The meaning of many terms and phrases used in the website are defined below. Some may not be intuitively obvious to many readers.
Adversarial System – The adversarial system is one where two advocates represent their parties’ positions before an impartial judge or judges, who attempt to determine the truth of the case by pitting the prosecution against the defense. Justice is done when the most effective adversary is able to convince the judge or jury that his or her perspective on the case is the correct one.
Agency Relationship – A consensual connection between a hiring party who may be bound by the conduct of the person hired.
Assignable Rights – A liability policy makes express and implied promises which create certain rights possessed by the policyholder. Some of these rights may be sold by the policyholder to others, including a plaintiff. Such assignments are often coupled with a covenant not to execute. However, not all rights are assignable. Some rights are deemed in the law to be personal to the policyholder such that any attempt to assign them extinguishes them. Examples of non-assignable rights include the policyholder’s right to recover from an insurer for emotional distress and punitive damages and a clients right to recover from an attorney for legal malpractice.
Assignment of Rights – A liability insurance contract describes obligations which the insurer owes to the policyholder, which in turn creates corresponding rights, held by the policyholder, to receive policy benefits. As part of a settlement of third party liability litigation, policyholders often sell or assign to a plaintiff some of these rights.
Attorney-Client Relationship – A consensual connection between an attorney and client established by contract, conferring agency power to the attorney, and imposing fiduciary duties on the attorney. See Article: Attorney-Client Relationship.
Bad faith – Bad faith is the unreasonable failure of the insurer to pay policy benefits. The commission of bad faith requires a predicate breach of contract. See also, Duty of Good Faith and Fair Dealing.
Buss reimbursement – The implied right of a performing insurer to recover reimbursement of costs of defense allocable to the injured plaintiff’s claims that were never even potentially covered. See, Buss v. Superior Court (1997) 16 Cal.4th 35.
Blue Ridge reimbursement – The implied right of a performing insurer to recover reimbursement of costs of settlement which are not covered. See, Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489.
Brandt fees – Attorneys fees which a policyholder may recover from an insurer which is guilty of bad faith. See, Brandt v. Superior Court (1985) 37 Cal.3d 813.
CGL – The acronym is short for Commercial General Liability or Comprehensive General Liability, titles often used in business policies.
Civil lawsuit – A civil lawsuit is a judicial procedure by which parties seek redress. The work “civil” means that the subject matter is not criminal in nature.
Collateral Estoppel – A doctrine of equity by which a person who leads another to believe a particular thing true and to act upon such belief, may not contradict it. An insurer may be equitably estopped to deny that coverage exists where the insurer’s conduct caused the policyholder to have a reasonable belief that the insurer provides coverage and detrimentally relies on such conduct.
Collusion – A secret agreement for an unjust purpose. See, Article: Elusive Definition of Collusion.
Conditions – Part of the structure of a liability policy, the Conditions describe what the policyholder is required to do, such as truthfully complete the application, pay the premium and notify the insurer. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Conflict of Interest – Conflict of interest occurs whenever two or more parties interests diverge from one another. As applied to liability insurance, an insurer and policyholder develop conflicts of interest whenever the insurer denies coverage to the policyholder for a plaintiff’s lawsuit. Conflicts of interest between insurer an policyholder may create an ethical conflicts for any attorney representing the interests of both the insurer and the policyholder. See, Article: Conflicts of Interest.
Cooperation clause – A standard liability policy requires the policyholder to cooperate with the insurer with language such as: “You and any other involved insured must; (3) Cooperate with us in the investigation or settlement of the claim or defense against the ‘suit’.” See, Article: Insurer’s Contractual Right to Control Settlement.
Covenant not to execute – Often a victorious plaintiff, as a judgment creditor, will settle with a losing policyholder, as a judgment debtor, by promising not to levy against the policyholder’s assets in return for an assignment by the policyholder of rights under the policy. A covenant not to execute is distinct from a release in that a covenant does not extinguish the policyholder’s liability to the plaintiff. Preserving such liability may be essential to perfecting a claim against a defaulting insurer, whose contractual promise is to pay on behalf of the policyholder for existing liability to the plaintiff. See, Article: Compendium of “Collusion” Cases.
Cumis – A California reported opinion which states that when dependent counsel cannot ethically represent both the insurer and the policyholder, the insurer must provide independent counsel, selected and controlled by the policyholder. See, San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.
Cumis Counsel – See Independent Counsel.
Defendant – A person or entity sued by the Plaintiff in a civil lawsuit.
Declarations – Part of the structure of a liability policy, the Declarations consist of the first few pages of the contract where most of the variables peculiar to a specific policy contract are found. The Declarations will identify the name of the insurer, the name of the insured, the policy period, the policy limit, and other vital information. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Defaulting insurer – A liability insurer which refuses to defend or fails to discharge the services inherent in the duty to defend.
Definitions – Part of the structure of a liability policy, the Definitions ascribe special meaning to terms used in the contract. Definitions tend to limit what you might otherwise expect from by the use of the word or phrase defined. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Dependent counsel – A lawyer who is selected by and represents the interests of the insurer and also represent the policyholder as a party in third party liability litigation. Dependent counsel has an attorney-client relationship with the insurer. Dependent Counsel is sometimes called insurance defense counsel or insurer appointed defense counsel. Dependent Counsel’s counterpart is Independent Counsel. See, Article: Difference Between Dependent and Independent Counsel.
Direct action statute – California Insurance Code §11580(b) construes liability policies to provide that the policyholder’s “bankruptcy . . . will not release the insurer from the payment of damages” and that where a “judgment is secured against the insured . . . based upon bodily injury . . . or property damage, then an action may be brought against the insurer . . . by such judgment creditor [ie. victorious plaintiff] to recover on the judgment.”
Discovery – A formal procedural process by which one party to litigation may require other parties to respond to questions about the lawsuit under oath. Examples of discovery include depositions, interrogatories, requests for admission, and document productions.
Disqualifying Conflict of Interest – A conflict of interest which prevents an attorney from ethically representing the interests of both an insurer and its policyholder. Disqualifying conflicts of interest often arise when an insurer reserves its rights to deny coverage to its policyholder while it agrees to provide a defense to its policyholder in a plaintiff’s lawsuit.
Duty of Competence – The duty of competence requires a lawyer to perform with the skill, prudence, and diligence commonly exercised by practitioners of the law profession. See, Article: Duty of Competence.
Duty of Full Disclosure – The duty of full disclosure obligates a lawyer to educate the client by disclosing all significant facts and developments to empower the client can make intelligent decisions about a civil lawsuit. See, Article: Duty of Disclosure.
Duty of Good Faith and Fair Dealing – The duty of good faith and fair dealing (also known as “bad faith”) is an implied covenant that neither party to a contract will do anything which will injure the right of the other to receive the benefits of the agreement. As applied to liability insurance, it is a liability insurer’s duty not to withhold unreasonably payments due under a policy. Bad faith exposes a liability insurer to pay non-contractual damages to the insured.
Duty of Undivided Loyalty – The duty of undivided loyalty obligates a lawyer to advance the client’s interest, to exercise independent professional judgment, to refrain from assuming a role adverse to the client, to not allow the representation of one client to interfere with the representation of the other, to follow the client’s lawful directions on all substantive matters, and to not abandon the client. See, Article: Duty of Undivided Loyalty.
Duty to Defend – The duty to defend is a liability insurer’s contractual promise to pay for a lawyer to represent the policyholder in such a lawsuit. “Standard comprehensive or commercial general liability insurance policies provide that the insurer has a duty to defend the insured in any action brought against the insured seeking damages for any covered claim. [T]he duty to defend may be as important as the duty to indemnify. [T]he insurer’s duty to defend runs to claims that are merely potentially covered, in light of facts alleged or otherwise disclosed. It entails the rendering of a service, viz., the mounting and funding of a defense in order to avoid or at least minimize liability. It arises as soon as tender is made. It is discharged when the action is concluded. It may be extinguished earlier, if it is shown that no claim can in fact be covered. If it is so extinguished, however, it is extinguished only prospectively and not retroactively: before, the insurer had a duty to defend; after, it does not have a duty to defend further. Obviously, the insurer’s duty to defend is broader than its duty to indemnify. But, just as obviously, it is not unlimited. It extends beyond claims that are actually covered to those that are merely potentially so—but no further.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 45-46.)
Duty to Indemnify – The duty to indemnify is a liability insurer’s contractual promise to pay certain civil judgments. “Standard comprehensive or commercial general liability insurance policies provide that the insurer has a duty to indemnify the insured for those sums that the insured becomes legally obligated to pay as damages for any covered claim. The insurer’s duty to indemnify runs to claims that are actually covered, in light of the facts proved. By definition, it entails the payment of money in order to resolve liability. It arises only after liability is established.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 45-46.)
Duty to Investigate – An insurer must investigate claims as an essential predicate to fulfilling its primary promises to defend and indemnify. See, Article: Duty to Investigate.
Duty to Settle – The duty to settle is an implied obligation of a liability insurer to protect the policyholder by settling a civil lawsuit in order to avoid a judgment which exceeds the policy limit of a liability policy. See, Article: Duty to Settle.
Endorsement – Part of the structure of a liability policy, Endorsements typically change what the policy says elsewhere. Insurers tend to use standardized preprinted contract form developed by the Insurance Services Office (ISO). In order to tailor coverage for any particular policyholder, endorsements will delete, add to, or change the standard language of the policy contract. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Estoppel – Estoppel is a legal term describing a species of misrepresentation. A liability insurer which misleads its insured may be prevented or “estopped” from taking advantage of its deception. Estoppel is closely related to waiver. See, Article: Waiver, Estoppel and Forfeiture.
Exclusions – Part of the structure of a liability policy, the Exclusions take away from the breadth of the insuring clause by the statement: “This insurance does not apply to:” followed by a long list of possible liability that are not covered by this policy. Exclusions may be easily understood as a laundry list of other policies one can buy. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Fiduciary – A person to whom power is entrusted for the benefit of another.
Fiduciary duty – A duty owed by a fiduciary to the one for whose benefit the fiduciary wields power. An insurer has fiduciary-like duties to the policyholder which arise out of the terms of the insurance policy and are implied from the obligations assumed by the insurer in the policy. See, Article: Duty of Good Faith and Fair Dealing.
Fiduciary relationship – As applied to a lawyer, a connection to a client of the very highest character which depends on the client’s trust and confidence in counsel including duties of loyalty and confidentiality, which continued in force even after a representation had ended, and by which the attorney may not do anything which will injuriously affect a former client nor may [the attorney] at any time use against [the] former client knowledge or information acquired by virtue of the previous relationship.
Implied – An “implied” right is one created by the law and superimposed into a contract, but is not expressly stated by the language of a contract.
Indemnity – Indemnity is defined by Civil Code § 2772 as “a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, of some other person.”
Independent Counsel – Independent Counsel (aka Cumis Counsel) is a lawyer who is selected by and represents only the policyholder and has no attorney-client nor business relationship with the insurer. Independent Counsel’s counterpart is Dependent Counsel. See, Article: Difference Between Dependent and Independent Counsel.
Insurance – Insurance is defined by the Insurance Code §25 as “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.”
Insuring Clause: Insuring Agreement – Part of the structure of a liability policy, the Insuring Clause is usually a sentence or two where the insurer makes the primary promises to defend and indemnify the insured. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Insurer Duties – See, Articles: Duty of Good Faith and Fair Dealing, Duty to Defend, Duty to Indemnify, Duty to Investigate and Duty to Settle.
Insurer Rights – See, Articles: Blue Ridge Reimbursement, Buss Reimbursement, Insurer’s Contractual Right to Control Settlement.
Law of Large Numbers – A statistical axiom that states that the larger the number of exposure units, the greater the probability that actual loss experience will equal expected loss experience. In other words, the credibility of data increases with the size of the data pool. The law of large numbers applies to the actuarial process by which an insurer decides whether to issue a policy and how much to charge. The law of large numbers may also apply to the claims process.
Liability insurance – Liability insurance is a contract whereby an insurer agrees to indemnify a policyholder against liability imposed on the policyholder in a civil lawsuit.
Limitations – Part of the structure of a liability policy, the Limitations state the policy limits applicable to a variety of circumstances. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Menage a Trois – A French phrase which originally described a domestic arrangement in which three people having sexual relations occupy the same household, which translates literally as “household of three”. In this website it refers to the three way relationship among a policyholder, a liability insurer and their common lawyer. See, Article: Three-Way Relationship: Tripartite or Menage a Trois.
Mixed action – A third party liability lawsuit in which more than one claim for damages is asserted, some of which “are at least potentially covered and the others are not.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 47.)
No action clause – A standard liability policy limits the policyholder’s or a claimant’s right to sue the insurer with language such as: “No person … has a right…: to sue us … unless all of the terms have been fully complied with. A person … may sue us to recover on an agreed settlement [signed by us] or a final judgment against the insured.” See, Article: Insurer’s Contractual Right to Control Settlement.
No automatic waiver rule – A rule of law that a liability insurer does not automatically waive any ground upon which it may later deny coverage to its policyholder by failing to specify that ground in a reservation of rights letter. See, Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 35.
Notice clause – A standard liability policy requires the policyholder to notify the insurer of a claim or lawsuit with language such as: “If claim is made of ‘suit’ is brought against any insured, you must: . . . Notify us as soon as practicable.” See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Notice-prejudice rule – A rule of law that an insurer may not disclaim certain obligations it owes to the policyholder because of the policyholder’s failure to give notice to the insurer as required by the terms of the policy unless the late notice caused prejudice to the insurer.
No voluntary payment provision – A clause in standard liability insurance policies which prohibits the policyholder from paying anything of value to a third party claimant for which the insurer may be held responsible. This clause effectively bars the policyholder from settling with a plaintiff unless the insurer consents. See, Article: Insurer’s Contractual Right to Control Settlement.
Own risk standard – A legal test by which an insurer’s decision to reject a policy limits demand because it denies coverage may be measured. (Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 660 “An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract…. The insurer should not be permitted to profit by its own wrong.”) The alternative is the Prudent Insurer Standard.
Performing insurer – A liability insurer which agrees to defend and discharges the services inherent in the duty to defend.
Plaintiff – A person or entity initiating a civil lawsuit against a defendant.
Plaintiff’s lawsuit – As used here, this phrase means a civil lawsuit in which a plaintiff seeks to recover damages from a defendant who has a liability insurance policy. This phrase may also refer to a lawsuit in which a cross-complaint is filed by a defendant against a policyholder.
Pleading into Coverage – Drafting a complaint so as to articulate genuine claims for damage which may fall within the indemnity coverage of a defendant’s liability insurance policy and influence the insurer to provide a defense and contribute to settlement. See, Article: Pleading Into Coverage.
Pleading out of Coverage – Drafting a complaint so as to eliminate claims for damage which may fall within the indemnity coverage of a defendant’s liability insurance policy and may discourage the insurer from providing a defense.
Policy limit – The policy limit is the maximum amount of money the insurer is contractually obligated to pay as indemnity, which dollar amount is usually stated in the Declarations.
Policy limits demand – An offer to settle by the injured plaintiff to the policyholder-defendant to resolve all claims for the policy limit.
Policy period – The policy period identifies the time period that liability insurance covers. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Pop policy limits – A settlement procedure by which an injured plaintiff makes a policy limits demand, thereby putting the liability insurer to a choice to accept the settlement offer or risk exposure to pay a judgment in excess of its policy limit for a violation of the duty of good faith and fair dealing. See definition of Blue Ridge Reimbursement. See, Article: How to “Pop” Policy Limits.
Pride or profit – Parties to a lawsuit often have two goals in litigation: pride and profit. Pride is served by vindication that groundless claims of negligence are proven false. Profit is served by minimizing the payment of money to the plaintiff and to one’s own lawyer. When an insurer concedes coverage, the policyholder can afford to indulge pride, since it has not money at stake. But when the insurer denies coverage, the policyholder must weigh how much personal profit may be lost by indulging pride.
Prudent insurer standard – A legal test by which the reasonableness of an insurer’s decision to reject a policy limits demand may be measured. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429 “In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer.”) The alternative is the Own Risk Standard.
Reservation of Rights – A reservation of rights is a provisional denial of coverage. A reservation of rights serves as a warning by an insurer that it may deny coverage to its policyholder on any and all grounds. By reserving its rights to deny coverage, the insurer does not waive any rights it might have against its policyholder and avoids a legal estoppel, waiver or forfeiture. As applied to liability insurance, insurers often reserve the right to contest the duty to indemnify and/or the defend to defend, while agreeing to defend. See, Article: Nature of Reservation of Righgts.
Res Judicata – The doctrine of res judicata precludes parties or their privies from relitigating a cause of action that has been finally determined by a court of competent jurisdiction as to any issue necessarily decided.
Right To Control Defense – The right to control the defense means two things. First, the person in control of the defense has the right to make the major decisions in the lawsuit such as whether to file a cross-complaint, whether to settle, how much to pay in settlement, and whether to go to trial. Second, the person in control of the defense choosing a lawyer to handle the defense and manages the work of the lawyer. See, Article: Insurer’s Contractual Right to Control Settlement.
Right To Control Settlement – A handful of contractual provisions confer on a performing insurer the right to control settlement by prohibiting the policyholder from settling with an injured plaintiff without the insurer’s consent. However, these provisions may be unenforceable by a defaulting insurer. See, Article: Insurer’s Contractual Right to Control Settlement.
Set up – An attempt by a plaintiff and/or policyholder to create bad faith liability by an insurer, often by agreeing to the policyholder’s liability or the amount of the plaintiff’s damages without evidentiary support. Properly the courts are sensitive to and uniformly decry a set-up. (Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal. App. 3d 883, 892: “bootstrapped their damages with the ingenious assistance of counsel.”) (J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 18: “concoct a bad faith claim out of whole cloth.”)
Settle and sue – A procedure of dispute resolution available when a liability insurer wrongfully fails to defend, the abandoned policyholder may cooperate with the injured plaintiff to settle their liability lawsuit and then sue the defaulting insurer, supported by a presumption of liability and damages. See, Article: How to Settle and Sue.
Settlement Option – A standard liability policy makes no express promise to settle and creates no contractual obligation to settle. Instead, the language specifies only an option to settle, such as: “We may in our discretion . . . settle any claim or ‘suit’.” See definition of Duty to Settle.
Structure of a standard policy – Liability insurance policies are highly structured, consisting of easily identifiable parts including Declarations, Insuring Clause, Conditions, Definitions, Limitations, Exclusions, and Endorsements. See, Article: Anatomy of a Liability Insurance Policy – Part 1: Policy Structure.
Testify into coverage – Giving truthful testimony through discovery which supports a finding that the policyholder is liable to the injured plaintiff for misconduct which is covered by an insurer’s policy. Dependent counsel sometimes discourage policyholders from testifying into coverage, which may be contrary to the policyholder’s interests. See, Article: Incentives to Confess Covered Liability. A policyholder testifying into coverage is a counterpart to a plaintiff pleading into coverage. See, Article: Pleading Into Coverage.
Third party liability lawsuit – See, Plaintiff’s lawsuit. An action by an injured plaintiff filed against a defendant who has liability insurance. While the insurer and policyholder are parties to the insurance contract, the plaintiff is not, and thus is a “third party.”
Tripartite Relationship – A coalition of insurer, policyholder and the insurer’s dependent counsel. When no conflicts of interest divide its members, this defense team harmoniously seek a single, shared, common goal and purpose of defeating or minimizing legal claims of a plaintiff in a third party civil lawsuit. When conflicts of interest do divide its members, the relationship resembles a husband (lawyer), wife (insurer) and mistress (policyholder) which may be discordant. See, Article: Three-Way Relationship: Tripartite or Menage a Trois.
Voluntary payment provision – A standard liability policy prohibits the policyholder from settling a lawsuit without the insurer’s consent with language such as: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense … without our consent.” See, Article: Insurer’s Contractual Right to Control Settlement.
Waiver – The voluntary relinquishment of a known right. If one knows of the existence of a right and chooses to give it up, the result is a waiver.
Wrongful failure to defend – When a liability insurer disclaims any duty to defend, it risks that its decision may turn out to be wrong. The policyholder’s mere potential covered liability to the injured plaintiff may trigger the broad duty to defend. A reasonable but erroneous failure to defend garners severe consequences to the defaulting insurer. See, Article: Nature of Duty to Defend.