INTRODUCTION
Cooperation is a good thing. The word “cooperation” derives from the Latin for “work together.” It means to work jointly towards the same end or to comply with a request; to associate with another or others for mutual benefit. Young mothers urge their children to cooperate. Governments pressure warring factions to cooperate. Trial courts push lawyers to cooperate. Liability insurers expressly require their policyholders to cooperate.[1] No California statute, regulation, reported opinion, nor standard contract provision prohibits a policyholder from cooperating with a plaintiff. Such cooperation is commonplace when an insurer wrongfully denies coverage. However, they may not collude.[2] Collusion is secret agreement for an unlawful purpose.[3] Collusion is a well recognized, but quite limited defense by which insurers may resist paying unreasonable settlements.[4]
ENEMIES MAY ALSO BE ALLIES
Plaintiffs and defendants are natural enemies in a liability dispute. Often emotions run high, prompting the parties to choose between economic gain or vengeance, but rarely both.[5] But in a simultaneous coverage dispute a plaintiff and a policyholder may also be natural allies who choose to work together towards the same end for their mutual benefit. By analogy, the U.S.A. and China may have many good reasons to be mad at each other, but they share a common goal of keeping nuclear weapons out of the hands of North Korea. They may cooperate against North Korea while they continue to fight each other. Similarly, a plaintiff may continue to battle a defendant and at the same time cooperate with a policyholder to achieve shared goals regarding coverage.
SOME REASONS TO COOPERATE
• Objectivity: The lawsuit should not be personal.
• Closure: The parties usually want to end the lawsuit.
• Lucre: The lawsuit is primarily about money.
• Savings: The parties may want to minimize litigation expense.
• Time: The parties may want to resolve the dispute soon.
• Stress: The parties may want to end the distraction of lawsuit.[6].
• Principle: The law favors settlement.[7]
• Practicality: The insurer has lots of money.
SOME REASONS TO NOT COOPERATE
• Vengeance: The plaintiff and the defendant hate each other.
• Non-monetary justice: The dispute cannot be resolved with money.
• Wealth: The defendant has enough verifiable, available assets to satisfy any judgment so that the plaintiff does not need the reliability of collection from an insurer.
• Litigation Tactics: The plaintiff’s lawyer prefers to avoid a defense effort well funded by an insurer.
• Tradition: The plaintiff and the defendant are supposed to stay mad at each other.
SOMETIMES, COVERAGE ISSUES DRIVE LITIGATION STRATEGY
Often at the very end of a contentious, hard fought, expensive lawsuit, an injured plaintiff wins the pyrrhic victory of a big judgment with no one from whom to collect. A plaintiff may settle with the defendant for a covenant not to execute in return for an assignment of the policyholder’s only viable asset – legal rights against a defaulting insurer.[8]
Too often, the very end of a lawsuit is poor time to start thinking seriously about coverage. The precise nature of the claims previously made and now concluded, the evidence adduced, the discovery preserved, trial testimony given, special verdict findings returned and the like will form the evidence upon which coverage may turn. Maybe this vast record will support coverage or maybe it will undermine coverage. Second guessing and recrimination is likely to abound.
An alternative to this frequent sad scenario is to think about coverage early. If coverage is the prize upon which ultimate collection depends, perhaps coverage is worthy are consideration at the beginning of the lawsuit. Perhaps, coverage should be recognized as a strategic goal that should drive litigation tactics in the liability suit. In appropriate cases, insurance coverage should rate a higher priority than liability or damages in the liability suit. The advantages of early resolution are manifest – saving time, money and stress. The plaintiff and the defendant may, and perhaps should, cooperate properly, early, and often.
COLLUSION IS PROHIBITED
The limit of permissible cooperation is collusion. “The principles of fraud and collusion are self-evident and require no extended discussion. The facts and circumstances which will lead a court to conclude that either are present are limited only by the imagination of those who would cheat and deceive.”[9] As a practical matter, the law of collusion has very limited application[10] and reported opinions barring coverage because of collusion are very rare.[11] “One court suggested an example when it stated that a ‘cognizable claim of fraud or collusion would [require a showing that the third party claimant] had no substantial claim or chance of recovery and that the [insured] had permitted a judgment in [the claimant’s] favor which was disproportionate to his injuries; [and that the insurer] had no notice of this in time to intervene.’”[12]
ETHICAL COMMUNICATION
Lawyers may freely speak with each other about cooperating, but a lawyer may not ethically communicate with an opposing party who is represented by counsel. “While representing a client, a [lawyer] shall not communicate directly or indirectly about the subject of the representation with a party the [lawyer] knows to be represented by another lawyer in the matter, unless the [lawyer] has the consent of the other lawyer.”[13] There is no ethical prohibition against the parties communicating with each other. Dependent counsel are often more inclined than independent counsel to resist cooperating in any fashion that is contrary to insurer’s interests.[14] Plaintiff’s counsel may communicate with a policyholder while defense counsel is present, such as during a deposition. A neutral way to encourage cooperation may be to alert potential allies of this website.
STRATEGIC CHOICES
Given that a plaintiff and a policyholder are enemies in a liability dispute, their strategic choice of whether or not to cooperate usually focuses upon whether they choose to work together regarding the coverage dispute. The plaintiff want coverage for a reliable source of collection. The policyholder wants coverage to protect personal assets. The insurer will make as many as ten significant decisions that will impact the policyholder and may affect the plaintiff.
1. Does a Coverage Dispute Exist? The first decision an insurer must make is whether to provide a defense at all. Most coverage disputes arise when the insurer says NO or MAYBE.[15]
2. Acquiescence? If the insurer creates a coverage dispute, both the policyholder and the plaintiff may each decide whether either chooses to do anything about it.[16]
3. Quick Fixes? Depending upon the number and subject matter of the coverage dispute, quick and cheap solutions may be available. A NO may be changed to a MAYBE and a MAYBE may be changed to a YES.[17] Dependent counsel may or may not be able to control the defense.[18] The insurer may modify or withdraw its coverage challenges.[19]
4. Cooperation? The policyholder and the plaintiff may legally, ethically, and contractually join forces to pursue their common goals.[20] There is no such thing as a set-up for the simple reason that the courts will not allow it.[21] The plaintiff may plead into coverage.[22] Both the policyholder and the plaintiff may testify truthfully into coverage.[23] The plaintiff may “pop” the policy limits.[24]
5. Develop Evidence? The policyholder and the plaintiff may actively document events in the conduct of the defense.[25] Coverage disputes may turn on misinformation or lack of clarity as to the insurer’s position.[26] The plaintiff may consider making a policy limit settlement offer[27] that may trigger an insurer’s duty to settle.[28] If the insurer is not faithfully providing a defense, the litigants may consider settlement or arbitration.[29]
6. Conflicts of Interest? If dependent counsel has unresolved ethical concerns,[30] the policyholder and the plaintiff may force dependent counsel to make difficult ethical choices.[31]
7. Control the Defense? The policyholder need not accept dependent counsel’s control of the defense[32] without compliance with Rule 3-310.[33] There are several ways that the policyholder may secure a court order that dependent counsel has unresolved, disqualifying conflicts of interest.[34] If the insurer is not faithfully paying for independent counsel, it may be in breach of its duty to defend.[35]
8. Seek to Settle? The policyholder and the plaintiff may trigger the insurer’s duty to settle[36] if the policyholder makes a proper settlement offer.[37] If the insurer is in breach of its duties the policyholder may assign its rights to the plaintiff to finance a settlement.[38]
9. Buss Reimbursement? The plaintiff may dismiss causes of action that are clearly not covered. The policyholder may fire conflicted dependent counsel[39] and request that independent counsel carefully account for reimbursable defense costs.[40]
10. Blue Ridge Reimbursement? The risk that an insurer may assert a right to seek reimbursement of the costs of settlement creates incentives for the policyholder to confess covered liability.[41] When an insurer makes a settlement offer to the plaintiff and asserts rights of reimbursement, there are several things that the policyholder and the plaintiff may do to minimize the risk of reimbursement.[42]
[1] See, Article: Cooperation – Policyholder’s Duty; Standard policy language is: “You and any other involved insured must; (3) Cooperate with us in the investigation or settlement of the claim or defense against the ‘suit’.”
[2] See, Article: Line Dividing Cooperation from Collusion.
[3] See, Article: Elusive Definition of Collusion.
[4] See, Article: Collusion – A Limited Defense.
[5] See, Article: Prize: Price or Pride.
[6] See, Article: Goals Shared by Policyholder and Plaintiff.
[7] “The law favors settlements. (Potter v. Pacific Coast Lumber Co. (1951) 37 Cal.2d 592, 602; (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 800.) “[I]t is fundamental that the law favors settlements.” (Brown v. Guarantee Ins. Co. (1957) 155 Cal. App. 2d 679, 696.) There is “a strong public policy in favor of settlement.” (American Motorcycle Assn. v. Superior Court of Los Angeles County (1978) 20 Cal. 3d 578, 603.)
[8] See, Article: Assignment of Policyholder’s Claims to a Plaintiff.
[9] Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 530.
[10] See, Article: Collusion – A Limited Defense.
[11] See, Article: Compendium of Cases: Collusion.
[12] Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 530, fn. 27, quoting from Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 806 (emphasis added).
[13] Rules of Professional Conduct, Rule 2-100.
[14] See, Articles: Dependent Counsel Is Beholden to the Insurer, Dependent Counsel Represents the Insurer, Difference Between Dependent and Independent Counsel.
[15] See, Article: Reservation of Rights.
[16] See, Practice Pointer: Acquiescence Is Dangerous.
[17] See, Quick Fixes.
[18] See, Attorney Duties in Table of Contents.
[19] See, Insurer Duties in Table of Contents.
[20] See, Article: Line Dividing Cooperation from Collusion.
[21] See, Article: Compendium of Cases: Collusion.
[22] See, Article: Plead Into Coverage Properly.
[23] See, Article: Testify Into Coverage Truthfully.
[24] See, Article: How to Make a Policy Limit Settlement Offer Properly.
[25] See, Article: Compendium of Cases: Failure of Proof of Disqualifying Conflicts of Interests.
[26] See, Articles: There Is No Deadline to Deny Coverage and Civil Code §2860 – Protection Must Be Earned.
[27] See, Practice Pointer: How to Make a Policy Limit Settlement Offer Properly.
[28] See, Article: Duty to Settle.
[29] See, Article: Defaulting Insurer Forfeits Control of the Defense.
[30] See, Article: Disqualifying Conflicts of Interest.
[31] See, Attorney Duties in Table of Contents.
[32] See, Article: Control of the Conduct of the Defense.
[33] See, Article: Duty to Comply with Rule 3-310.
[34] See, Practice Pointer: Procedural Alternatives to Determine Disqualifying Conflicts.
[35] See, Article: Defaulting Insurer Forfeits Control of the Defense.
[36] See, Article: Duty to Settle.
[37] See, Article: How to Make a Policy Limit Settlement Offer Properly.
[38] See, Article: Assignment of Policyholder’s Claims to a Plaintiff.
[39] See, Article: Client May Fire Attorney.
[40] See, Article: Buss Defense Cost Reimbursement.
[41] See, Practice Pointer: Incentives to Confess Covered Liability.
[42] See, Article: Blue Ridge Settlement Cost Reimbursement.