“No” – Insurer Denies All Coverage – PP


When a policyholder asks a liability insurer for help with a plaintiff’s lawsuit, the insurer must promptly answer: “Yes”, “No”, or “Maybe”.[1] A “No” response must give a detailed written explanation, and urge the policyholder to fight back.[2] Saying that there is no coverage for a liability dispute (in which the policyholder and plaintiff are adversaries) creates a second, usually related coverage dispute (in which the policyholder and plaintiff may become allies).

This Practice Pointer is the second part of a triad (a Memorandum gathers objective legal authority: an Action Guide provides forms) that subjectively explores strategic and tactical options that cooperating policyholders and plaintiffs may consider in deciding how to respond to an insurer that says “No”.

In the Memorandum, readers learned that the policyholder and the plaintiff may: 1) cooperate with each other, if they want to; 2) easily determine whether the denial is right, wrong, or fixable; 3) enforce duties owed by the insurer; 4) control of the defense and settlement because a breaching insurer may not enforce several protective contractual provisions; 5) plead into coverage properly; 6) testify into coverage truthfully; 7) protect confidential communications; and 8) maximize recovery of Cumis fees from the defaulting insurer.

This Practice Pointer subjectively explores whether to defer responding to the insurer’s denial of coverage until the policyholder and the plaintiff have discussed and decided whether: 1) the coverage dispute should drive the liability dispute; 2) the parties should execute procedural agreements while the insurer is in default; 3) to offer to settle within the insurer’s policy limit; 4) to plan on executing an assignment and covenant; 5) to sign a privilege non-waiver agreement; 6) to anticipate and minimize in-fighting by negotiating a confidential recovery distribution agreement; and 7) tying all of this together with a coordination agreement. Only after the litigants have explored all of these issues, should they request that the insurer reconsider its denial of all coverage. Adversarial zeal calls for the policyholder and plaintiff to take full advantage of the temporary, self-imposed absence of a defaulting insurer.


Insurance companies are financial institutions. Like banks, they take money in and then pay it back out. Usually, money resolves civil lawsuits.[3] When a defendant filing a cross-complaint, reciprocal rights may emerge in the opposing side. Insurance often; 1) assures the plaintiff of a reliable source of collection; 2) implies an “obligation” to settle not shared by the defendant; 3) pays the lawyer to conduct the litigation; and 4) cannot take a setoff for sums owing.[4]

Because an insurer’s denial of coverage for a liability dispute usually creates a related coverage dispute, some litigants priortize resolution of the coverage dispute over resolution of the liability dispute.[5] A policyholder can “win” in either of two ways: 1) utterly humiliate the plaintiff; or 2) have anybody else pay the plaintiff off. Since as many as 96% of some kinds of civil cases settle, humiliating the plaintiff is rarely a realistic goal.[6]

The parties should scrutinize the allegations of the complaint, the conduct of discovery, verifications, sworn declarations, deposition and trial testimony, jury instructions, special interrogatories to the jury, the form of judgment, and many other items of admissible evidence with coverage in mind. All of this evidence is going to be developed in the course of litigating the liability dispute and in the process will create a record of admissible evidence that may impact a coverage dispute. Smart litigants will recognize, evaluate, and plan on making this developed evidence useful. In fact, the impact of this developed evidence is usually very one-sided: the policyholder creates a mountain of potentially damaging evidence while the insurer creates none. Because the insurer is not a party to the liability action, its swears to nothing, verifies nothing, and gives no testimony. Since the policyholder and the plaintiff are in charge of creating the evidentiary record left by the liability dispute, smart litigants may elect to help rather than hinder coverage. Many litigants fail to start thinking about the impact of their evidentiary record until after judgment or settlement – which is often too late.[7]


A California statute clarifies that the court procedures by which a liability dispute is resolved have direct and significant impact upon a liability insurer’s obligation to pay for the outcome. Liability insurance is a contract of indemnity that, by its very nature, does not mature until two things have been established in a liability dispute: 1) the policyholder is legally liable to the plaintiff; and 2) the amount of damages.[8] Only after the policyholder’s liability and the amount of the plaintiff’s damages are established does the insurer have to pay. These determinations “conclusively” bind an insurer that fails to defend.[9] But if the policyholder controls the defense, the insurer may rebut a “presumption” that it is liable to pay the judgment.[10] An an insurer that controls the defense is conclusively bound unless it issues a reservation of rights.[11]

Whether the outcome of a liability dispute is presumptively or conclusively binding on an insurer can be hugely important. An insurer that is conclusively bound by the outcome of a liability dispute has no excuse not to pay. But an insurer that is merely presumptively bound has a license to engage in another whole round of litigation. “Courts have reached differing results on these issues depending upon the following two factors: (1) whether or not the insurer provided a defense to the insured and (2) the nature and extent of judicial oversight of, or participation in, the settlement process so as to give some assurance that there was no fraud and collusion in the making of the settlement.”[12]


There are many procedural ways that a liability dispute can be resolved, the most common of which include: 1) a court trial with: A) a default prove-up; B) a lackluster defense; C) a vigorous defense; 2) a trial by general reference; 3) an arbitration; 4) a mandatory settlement conference; 5) a mediation; 6) a “good faith”[13] settlement; 7) a private settlement; and 8) a stipulated judgment. Many of these options have been tested in reported opinions with results that range from lambasting the plaintiff to ridiculing the insurer – all depending on the peculiar facts of each case. Still, patterns emerge.[14]


Most observers would agree that an insurer that wrongfully refuses to defend is a “bad guy.” But the insurer’s wrongful conduct is not a license for a policyholder and a plaintiff to commit collusion. Two wrongs don’t make a right. Because of the risk of collusion or fraud, courts are reluctant to conclusively bind tan insurer to the outcome of a liability dispute in which it did not participate. Courts are also careful to shift the burden of proof between insurer and claimant based upon their behavior.

The result is a sort of sliding scale of the trustworthiness of procedural options that do or do not satisfy the court system’s concerns for its own integrity. Accordingly, the courts insist upon procedural due process of law. “The farther down the continuum from contested judgment to voluntary payment the facts lie, the more difficult it will be to prove the existence of an ‘amount which the insureds are legally obligated to pay.”[15] Thus, the courts have a stake in the action that is independent of the interests of the selfish interests of the policyholder and the insurer. The courts goal is to give “meaningful protection to an insured who is abandoned by a liability insurer wrongfully denying coverage or refusing a defense and at the same time provide to the insurer some measure of procedural due process in order to protect against the consequences of a fraudulent or collusive settlement.”[16]

A good rule of thumb is this: There will always be a judicial test the bona fides of the policyholder’s liability and the amount of the plaintiff’s damages – either in the liability dispute or in the coverage dispute – take your choice. Otherwise, due process of law fails. In a very well reasoned and comprehensive opinion authored by Justice Croskey, the court analyzed a long history of related cases to draw a bright line: an adjudication will conclusively bind an insurer – a settlement will not. In Pruyn a plaintiff’s argument failed “that the determination under section 877.6 which was made by the trial court was sufficient judicial oversight to make the resulting judgment binding on the defendant insurers.”[17] Instead, the court drew the line to bind an insurer following any sort of adjudication, but not bind the insurer to any settlement, no matter how closely scrutinized by a court. The unarticulated rationale seems to be that trial courts can casually approve settlements as being in good faith without independently passing on the bona fides of liability and damage. But in contrast, in any sort of trial the court necessarily adjudicates the all important issues of the policyholder’s liability and the amount of the plaintiff’s damages. “[A] default judgment would bind the insurer that had denied coverage or refused to provide a defense. The same result flows where the settlement resulted in an uncontested trial. However, [not] where the judicial participation is limited to a good faith determination. [T]he bona fides of the settlement must be resolved before [the plaintiff] can enforce against the insurer the judgment which resulted from that settlement.[18]

Although a “good faith” settlement is not conclusively binding on a defaulting insurer, “(1) a settlement would be presumptive evidence of an insured’s liability and the amount of the damages sustained by the injured party in a later [coverage] action against an insurer which wrongfully withheld coverage or a defense, and (2) a good faith determination pursuant to section 877.6, would provide evidentiary support for that presumption; and such presumption, unless overcome by evidence produced by the insurer, would make the stipulated judgment binding and the ‘no action’[19] clause inapplicable.[20]

Despite the clarity of Pruyn’s bright line, some courts have not honored default prove-ups and uncontested trials where “clearly something seems amiss in the circumstances surrounding the ‘trial’.”[21]


The binding effect of a settlement between an abandoned policyholder and a plaintiff and the burden of proof to establish the bona fides of the policyholder’s liability and the amount of the plaintiff’s damages depends on the procedure selected to resolve a liability dispute.

Given the landscape of California decisions, it seems clear that sooner or later a settling policyholder and plaintiff must undergo some form a independent, trustworthy adjudication of the issues of the policyholder’s liability and the amount of the plaintiff’s damages. Their choice is to conduct the adjudication: 1) in resolving the liability dispute in the hopes of conclusively binding the defaulting insurer to the outcome; or 2) in subsequent coverage litigation where the insurer brings its formidable resources to fight.

1.   Tactical Procedural Resolution Options

A settling policyholder and plaintiff have many procedural options to implement a settlement, but some working rules of thumb appear.

Do not simply stipulate to a judgment in which the policyholder confesses liability and the plaintiff arbitrarily selects a damage figure.

Do conduct the adjudication as part of resolving the liability dispute.

Do discuss the terms of a Assignment and Covenant prior to the adjudication, but do not necessarily execute it.

• If the parties elect to defer the adjudication to the coverage dispute, do make a record of close judicial scrutiny of the settlement process in evaluating the bona fides of the fact of the policyholder’s liability and the amount of the plaintiff’s damages, including making a good faith motion.

On the sliding scale of binding a defaulting insurer to the resolution of a liability dispute, the courts will look for evidence of fairness, reasonableness, and due process. “[T]he easiest case for assessment of indemnity damages almost certainly would be one in which the third party claimant had forced the insured to trial and had obtained a fully litigated judgment fixing the amount due on the claim. Such a judgment, in contested proceedings, would provide relatively persuasive evidence of both the obligation and its amount.”[22] However, “neither the adequacy of the representation nor the effectiveness of the defense are relevant to the question whether the insured can enter into a binding settlement without the insurer’s consent.”[23] Still, these cases seem to turn on their peculiar facts. The more vigorous the defense appear, the more likely it is that due process has been served which should boost the likelihood that the insurer will be bound.

2.   Tactical Fairness Options

Notwithstanding the presumed fact that a defaulting insurer is behaving very badly and may not deserve much respect, settling policyholders and plaintiff should discuss and resolve how to treat the insurer fairly.

Do keep the defaulting insurer advised of each step in the settlement process. “The ‘general rule’ is that an insurer is not bound by a judgment unless it had notice of the pendency of the action. However, if an insurer denies coverage to the insured, the insured’s contractual obligation to notify the insurer ceases. The insured is relieved of his obligation to inform the insurance company of the service of summons or the date of trial of the action.”[24] On the other hand, “a cognizable claim of fraud or collusion [may be supported if the insurer] had no notice of this in time to intervene.”[25]

Do invite the defaulting insurer to participate in the settlement process. Many reported opinions mention that a factor in determining whether to bind an insurer to a settlement is whether the settling parties kept the insurer informed.[26]

Do not yield to the insurer if it recants. While many recanting insurers are likely to seize control of the defense going forward, may seek to unwind whatever the parties have previously accomplished, and may delay resolution for years, the litigants may be able to minimize these drawbacks by entering into binding procedural agreements before the insurer recants.


While an insurer is in default of its duty to defend, the policyholder and plaintiff may enter into binding agreements to settle their liability dispute.

1.   Privilege Non-Waiver Agreement

The Common Interest Doctrine[27] protects confidential communications among parties with common interests from disclosure to an adverse party. For example a policyholder and plaintiff who are adverse in a liability dispute may share confidential information regarding their common interests in a coverage dispute without waiving the attorney-client privilege or the work product doctrine. Sometimes knowN as a joint defense or confidentiality agreement, the effect of such an agreement is to avoid waiver of evidentiary privileges. However, claims of privilege are often subject to in camera review of the privileged material. When a liability insurer denies all coverage, cooperating policyholder and plaintiffs should consider negotiating a privilegenon-waiver agreement.

2.   Policy Limit Settlement Offer

The implied covenant of good faith and fair dealing requires a liability insurer to accept a reasonable settlement offer within its policy limit.[28] “It follows from what we have said that an insurer, who wrongfully declines to defend and who refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgent against the insured even if it exceeds the policy limits.”[29] Accordingly, a plaintiff who has suffered damages that may exceed a policyholder’s policy limit(s) may want to consider making an offer to the policyholder to settle within the defaulting insurer’s policy limit, which offer must be communicated to the insurer. If the offer is declined and the plaintiff later recovers a sum in excess of the policy limit, the defaulting insurer may be required to pay more than its policy limit.

3.   Assignment and Covenant

When a plaintiff recovers a judgment or settlement from a defendant/policyholder whose liability insurer has wrongfully failed to defend, the policyholder’s right to sue the defaulting insurer is an asset that some policyholders will sell to the plaintiff to protect their other assets. “An action for damages based on an insurer’s wrongful failure to settle is assignable. [I]t is well settled that a provision [in a policy prohibiting assignment] does not preclude the transfer of a cause of action for damages for breach of a contract.[30] Typically, the plaintiff grants to the policyholder a promise not to execute against other assets of the policyholder but does not release the policyholder from liability because the policyholder’s liability to the plaintiff is a necessary predicate to the insurer’s obligation to indemnify. “[A] covenant not to execute is not a release. It [does] not blot out the personal judgment against [the policyholder] or extinguish his claim for breach of contract against the carrier.[31] “[A]n assignment may be made before trial, but the assignment does not become operative, and the claimant’s action against the insurer does not mature, until a judgment in excess of the policy limits has been entered against the insured.”[32]

Courts are skeptical of assignments with covenants not to execute because the defendant has no incentive to fairly adjudicate liability and damages. In Pruyn, the court noted that “[a] nonparty insurer must be given a fair opportunity to litigate the question of whether the settlement was unreasonable or was the product of fraud or collusion particularly if a covenant not to execute is a part of that settlement.”[33] Other cases have found settlements with assignments and covenant to be a “worthless paper transaction”[34], where “a true independent adjudication of the insured’s liability . . . is wholly lacking”[35], and “[a] stipulated judgment with a covenant not to execute will not bind the insurer. . . . The covenant not to execute shields the insured from such liability [because] to sanction such a transaction ‘would be to invite collusion between the claimants and the insured’ by allowing them to ‘bootstrap[] their damages with the ingenious assistance of counsel.’”[36]

4.   Confidential Recovery Distribution Agreement

Both policyholders and plaintiffs hire lawyers who often provide legal services in both the liability dispute and the coverage dispute pursuant to retainer agreements that grant an attorneys lien.[37] An insurer that wrongfully breaches any of its duties to investigate, defend, settle, or indemnify may become liable to pay substantial damages. Cooperating policyholders, plaintiffs, and their counsel should negotiate at an early stage who gets how much long before anyone knows whether the insurer is liable or for how much. Greed tends to yield gridlock when clients and lawyer battle over a known pot of gold.

5.   Stipulation to Procedural Efficiencies

A.  Advance the Trial Date

It can take nearly five years to commence trial in some courts. However, litigants may stipulation to resolve their liability dispute by arbitration or a by general reference, with or without a jury. In this fashion, a dispute may be resolved in months, not years.

B.  Shortcut Discovery

Simple, low-value disputes and some other lawsuits may be efficiently and economically resolved by voluntarily agreeing to limit the scope of costly discovery.

C.  Streamline Trial Procedure

Parties may streamline a trial by admitting documents, waiving foundation, agreeing to testimony by declaration, testimony by telephone, stipulating to uncontroverted and foundational facts, and the like.

6.   Coordination Agreement

Cooperating parties should consider negotiating a Coordination Agreement so as to tie the various other Model Contracts together, and clarify that some documents are confidential while others are public.


Only after a policyholder and a plaintiff have discussed all of the foregoing issues and documents should either of them respond to an insurer’s wrongful denial of all coverage. When asked to reconsider its denial of coverage, the insurer agree to defend under a reservation of rights. If so, it may[38] earn the right to control the defense and settlement, thereby limiting the litigants’ opportunity to reach some of all of the options mentioned here.

Hyperlink to the Action Guide for forms by which readers may implement the decisions they have made.

[1] “[E]very insurer shall immediately accept [“Yes”] or deny the claim, in whole [“No”] or in part [“Maybe”].” (Code of Reg. § 2695.7(b) (text in parentheses added).)

[2] Every insurer that denies a third party claim, in whole or in part, or disputes liability or damages shall do so in writing [including] a statement that [the policyholder] may have the matter reviewed by the California Department of Insurance.” (Ibid. (ellipses omitted).)

[4] See, No Setoff – MoL

[6] See, Rule of 49: The Insurer Is Much More Dangerous Than the Plaintiff – PP

[7] See, Future Flip – PP

[8] “Upon an indemnity against liability, the person indemnified is entitled to recover upon becoming liable.” (Civ. Code § 2778(1) (ellipsis omitted).)

[9] “If the [insurer] neglects to defend the [policyholder], a recovery against the [policyholder] suffered in good faith, is conclusive in [the policyholder’s] favor against the [insurer].” (Civ. Code § 2778(5) (ellipses omitted).)

[10] “The [insurer] is bound to defend actions brought against the [policyholder in] matters embraced by the indemnity, but the [policyholder] has the right to conduct such defenses. [However, if the insurer] is not allowed to control its defense, judgment against the [policyholder] is only presumptive evidence against the [insurer].” (Civ. Code § 2778(4)(6) (ellipses omitted).)

[11] “[T]he insurer’s unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to” deny coverage. (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754.)

[12] Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 516 (Pruyn)

[13] See, Code Civ. Proc. § 877.6.

[14] See, Compendium of Cases: Collusion – MoL for a sampling of the coverage consequences to a variety of procedural options to resolve a liability dispute.

[15] Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal. App.4th 501, 535-536.

[16] Pruyn, supra, 36 Cal.App.4th at 530.

[17] Id. at 523.

[18] Ibid.

[19] Standard CGL policies require that liability and damages be determined by an “actual trial”: “No action shall lie against the company . . . until the amount of the insured’s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company.” However, a defaulting insurer may not enforce this provision. (See, Control of Settlement – MoL).

[20] Id. at 525.

[21] Lipson v. Jordache Enterprises, Inc. (1992) 9 Cal. App.4th 151, 158; See, Compendium of Cases: Collusion – MoL

[22] Xebec, supra, 12 Cal. App.4th at 535-536.

[23] Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 789.

[24] Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 238 (citations omitted.)

[25] Zander v. Texaco, Inc., supra, 259 Cal.App.2d at p. 806.

[28] See, Duty to Settle – MoL" href="http://dutytodefend.com/duty-to-settle-2/">Duty to Settle – MoL

[29] Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 661.

[30] Id. at 661-62.

[31] Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 803.

[32] Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718, 725.

[33] Pruyn, supra, 36 Cal.App.4th at 526-27 (ellipsis omitted).

[34] Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal. App. 3d 883, 894.

[35] Xebec supra, 12 Cal. App.4th at 544, 541.

[36] Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal. App. 4th 1104, 1114.

[37] See, Attorney Liens – MoL

[38] No reported California opinion clearly states whether an insurer that wrongfully denies all coverage and then recants, agreeing to defend under a reservation of rights may thereafter control the defense and settlement.

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