co.

(1985) 175 Cal.App.3d 1

Cates Const., Inc. v. Talbot Partners

(1999) 21 Cal.4th 28

Charnay v. Cobert

(2006) 145 Cal.App.3d 170

Chesapeake Industries, Inc. v. Togova Enterprises, Inc.

(1983) 149 Cal.App.3d 901

Dynamic Concepts, Inc. v. Truck Ins. Exchange

(1998) 61 Cal.App.4th 999

Egan v. Mutual of Omaha Ins. Co.

(1979) 24 Cal.3d 809

Executive Aviation, Inc. v. National Ins. Underwriters

(1971) 16 Cal.App.3d 799

Flatt v. Superior Court

(1994) 9 Cal.4th 27

Fleming v. Safeco Ins. Co. of America, Inc.

(1984) 160 Cal.App.3d 31

Foley v. Interactive Data Corp.

(1988) 47 Cal.3d 654

Gafcon, Inc. v. Ponsor & Associates

(2002) 98 Cal.App.4th 1388

George F. Hillenbrand, Inc. v. Insurance Co. of North America

(2002) 104 Cal.App.4th 784

Golden Eagle Ins. Co. v. Foremost Ins. Co.

(1993) 20 Cal.App.4th 1372

Gray v. Zurich Insurance Co.

(1966) 65 Cal.2d 263

Gruenberg v. Aetna Ins. Co.

(1973) 9 Cal.3d 566

Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone

(2000) 79 Cal.App.4th 114

Haskel, Inc. v. Superior Court

(1995) 33 Cal.App.4th 963

Hogan v. Midland National Ins. Co.

(1970) 3 Cal.3d 553

Horace Mann Ins. Co. v. Barbara B.

(1993) 4 Cal.4th 1076

In re Jordan

(1972) 7 Cal.3d 930

James 3 Corp. v. Truck Ins. Exchange

(2001) 91 Cal.App.4th 1093

Jordan v. Allstate Ins. Co.

(2007) 148 Cal. App.4th 1062

Kleinclaus v. Marin Realty Co.

(1949) 94 Cal.App.2d 733

Long v. Century Indemnity Co.

(2008) 163 Cal.App.4th 1460

Mariscal v. Old Republic Life Ins. Co.

(1996) 42 Cal.App.4th 1617

Medina v. Safe-Guard Products, Int'l, Inc.

(2008) 164 Cal.App.4th 105

Merritt v. Reserve Ins. Co.

(1973) 34 Cal.App.3d 858

Michelson v. Hamada

(1994) 29 Cal.App.4th 1566

Miller v. Elite Ins. Co.

(1980) 100 Cal.App.3d 739

Montrose Chemical Corp. v. Superior Court

(1993) 6 Cal.4th 287

Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.)

(1994) 25 Cal.App.4th 902

Mosier v. S. Cal. Physicians Ins. Exch.

(1998) 63 Cal. App.4th 1022

Neal v. Farmers Ins. Exch.

(1978) 21 Cal.3d 910

Neel v. Magana, Olney, Levy, Cathcart & Gelfand

(1971) 6 Cal.3d 176

O'Morrow v. Borad

(1946) 27 Cal.2d 794

People v. Davis

(1957) 48 Cal.2d 241

People v. Massey

(1955) 137 Cal. App.2d 623

Rankin v. Curtis

(1986) 183 Cal.App.3d 939

Safeco Ins. Co. of America v. Parks

(2009) 170 Cal.App.4th 992

San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc.

(1984) 162 Cal.App.3d 358

Smith v. State Farm Mut. Auto. Ins. Co.

(1992) 5 Cal.App.4th 1104

State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co.

(1970) 9 Cal.App.3d 508

State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co.

(1999) 72 Cal.App.4th 1422

State Farm Fire & Casualty Co. v. Superior Court

(1989) 216 Cal.App.3d 1222

State of California v. Pacific Indem. Co.

(1998) 63 Cal.App.4th 1535

Stonewall Ins. Co. v. City of Palos Verdes Estates

(1996) 46 Cal.App.4th 1810

Tan Jay Int'l, Ltd. v. Canadian Indem. Co.

(1988) 198 Cal.App.3d 695

Tomaselli v. Transamerica Ins. Co.

(1994) 25 Cal.App.4th 1269

Travelers Ins. Co. v. Lesher

(1986) 187 Cal.App.3d 169

20th Century Ins. Co. v. Superior Court

(2001) 90 Cal.App.4th 1247

Val's Painting & Drywall, Inc. v. Allstate Ins. Co.

(1975) 53 Cal.App.3d 576

Vu v. Prudential Prop. & Cas. Ins. Co.

(2001) 26 Cal.4th 1142

Waller v. Truck Ins. Exchange, Inc.

(1995) 11 Cal.4th 1

Wilson v. 21st Century Ins. Co.

(2007) 42 Cal.4th 713

Wint v. Fidelity & Cas. Co. of New York

(1973) 9 Cal.3d 257

Wisper Corp. N.V. v. California Commerce Bank

(1996) 49 Cal.App.4th 948

STATUTES

Bus. & Prof. Code §6125

Bus. & Prof. Code §6068(m)

Civil Code §3287(a)

Civil Code §3289(b)

Civil Code §3294(a)

Civil Code §3302

Insurance Code §790.03(h)

CONSTITUTION, RULES & TREATISES

Const. Art. 15, §1

ABA Model Rule 1.8(h)

California Rules of Professional Conduct

Rule 3-310

Rule 3-400(A)

Rule 3-500

Rule 3-510

Code of Regulations

§2695.3

§2695.4

§2695.5

§2695.6

§2695.7

Matthew 6:24

Susan P. Shapiro, Tangled Loyalties: Conflicts of Interest in Legal Practice,

Ann Arbor, MI: University of Michigan Press (2002) at p.4

State Bar of California Formal Ops. 2004-165, 2003-161, 1999-154, 1993-133, 1981-58 and

1980-52, Los Angeles County Bar Assoc. Formal Ops. 456, 436 and 386

INTRODUCTION

SUMMARY OF EVIDENCE

LEGAL DISCUSSION

I.	The Nature of Liability Insurance

1.	Insurance Is Regulated

Insurance is a regulated industry governed by statutes, regulations and case law through the California Department of Insurance. Liability insurance is regulated because it serves in a position of public trust for which all insurers owe fiduciary like duties to their policyholders. Because of a policyholder's special dependence on the insurer's good faith and performance and the unequal bargaining power between them, "special and heightened duties" arise "due to the unique nature of the insurance contract." (Vu v. Prudential Prop. & Cas. Ins. Co. (2001) 26 Cal.4th 1142, 1150-1151.)

2.	Liability Insurers Make Two Primary Contractual Obligations

Liability insurers make only two primary promises to their policyholders. These two promises create duties which the liability insurer must fulfill to its policyholders. First, the policy promises to defend its policyholder against any lawsuit which is potentially covered by the policy. This promise is known as the duty to defend. Second, the policy promises to pay a judgment entered against its policyholder which is actually covered by the policy. This promise is known as the duty to indemnify. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275 (Gray).)

3.	Liability Insurers Have Statutory and Regulatory Obligations

Just as motorists must obey the standards established by the Vehicle Code, such as speed limits, so liability insurers must conduct themselves in compliance with statutory and regulatory standards established by the legislature and Department of Insurance.

A.	Adopt and Implement Standards

1.	An insurer must adopt reasonable standards for the prompt investigation (determine coverage, liabilities, the nature and extent of damages): (Insurance Code §790.03(h)(3).)

2.	An insurer must implement reasonable standards for the prompt investigation (determine coverage, liabilities, the nature and extent of damages): (Insurance Code §790.03(h)(3).)

3.	An insurer must adopt reasonable standards for the prompt processing of claims: (Insurance Code §790.03(h)(3).)

4.	An insurer must implement reasonable standards for the prompt processing of claims: (Insurance Code §790.03(h)(3).)

5.	An insurer must begin an investigation within 15 days: (Reg. §2695.5(e)(3).)

B.	Communication

6.	An insurer must disclose to its policyholder all benefits, coverage, time limits and other provisions of any insurance policy that may apply to the claim presented by the policyholder: (Reg. §2695.4.)

7.	An insurer must communicate all additional benefits which might reasonably be payable upon receipt of additional evidence: (Reg. §2695.4.)

8.	An insurer must not misrepresent to a policyholder pertinent facts or insurance policy provisions relating to any coverages: (Insurance Code §790.03(h)(1).)

9.	An insurer must not persist in seeking information not reasonably required for or material to the resolution of a claim dispute: (Reg. §2695.7(d).)

10.	An insurer must Acknowledge and act upon communications from policyholders no later than 15 days: (Reg. §2695.5(b)(e).)

11.	An insurer must provide within 15 days a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim: (Reg. 2695.7(b)(1).)

12.	An insurer must inform policyholders of the coverage under which payment has been made upon request (Insurance Code §790.03(9).)

13.	An insurer must furnish a policyholder with a complete response to an inquiry based on the facts as then known by the insurer within 15 calendar days: (Reg. §2695.5(b).)

14.	An insurer must notify the policyholder in writing of any time requirements not less than 60 days before the expiration date, unless the claim has been paid: (Reg. §2695.7(f).)

C.	Cooperate and Assist

15.	An insurer must cooperate with and assist the policyholder to determine the extent of the insurer's additional liability: (Reg. §2695.4; §2695.5(e)(2).)

16.	An insurer must not compel its policyholder to sue its insurer to recover amount due under an insurance policy: (Insurance Code §790.03(h)(6).)

D.	Accept or Deny Claims

17.	An insurer must accept or deny a claim, in whole or in part within forty (40) days and clearly document in the claim file amounts accepted or denied. (Reg. §2695.7(b):

18.	Accept or deny the claim in writing within 40 calendar days stating all then known bases for a denial and the factual and legal bases for the denial, and explaining specific policy provisions and their application, plus a statement that the policyholder may have the matter reviewed by the California Department of Insurance: (Reg. §2695.7(b).)

E.	Try to Settle

19.	Attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear: (Insurance Code §790.03(h)(5).)

20.	Make a settlement offer that is below the amount that a reasonable person with knowledge of the facts and circumstances would have offered in settlement of the claim considering the value of the claim, the advise of claims personnel, and a likely jury verdict: (Reg. §2695.7(g)(7).)

21.	An insurer must not delay or deny settlement of a claim on the basis that responsibility for payment should be assumed by others: (Reg. §2695.7(e).)

22.	An insurer must tender payment of the undisputed amount of a claim within 30 calendar days, upon receipt of a properly executed release: (Reg. §2695.7(h).)

F.	Maintain Records

23.	An insurer must maintain a claim file which contains all documents pertaining to a claim which are legible: (Reg. §2695.3(a); §2695.5(e)(1).)

G.	Train Personnel

24.	An insurer must provide thorough and adequate training regarding insurance regulations to its claims personnel, certify in writing under oath that the claims manual has a copy of the regulations, and certify in writing that it provided required training. (Reg. §2695.6(b).)

25.	An insurer must adopt and communicate to all its claims agents written standards for the prompt investigation and processing of claims: (Reg. §2695.6(a).)

4.	Liability Insurers Have Implied Common Law Obligations

A.	Duty of Good Faith and Fair Dealing

In every insurance policy there is an implied obligation of good faith and fair dealing that the insurer will not do anything to injure the right of the policyholder to receive the benefits of the policy. To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the policyholder as it gives to its own interests. The insurer breaches the implied obligation of good faith and fair dealing if it deprives the policyholder of the benefits of the policy unreasonably or without proper cause. It is not necessary for the insurer to intend to deprive the policyholder of the benefits of the policy.

"Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683. (Foley) The fundamental principle of the implied covenant of good faith and fair dealing is "that neither party will do anything which will injure the right of the other to receive the benefits of the agreement." (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573.) The obligations imposed by the implied covenant are not those set out in the terms of the contract itself, but rather are obligations imposed by law governing the manner in which the contractual obligations must be discharged--fairly and in good faith. (California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54.) The precise nature and extent of the duty imposed by the implied covenant depends on the nature and purpose of the underlying contract and the legitimate expectations of the parties arising from the contract. (Foley, supra 47 Cal.3d at 684.)

The insurer which breaches the duty of good faith and fair dealing may be liable for tort damages. The main reason for tort liability for breach of an insurance contract is that a policyholder whose claim is wrongfully denied cannot obtain a substitute in the marketplace; i.e., "an insured will not be able to find another insurance company willing to pay for a loss already incurred." (Cates Const., Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 44; Medina v. Safe-Guard Products, Int'l, Inc. (2008) 164 Cal.App.4th 105, 111.) Limiting the insurer's obligation to paying only policy benefits usually does not adequately compensate an policyholder and may not adequately deter the insurer from breaching the contract in the first place. (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1265-1266.)

The implied covenant of good faith and fair dealing is breached where an insurer delays or denies payment of policy benefits unreasonably (i.e., without any reasonable basis for its position) or without proper cause. (Jordan v. Allstate Ins. Co. (2007) 148 Cal. App.4th 1062, 1072-1073 (Jordan).)

The duty of good faith and fair dealing requires an insurer to give a "careful and serious consideration to the interests and position of the assured. . . . The carrier cannot exclusively preoccupy itself with its own interests but must also weigh the real interests of the assured." (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 875 (Merritt).) When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its policyholder's claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of its insured." (Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1619-1620 (Mariscal).)

B.	Duty to Investigate

Liability insurers have a duty to investigate claims by their policyholders to defend and indemnify them. All liability insurers must adopt and implement reasonable standards for the prompt investigation of claims. (Insurance Code §790.03(h)(3).) It is essential that an insurer fully inquire into possible bases that might support a policyholder's claim. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819.) The insurer may not just focus on those facts which justify denial of the claim. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 721 (Wilson).) The insurer may not deny a claim without first thoroughly investigating the policyholder's claim for a defense through independent counsel. The insurer must initiate its own investigations rather than sit back and find fault with information provided by the policyholder. (Mariscal, supra, 42 Cal.App.4th at 1623; Jordan, supra, 148 Cal.App.4th at 1072.)

The reasonableness of the insurer's denial of a claim must be determined on the basis of the information known or reasonably available to it at the time of denial. The insurer's duty to investigate does not end simply because a lawsuit between the insurer and policyholder has been filed. (Austero v. National Cas. Co. of Detroit, Mich. (1978) 84 Cal.App.3d 1, 32.)

C.	Duty to Evaluate Claims Objectively

A liability insurer must use objective standards in making its claims decisions. Wilson, supra, 42 Cal.4th at 721. The insurer cannot ignore evidence supporting a claim, while focusing on facts justifying denial of the claim. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1281.) If it does so, it acts unreasonably towards its policyholder. The reasonableness of the insurer's decision must be evaluated as of the time it was made, rather than on the basis of later developments. Otherwise an insurer could refuse to defend its policyholder on the slightest provocation and then resort to hindsight for the justification. (Mariscal, supra, 42 Cal. App.4th at 1624.)

D.	Duty To Not Coerce Compromises

A liability insurer may not delay payment of a claim in order to coerce a compromise of another claim. Instead, an insurer must settle claims promptly, where liability has become apparent under one portion of the insurance policy coverage but not attempt to influence settlements under other portions of the insurance policy coverage. (Insurance Code §790.03(h)(12); Beck v. State Farm Mut. Auto. Ins. Co. (1976) 54 Cal.App.3d 347, 355.)

E.	Duty to Equally Protect Policyholder's Interests

The duty of good faith and fair dealing requires an insurer to "careful and serious consideration to the interests and position of the assured. . . . The carrier cannot exclusively preoccupy itself with its own interests but must also weigh the real interests of the assured." (Merritt, supra 34 Cal.App.3d at 875.) When investigating a claim, an insurance company has a duty to diligently search for evidence which supports its policyholder's claim. If it seeks to discover only the evidence that defeats the claim it holds its own interest above that of its insured." (Mariscal, supra, 42 Cal.App.4th at 1619-1620.)

F.	Duty to Process Claims Promptly

Insurance Code §790.03(h)(3) requires insurers "to adopt and implement reasonable standards for the prompt . . . processing of claims." "A delay in payment of benefits due under an insurance policy gives rise to tort liability only if the insured can establish the delay was unreasonable" (Brehm v. 21st Century Ins. Co. (2008) 166 Cal.App.4th 1225, 1237.) Unreasonable delay in the processing of a claim or the payment of benefits may be evidence of bad faith by the insurer. (Fleming v. Safeco Ins. Co. of America, Inc. (1984) 160 Cal.App.3d 31, 37.)

G.	Duty to Pay Claims As They Become Clear

Insurance Code §790.03(h)(12) requires insurers "to settle claims promptly, where liability has become apparent."

II.	The Nature of the Duty to Defend

1.	The Insurer Must Provide Ethical Counsel to Discharge the Duty to Defend

While liability insurance companies promise to defend their policyholders in lawsuit, the insurer cannot lawfully discharge this duty itself, since insurers are not licensed to practice law.

"No person shall practice law in California unless the person is an active member of the State Bar." Bus & Prof §6125. Thus, the insurer can fulfill its promise to defend only by paying for ethical counsel to provide "a proper defense" to the policyholder. (See, Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 191.) Any lawyer with ethical conflicts is subject to "per se or automatic disqualification" from representing a policyholder. (State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1431 (State Farm).) Disqualifying conflicted counsel is "analogous to the biblical injunction against 'serving two masters' (Matthew 6:24)." (Flatt v. Superior Court (1994) 9 Cal.4th 275, 286.)

2.	The Insurer Must Not Prejudice The Policyholder's Defense

A liability insurer may not do anything to prejudice its policyholder's defense. "When the courts talk about prejudice to the insured from concurrent litigation of the declaratory relief and third party actions, they are saying, in effect, that the insurer must not be permitted to join forces with the plaintiffs in the underlying actions as a means to defeat coverage. Another sort of prejudice occurs when the policyholder is compelled to fight a two-front war, doing battle with the plaintiffs in the third party litigation while at the same time devoting its money and its human resources to litigating coverage issues with its carriers. And, of course, there is the collateral estoppel issue. If the declaratory relief action is tried before the underlying litigation is concluded, the 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." Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902, 909-910 (Montrose II).)

3.	The Duty to Defend Is Broad By Its Nature

"It is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. . . .'[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy.' Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081.) Any uncertainty as to whether a duty to defend is owed is resolved in favor of the policyholder. (B & E Convalescent Ctr. v. State Comp. Ins. Fund (1992) 8 Cal.App.4th 78, 99-100.) This broad duty to defend is intended to "give the insured the peace of mind and security which the insured has every right to expect." (California Ins. Guar. Ass'n v. Wood (1990) 217 Cal.App.3d 944, 948.)

"The insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability. As a consequence, California courts have been consistently solicitous of insureds' expectations on this score." (Montrose I, supra, 6 Cal.4th 287, 295-296.)

4.	The Duty to Defend Arises When Suit Is Filed

The promise to defend is different from the promise to indemnify in that the insurer's duty to defend is triggered at the beginning of a lawsuit - when the lawsuit is filed against the policyholder - and it continues until the lawsuit ends. In contrast, the insurer's duty to indemnify arises only at the end of the lawsuit. (Gray, supra, 65 Cal.2d at 275.)

5.	The Duty to Defend Must Be Discharged Immediately

The duty to defend must be discharged immediately. (Montrose I, supra 6 Cal.4th at 295: "Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.")

6.	The Legal Test to Determine Whether the Insurer Has a Duty to Defend

A liability insurer must defend its policyholder whenever complaint raises a single issue which could bring it within the policy coverage by any conceivable theory. An insurer has a duty to defend even when it ultimately has no obligation to indemnify. An insurer's duty to defend also extends to claims that are groundless, false, or fraudulent. (Scottsdale Ins. Co. v. MV Transp. (2005) 36 Cal.4th 643, 654-655 (MV Transp).)

The insurer's duty to defend is established if the policyholder is sued in a lawsuit which seeks property damage caused by an accident. The insurer must determine that it owes a duty to defend if a comparison of the allegations of the plaintiff's complaint with the terms of the policy creates any possibility of coverage. (Gray, supra, 65 Cal.2d at 275.)

The insurer may avoid its duty to defend only if the insurer can show by undisputed evidence that no possibility of coverage exists. Facts merely tending to show that the claim may not be covered are insufficient to eliminate the duty to defend. Any doubt as to whether there is a duty to defend must be resolved in the policyholder's favor. (Montrose I, supra, 6 Cal.4th at 295.)

When the insurer agrees to defend the policyholder and the insurer concedes coverage, the insurer has the right to control the conduct of the policyholder's defense of the plaintiff's lawsuit. (Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1008, fn. 6.)

7.	Each Of Multiple Insurers Must Fulfill the Duty to Defend

"[W]here more than one insurer owes a duty to defend, a defense by one constitutes no excuse of the failure of any other insurer to perform." (Wint v. Fidelity & Cas. Co. of New York (1973) 9 Cal.3d 257, 263; Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1005.) A liability insurer must not delay or deny a claim for defense or indemnity on the basis that responsibility for payment should be assumed by others. (Code of Regulations Section 2695.7(e).)

III.	The Nature of a Reservation of Rights

1.	A Reservation of Rights Avoids Waiver Of Disputes Coverage

A liability insurer must warn its policyholder if the insurer may not pay a judgment entered against its policyholder. (Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810, 1839.) A liability insurer that fails to warn its policyholder is required by law to pay any judgment entered against its policyholder, whether it is technically covered or not. Such a warning is known as a reservation of rights. (Val's Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 587 (Val's).) A reservation of rights typically expresses that because the duty to defend is broader than the duty to indemnify, the insurer will provide a defense to the policyholder, but alerts the policyholder that the insurer may not pay a judgment entered against the policyholder for wrongdoing that is not covered by the policy.

2.	Insurers Frequently Reserve Rights In Mixed Actions

Sometimes, a policyholder may be sued by a plaintiff for as many as three different categories of alleged wrongdoing. First, the plaintiff may sue the policyholder for alleged wrongdoing that is clearly covered by a liability insurer's policy. Second, the plaintiff may sue the policyholder for alleged wrongdoing that may or may not be covered by a liability insurer's policy. Third, the plaintiff may sue the policyholder for alleged wrongdoing that is clearly not covered by a liability insurer's policy. This type of lawsuit is known as a "mixed action."

3.	A Reservation of Rights May Be Limited By Express Waiver

A reservation of rights may be limited or unlimited. An unlimited reservation of rights warns the policyholder that the insurer may deny coverage on any ground. If a liability insurer limits the scope of its reservation of rights, it must do so by what is known as a waiver. A waiver is a voluntary relinquishment of a known right. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31-32.) Thus, if an insurer has information that provides a basis to permit it to deny coverage and the insurer nonetheless gives up that right, it waives its right. (Val's, supra, 53 Cal.App.3d at 587.)

4.	A Reservation of Rights Always Creates Some Conflicts of Interest

A reservation of rights always creates conflicts of interest between the insurer and its policyholder. (Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 84 (Haven).) ("In some cases, such as this one, there is a conflict of interest or a potential conflict of interest between the insurer and the insured. (Cumis, supra, at pp. 364, 375.) Usually, these conflicts involve the insured trying to obtain coverage and the insurer trying to avoid it.") This is so because the insurer will benefit by a judgment that is not covered by the policy while the policyholder will benefit by a judgment that is covered by the policy. (Cumis, supra, 162 Cal.App.3d at 375.)

5.	No Disqualifying Conflict Arises If Reserved Coverage Issues Are

Limited To Those That Have Nothing To Do With the Liability Suit

When a liability insurer agrees to defend its policyholder against a plaintiff's lawsuit without a reservation of rights, it concedes coverage. When the insurer concedes coverage, the insurer has the contractual right to control the policyholder's defense and to appoint an attorney to follow the insurer's directions as to how to conduct the defense. This is so because when the insurer concedes full coverage, the insurer, not the policyholder will pay a judgment. (Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal.App.3d 799, 810.) The insurer and its policyholder have no conflicts of interest regarding the conduct of the defense by insurer appointed defense counsel. (Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1422 (Gafcon).)

While a reservation of rights always creates conflicts of interest between the insurer and its policyholder, the conflicts of interest do not always impact the conduct of the defense of the plaintiff's lawsuit. When the insurer's reservation of rights is limited to bases that have nothing to do with the plaintiff's lawsuit, the conflict created by the reservation of rights may not impact the conduct of the defense. (Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1470 (Long).) For example, if an insurer issues a reservation of rights which is limited to denying coverage because the policyholder failed to pay a premium and the insurer waives all other grounds to deny coverage, then the insurer's reservation of rights will have nothing to do with the plaintiff's lawsuit, and the insurer may control the policyholder's defense through insurer appointed defense counsel.

6.	Disqualifying Conflicts Arise If Any Reserved

Coverage Issue Is Related to the Liability Suit

The distinction between reservations of rights which do and do not create conflicts of interest is whether any ground upon which the insurer reserves the right to disclaim coverage is related to any question present in the third party litigation. Broad reservations of rights almost always create disqualifying conflicts since coverage may be denied based on issues of substance in the third party liability suit. "Of course, the insurer may have more than one defense to coverage. In that event, the trial court will need to consider each defense separately to decide whether it can be determined without prejudice to the insured and whether it is amenable to resolution by summary judgment or summary adjudication." (Montrose I supra, 6 Cal.4th at p. 306.) Thus, unless the coverage issues raised by an insurer's reservation of rights are limited by waiver to factual and legal disputes which are unrelated to,1 irrelevant to,2 extrinsic to, independent of,3 or have nothing to do with4 the third party litigation, the insurer's coverage dispute cannot be allowed to prejudice the policyholder. In the absence of express waivers by the insurer, a reservation of rights is unlimited as a matter of law.

7.	The Requirements to Seek Settlement Reimbursement

A liability insurer may seek reimbursement from its policyholder for the amount it pays for a reasonable settlement if all of the following are true:

(1) the settlement was reasonable; and

(2) the insurer timely expresses a reservation of rights to seek reimbursement of a reasonable settlement on the grounds there is no coverage under the policy; and

(3) the insurer expressly notifies the policyholder of the insurer's intent to accept a proposed settlement offer; and

(4) the insurer expressly offers that the policyholder may assume the defense; or

(5) the policyholder agrees that the settlement offer was unreasonable and the policyholder would not claim bad faith the failure insurer's failure to settle.

(Blue Ridge, supra, 25 Cal.4th at 502.)

8.	The Requirements to Seek Defense Reimbursement

A liability insurer may seek reimbursement from its policyholder for the amount it pays for defense costs if all of the following are true:

(1) The defense costs were incurred by the insurer to defend the policyholder from whom the insurer seeks reimbursement;

(2) The defense costs were incurred by the insurer to defend claims that were never even potentially covered by the policy and that were not allocable to claims that are covered or were not allocable to claims that are potentially covered;

(3) The defense costs were incurred by insurer appointed defense counsel and each of the following is true:

(A) The insurer did not interfere with insurer appointed defense counsel's independence of professional judgment;

(B) The insurer did not interfere with the client-lawyer relationship between the policyholder and insurer appointed defense counsel; and

(C) Insurer appointed defense counsel protected information relating to the policyholder to maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client; and

(D) Insurer appointed defense counsel obtained the policyholder's informed written consent.

(Buss, supra, 16 Cal.4th at 39; Rule 3-310(f).)

IV.	The Nature of the Attorney Client Relationship

1.	All Lawyers Owe Their Clients Four Principle Duties

Attorneys owe four duties to their clients. They are: Undivided Loyalty; Full Disclosure; Confidentiality; and Competent Representation.

A.	Duty of Undivided Loyalty

All attorneys owe a duty of undivided loyalty to their clients. This duty requires the lawyer: (1) to act to advance the client's interest and not the interest of the lawyer or anyone else. "[T]he bedrock principle of fiduciary obligation, the duty of loyalty, requires that trustees be disinterested, that they put the interests of those they act for or represent before their own or that of others." (Susan P. Shapiro, Tangled Loyalties: Conflicts of Interest in Legal Practice, Ann Arbor, MI: University of Michigan Press (2002) at p.4); (2) to exercise independent professional judgment not influenced by the lawyer's interests or any other factors extraneous to the normal attorney-client relationship. See Rule 3-310(B), which identifies certain personal interests and relationships that might cause a lawyer to have a conflict of interest; (3) to refrain from assuming a role adverse to the client; (4) in joint client situations, to not allow the representation of one client to interfere with the representation of the other; (5) to follow the client's lawful directions on all substantive matters (See People v. Davis (1957) 48 Cal.2d 241, 256-57 [it amounts to taking a position adverse to the client, and therefore violates the duty of undivided loyalty, for an attorney to surrender any of the client's substantial rights without the client's ". . . free and intelligent consent after full knowledge of all the facts and circumstances. . . ." citing (Anderson v. Eaton (1930) 211 Cal. 113, 116); and (6) to not abandon the client (People v. Massey (1955) 137 Cal. App.2d 623, 625), an attorney's failure to appear at appellate argument violates the attorney's duty of respect for the court as well as being a violation of the duty of undivided loyalty to the client.]

B.	Duty of Full Disclosure

All attorneys owe a duty to disclose to their clients all significant facts and developments. This duty has five different elements:

(1)	Duty to Advise

"One of an attorney's basic functions is to advise. Liability can exist because the attorney failed to provide advice. Not only should an attorney furnish advice when requested, but he or she should also volunteer opinions when necessary to further the client's objectives." (Nichols, supra, 15 Cal.App.4th at 1684-1685.) "The duty of a fiduciary embraces the obligation to render a full and fair disclosure to the beneficiary of all facts which materially affect his rights and interests. Where there is a duty to disclose, the disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud. [A]lthough the defendant makes no active misrepresentation, this element is supplied by an affirmative obligation to make full disclosure, and the non-disclosure itself is a 'fraud.'" (Citations, ellipses, and quotations marks omitted.) (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-189 ("Neel").) "[T]he attorney may still have a duty to alert the client to legal problems which are reasonably apparent, even though they fall outside the scope of the retention. The rationale is that, as between the lay client and the attorney, the latter is more qualified to recognize and analyze the client's legal needs. The attorney need not represent the client on such matters. Nevertheless, the attorney should inform the client of the limitations of the attorney's representation and of the possible need for other counsel." (Nichols, supra, 15 Cal.App.4th at 1685.)

(2) Duty to Initiate Disclosure

All attorneys have a duty to disclose significant developments [under Rule 3-500 and B&P Code § 6068(m)] and all other information material to the client's rights and interests. "Finally, the dealings between practitioner and client frame a fiduciary relationship. The duty of a fiduciary embraces the obligation to render a full and fair disclosure to the beneficiary of all facts which materially affect his rights and interests." (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-89 (Neel).)

(3) Duty to Respond to Inquiry

All attorneys have a duty to promptly comply with reasonable requests for information and document copies when necessary to keep the client informed under Rule 3-500 and to respond promptly to reasonable status inquiries from clients under B&P Code § 6068(m).

(4) Duty to Communicate Settlement Opportunities

All attorneys have a duty to promptly communicate settlement offers to the client under Rule 3-510.

(5) Duty of Candor

Underlying all of these obligations is the duty to speak with candor to the client, that is, the duty to speak frankly and without bias. "Where there is a duty to disclose, the disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud. . . .' (citations omitted)" (Neel, supra, 6 Cal.3d at 188-89.)

C.	Duty of Confidentiality

All attorneys have a duty of confidentiality which is all but absolute. (B&P Code § 6068(e).) This duty prohibits a lawyer from voluntarily disclosing any information obtained by the lawyer as a result of a lawyer-client relationship if doing so likely would be harmful or embarrassing to the client, or if the client has directed the lawyer to not disclose the information. (See, e.g., State Bar of California Formal Ops. 2004-165, 2003-161, 1999-154, 1993-133, 1981-58 and 1980-52, Los Angeles County Bar Assoc. Formal Ops. 456, 436 and 386, In re Jordan (1972) 7 Cal.3d 930, 940-41; and United States v. Stepney (2003 N.D. Cal.) 246 F.Supp.2d 1069, 1073-74.) "[C]onfidentiality is essential where communication can affect coverage. Thus, the lawyer is forced to walk an ethical tightrope, and not communicate relevant information which is beneficial to one or the other of his clients." (Cumis, supra, 162 Cal.App.3d at 366.)

D.	Duty of Competent Representation

All attorneys owe a duty of competence to their clients. "In the first place, the special obligation of the professional is exemplified by his duty not merely to perform his work with ordinary care but to use the skill, prudence, and diligence commonly exercised by practitioners of his profession. If he further specializes within the profession, he must meet the standards of knowledge and skill of such specialists." (Neel, supra, 6 Cal.3d at 188.) The duty of competence is the only duty that a client cannot waive in advance. See Rule 3-400(A) of the California Rules of Professional Conduct and ABA Model Rule 1.8(h); (Charnay v. Cobert (2006) 145 Cal.App.3d 170, 183.)

2.	Dependent Counsel Jointly Represents the Insurer and the Policyholder

The case of State Farm, supra, 72 Cal.App.4th at 1425 squarely holds that "the attorney representing an insured is also representing the insurance company." "[A]n attorney-client relationship is formed between an insurance company and the counsel it hires to defend an insured. . . . [T]he attorney represents two clients, the insured and the insurer. . . . an insurance company is a client with respect to its ability to assert the attorney-client privilege. . . . [A]n insurance company has an independent right, as a client, to bring a legal malpractice action against the counsel it hired to defend its insured." (Id. at 1429-1430.)

3.	Dependent Counsel Must Analyze Reservations of Rights

The burden of avoiding conflicts of interest is borne by the lawyer. (See, State Farm, supra, 72 Cal.App.4th at 1435.) Since dependent counsel jointly represents both the insurer and the policyholder. Rule 3-310 prohibits any lawyer from accepting employment for joint clients with potential conflicts of interest before analyzing the conflicts, making written disclosure to both clients and obtaining their informed written consent. Such disclosure is one of the four primary duties all lawyers owe to their clients: competent representation, full disclosure, confidentiality, and undivided loyalty. The insurer's right to control its policyholder's defense, earned by conceding coverage, never materializes when the insurer reserves rights to deny coverage.

4.	Dependent Counsel Must Make Written Disclosure of

Potential Conflicts Created By Reservations of Rights

Rule 3-310 provides that a lawyer "shall not accept or continue representation of a client without providing written disclosure to the client . . . [if the lawyer has a] relationship with another person or entity the member knows or reasonably should know would be affected substantially by resolution of the matter."

5.	Dependent Counsel Must Obtain Informed Written Consent to

Jointly Represent the Policyholder and The Reserving Insurer

Rule 3-310 provides that a lawyer "shall not, without the informed written consent of each client . . . accept or continue representation of more than one client in a matter in which the interests of the clients potentially conflict. . . ."

6.	The Ethical Duties of Independent Counsel

Because the policyholder is named as a defendant in the plaintiff's lawsuit and the liability insurer is not, an adverse judgment will always authorize a sheriff to seize property of the policyholder, but will not permit the sheriff to collect from the policyholder's insurer. Thus, the policyholder does have the right to have an attorney of the policyholder's sole choice conduct the defense.

Independent counsel represents only the policyholder in defending against the plaintiff's complaint. Independent counsel has no attorney-client relationship with the insurer and does not represent the interests of the liability insurer. (Haven, supra, 32 Cal.App.4th 78.) Thus, in contrast to insurer appointed defense counsel, independent counsel is not obligated analyze joint representation conflicts of interest and has no obligation to make disclosure to nor obtain the informed written consent of the insurer. (Rule 3-310; Cumis, supra, 162 Cal.App.3d at 375.)

V.	Liability Insurers Have Six Substantive Decisions

When a policyholder makes a claims to a liability insurer for a defense of a plaintiff's lawsuit, the insurer has as many as six substantive decisions to make.

1.	Should the Liability Insurer Provide a Defense?

A liability insurer must adopt and implement standards for the prompt investigation and processing of a policyholder's claim for a defense. The standard which the insurer must adopt and implement is clear.

"We summarize familiar principles pertaining to an insurer's duty of defense. An insurer must defend its insured against claims that create a potential for indemnity under the policy. The duty to defend is broader than the duty to indemnify, and it may apply even in an action where no damages are ultimately awarded.

"Determination of the duty to defend depends, in the first instance, on a comparison between the allegations of the complaint and the terms of the policy. But the duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered. Moreover, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability. The defense duty arises upon tender of a potentially covered claim and lasts until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage. When the duty, having arisen, is extinguished by a showing that no claim can in fact be covered, it is extinguished only prospectively and not retroactively.

"On the other hand, in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. This freedom is implied in the policy's language. It rests on the fact that the insurer has not been paid premiums by the insured for [such] a defense. . . . [T]he duty to defend is contractual. The insurer has not contracted to pay defense costs for claims that are not even potentially covered.

"From these premises, the following may be stated: If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance." (Citations omitted.) (MV Transp., supra, 36 Cal.4th at 654-655.)

2.	Should the Liability Insurer Reserve Its Rights?

As discussed above, a liability insurer waives coverage disputes if it fails to promptly warn its policyholder that it reserve its rights. "If a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage." Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 755.

When an insurer secures the benefits of reserving its rights to deny coverage, it assumes certain responsibilities. A purpose of warning the policyholder that the insurer may not cover a judgment is to empower the policyholder to take steps to protect itself from its own insurer. The insurer's duty of good faith and fair dealing and its statutory obligations require the insurer to analyze potential conflicts of interest created by a reservation of rights and accurately disclose to the policyholder the right to independent counsel. Code of Regulations, §2695.4 provides in part: "(a) Every insurer shall disclose . . . all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured's policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer's additional liability."

3.	Should the Liability Insurer Provide Independent Counsel?

A liability insurer must adopt and implement standards to determine whether to provide independent counsel to the policyholder. The standard which the insurer must adopt and implement is clear.

There are certain circumstances that create a conflict of interest which requires a liability insurer to provide independent counsel whether or not the insurer has reserved its rights to deny coverage. These include the following:

(1) The insurer has filed suit against the policyholder, whether or not the suit is related to the lawsuit the insurer is obligated to defend;

(2) The insurer settles on terms which leave the policyholder exposed to claims; and

(3) The insurer has appointed defense counsel whose representation of the policyholder is rendered less effective by reason of representation of the insurer.

(James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101-1102; Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372,1394-1396 (Golden Eagle); O'Morrow v. Borad (1946) 27 Cal.2d 794, 800.)

When insurer appointed defense counsel cannot ethically represent the policyholder, the insurer must pay for independent counsel to conduct the policyholder's defense. Insurer appointed defense counsel cannot accept or continue employment if a reservation of rights creates conflicts of interest which renders the lawyer representation of the policyholder less effective by reason of his representation of the insurer. (Cumis, supra, 162 Cal.App.3d at 375.) Thus, the insurer's obligation to provide independent counsel is derived from insurer appointed defense counsel's inability to ethically represent both insurer and policyholder when their interests conflict. (Golden Eagle, supra, 20 Cal.App.4th at 1394; Mosier v. S. Cal. Physicians Ins. Exch. (1998) 63 Cal. App.4th 1022, 1042.)

When a liability insurer reserves rights on any issue related to the liability suit, insurer appointed defense counsel must comply with Rule 3-310. "We conclude 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." (Cumis, supra, 162 Cal.App.3d at 375.) Insurer appointed defense counsel cannot accept or continue representation of without analyzing the insurer's reservation of rights, making written disclosure to and obtaining the informed written consent of the policyholder and the insurer.

"If the insured does not give an informed consent to continued representation, counsel must cease to represent both." (Cumis, supra, 162 Cal.App.3d at 375.)

Conflicts of interest between the insurer and the policyholder require insurer appointed defense counsel to analyze potential conflicts of interest. This requires a careful analysis of the respective interests of the insurer and of the policyholder to determine whether the conflicts of interest can be reconciled. "[Insurer selected defense counsel] was bound to investigate all conceivable bases on which liability might attach." (Cumis, supra, 162 Cal.App.3d at 366.) Insurer appointed defense counsel must make written disclosure of this careful analysis to both the insurer and the policyholder to permit both to make intelligent decisions about whether each chooses to permit insurer appointed defense counsel to conduct the defense. Rule 3-310.

Analysis of conflicts under the Cumis case is complex. (Dynamic Concepts, supra, 61 Cal.App.4th at 1010.) "There is no talismanic rule that allows a facile determination of whether a disqualifying conflict of interest exists. Instead, '[t]he potential for conflict requires a careful analysis of the parties' respective interests to determine whether they can be reconciled . . . or whether an actual conflict of interest precludes insurer-appointed defense counsel from presenting a quality defense for the insured.'" (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131.) Lay policyholders are ill equipped to conduct this analysis. Thus, insurer appointed defense counsel have an affirmative duty to conduct this analysis. (Rule 3-310.) Similarly, an insurer's duty of good faith compels the insurer to do this analysis. "[T]he insurer should have informed the insured of the conflict of interest and of the opportunity to have independent counsel." (State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1235.)

Insurer appointed defense counsel is obligated to explain to the policyholder and the insurer the full implications of joint representation when the insurer reserves its right to deny coverage. (Rule 3-310.) If the policyholder does not give an informed consent to representation, insurer appointed defense counsel must cease to represent both the policyholder and the insurer. The insurer may not compel the policyholder to surrender control of the defense of the plaintiff's lawsuit. (Cumis, supra, 162 Cal.App.3d 358.)

Since the insurer is not itself licensed to practice law, the insurer must provide a defense to its policyholder by adequately funding a competent, ethical lawyer to conduct the policyholder's defense. (Buss, supra, 16 Cal.4th at 48; Merritt, supra, 34 Cal.App.3d at 882.) The insurer must pay for the policyholder's defense by paying independent counsel immediately and by paying for the independent counsel to defend the entire lawsuit regardless of whether the plaintiff's claims are clearly covered, clearly not covered, or potentially covered. (Montrose I, supra, 6 Cal.4th at 295, 302.)

The insurer is obligated to inform the policyholder of conflicts of interest and of the right to have independent counsel control the defense at the insurer's expense. "[T]he insurer should have informed the insured of the conflict of interest and of the opportunity to have independent counsel." (State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1235.)

4.	Should the Liability Insurer Sue to Dispute

Coverage While Liability Suit Is Pending?

A liability insurer must adopt and implement standards to determine whether to sue its policyholder to defeat coverage while the plaintiff's suit is still pending. The standard which the insurer must adopt and implement is clear.

A liability insurer may not sue its own policyholder or conduct discovery to resolve coverage issues while the plaintiff's lawsuit against the policyholder is still pending unless the insurer limits the grounds to deny coverage to matters which are completely unrelated to the plaintiff's lawsuit. (Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963.)

A liability insurer may not do anything to prejudice its policyholder's defense of a plaintiff's lawsuit. (Montrose II, supra, 25 Cal.App.4th at 909.) The insurer may not sue its policyholder to resolve an insurance coverage dispute unless it will not prejudice the policyholder's defense. Thus, the insurer is limited to resolving issues that are logically unrelated to or have nothing to do with the issues in the plaintiff's lawsuit. An insurer which sues its own policyholder to defeat coverage for a pending plaintiff's lawsuit may be liable for malicious prosecution. (Montrose I, supra, 6 Cal.4th at 306; Hillenbrand, supra, 104 Cal App 4th 784.)

5.	Should the Liability Insurer Seek Reimbursement of Defense Costs

A liability insurer must adopt and implement standards to determine whether to seek reimbursement of defense costs. The standard which the insurer must adopt and implement is clear.

A liability insurer may seek reimbursement from its policyholder for the amount it pays for defense costs if all of the following are true:

(1) The defense costs were incurred by the insurer to defend the policyholder from whom the insurer seeks reimbursement;

(2) The defense costs were incurred by the insurer to defend claims that were never even potentially covered by the policy and that were not allocable to claims that are covered or were not allocable to claims that are potentially covered;

(3) The defense costs were incurred by insurer appointed defense counsel and each of the following is true:

(A) The insurer did not interfere with insurer appointed defense counsel's independence of professional judgment;

(B) The insurer did not interfere with the client-lawyer relationship between the policyholder and insurer appointed defense counsel; and

(C) Insurer appointed defense counsel protected information relating to the policyholder to maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client; and

(D) Insurer appointed defense counsel obtained the policyholder's informed written consent.

(Buss, supra, 16 Cal.4th at 39; Rule 3-310(f).)

6.	Should the Liability Insurer Seek Reimbursement of Settlement Costs

A liability insurer must adopt and implement standards to determine whether to seek reimbursement of settlement costs. The standard which the insurer must adopt and implement is clear.

A liability insurer may seek reimbursement from its policyholder for the amount it pays for a reasonable settlement if all of the following are true:

(1) the settlement was reasonable; and

(2) the insurer timely expresses a reservation of rights to seek reimbursement of a reasonable settlement on the grounds there is no coverage under the policy; and

(3) the insurer expressly notifies the policyholder of the insurer's intent to accept a proposed settlement offer; and

(4) the insurer expressly offers that the policyholder may assume the defense; or

(5) the policyholder agrees that the settlement offer was unreasonable and the policyholder would not claim bad faith the failure insurer's failure to settle.

(Blue Ridge, supra, 25 Cal.4th at 502.)

VI.	Civil Code §2860 Has Limited Application

Civil Code §2860(a) enunciates an A + B = C structure: Specifically, [A] "if the provisions of a policy of insurance impose a duty to defend upon an insurer and [B] a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, [then, C] the insurer shall provide independent counsel to represent the insured." Case law says that absent The insurer's "unconditional" agreement to A + B, §2860 is "inapplicable."

Only if these responsibilities are satisfied by the insurer invoke the many privileges provided by the statute, such as requiring minimum qualifications of Cumis counsel, paying Cumis reduced rates, resolving fee disputes by arbitration, compelling Cumis to disclose confidential information (except relating to coverage issues), and allowing insurer's counsel to fully participate.

"[I]n the absence of a stipulation or unconditional agreement between the insurer and insured, unless and until there has been a judicial determination of an insurer's duty to defend and the existence of a conflict of interest, the provisions of Civil Code section 2860 are inapplicable." (Handy v. First Interstate Bank (1993) 13 Cal.App.4th 917, 926 (Emphasis added.))

If &Insurer& disputes whether there is a duty to defend or disputes whether there is any conflict of interest requiring independent counsel it cannot invoke its protection. The privilege of enjoying the benefits of §2860 comes only at the cost of accepting the responsibilities of §2860.

&Client& may seek damages for breach of contract and bad faith, which turns on (1) whether &Insurer& owed &Client& a duty to defend in the first instance; and (2) whether &Insurer& breached that duty by failing to defend &Client& "immediately" and "entirely" on tender of the defense. If &Client& proves that &Insurer& did have a duty to defend and breached that duty by failing to defend immediately and completely, then &Client& may recover the full amount of its attorney fees and costs. (See, Intergulf Development LLC v. Superior Court (2010)183 Cal.App.4th 16, 22.)

"Breach of duty to defend also results in the insurer's forfeiture of the right to control defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in section 2860. (Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, 984 (Fuller-Austin); Atmel Corp. v. St. Paul Fire & Marine Ins. Co. (N.D.Cal. 2005) 426 F.Supp.2d 1039, 1047 (Atmel).)"

(Intergulf Development LLC v. Superior Court (2010)183 Cal.App.4th 16, 20.)

If &Insurer& disclaims both of the A+B prerequisites of §2860(a), it fails to earn the privilege of invoking the rate limitation provision of the statute. Making a few partial payments to compensate &Client& for &Client&'s cost of defending itself leaves &Insurer& exposed for breach of contract and bad faith failure to defend "immediately" and "entirely." (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 296.)

VII.	&Client& May Recover Damages From &InsCo&

For Breach Of The Duty to Defend the &Plaintiff& Action

The measure of damage which a policyholder may recover from a defaulting insurer is clear.

1.	Cost of Defense

An insurer which breached its duty to defend is "liable for all costs and attorneys' fees expended by [its insured] for this purpose." (Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 558.) The insurer becomes liable for defense costs incurred by the policyholder allocable to claims not even potentially covered under the policy. (State of California v. Pacific Indem. Co. (1998) 63 Cal.App.4th 1535, 1548.)

2.	Cost of Settlement

An insurer which fails to defend must reimburse the policyholder for "all sums reasonably paid to the injured party . . . pursuant to a . . . reasonable settlement negotiated by the insured." Rankin v. Curtis (1986) 183 Cal.App.3d 939, 946; Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1110.

3.	Emotional Distress

Under the contract measure, emotional distress may be recoverable as consequential damages flowing from a substantial economic loss: "Whenever the terms of a contract relate to matters which concern directly the comfort, happiness or personal welfare of one of the parties . . . he may recover damages for physical suffering . . . caused by its breach. . . . A liability insurance policy is such a contract." State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co. (1970) 9 Cal.App.3d 508, 527-528.

4.	Cost of Mitigation

Because the policyholder has an obligation to mitigate damages, the policyholder may recover the reasonable costs of doing mitigation including legal fees and costs the insured incurs or expends in obtaining substitute counsel in the underlying action. (Kleinclaus v. Marin Realty Co. (1949) 94 Cal.App.2d 733, 739.)

5.	Prejudgment Interest

The measure of damages for the insurer's breach includes the amount due under the contract, plus interest. ( Civil Code §3302. ) "Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day." (Civil Code §3287(a).) The statutory requirement that benefits be "certain or capable of being made certain by computation" is generally liberally construed to permit recovery of prejudgment interest. (Chesapeake Industries, Inc. v. Togova Enterprises, Inc. (1983) 149 Cal.App.3d 901, 907.)

A prejudgment interest award is intended to make plaintiff whole "for the accrual of wealth which could have been produced during the period of loss." (Wisper Corp. N.V. v. California Commerce Bank (1996) 49 Cal.App.4th 948, 958.)

The policyholder is entitled to recover interest at 10% per annum for breach of a contract entered into after 1985. (Const. Art. 15, §1; Civil Code §3289(b); Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1586.)

VIII.	&Client& May Recover Damages From &InsCo&

For Breach Of The Duty of Good Faith and Fair Dealing

In addition to the foregoing damages, &Client& may recover the following damages for &InsCo&'s bad faith.

1.	Damage to Business

The policyholder may recover for damage to business or impaired credit proximately resulting from the insurer's wrongful refusal to defend a covered claim against the policyholder. (Tan Jay Int'l, Ltd. v. Canadian Indem. Co. (1988) 198 Cal.App.3d 695, 704.)

2.	Brandt Fees

"When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss — damages — proximately caused by the tort." (Brandt v. Superior Court (1985) 37 Cal.3d 813, 817.) "The fees recoverable, however, may not exceed the amount attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff's award which exceeds the amount due under the policy are not recoverable." (Id. at 819.) "Since the attorney's fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise." (Ibid.)

3.	Punitive Damages

"In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant." Civil Code §3294(a).

The purpose of punitive damages is to punish the defendant, to make an example, and thereby to deter others from similar conduct. (Neal v. Farmers Ins. Exch. (1978) 21 Cal.3d 910, 928, fn. 13.)