Top Ten: Surprising Truths When Coverage Is Denied

1:      Control: A policyholder-client may retain control of the conduct of the defense and the development of evidence by simply withholding consent for dependent counsel to represent the policyholder or to appear in court, if the insurer’s lawyer fails to comply with the rules of ethics or has a disqualifying conflict.[1]

 2:      Conflicts of Interest: A reservation of rights always creates some conflict of interest between the insurer and the policyholder, so that the insurer’s lawyer must make written disclosure to and obtain informed written consent from the policyholder and the insurer before starting work to represent the policyholder.[2]

3:      Cooperation: A plaintiff and a policyholder may lawfully, morally and properly cooperate with each other to truthfully plead[3] and testify into coverage.[4]

4:      Friends & Enemies: When a liability insurer denies coverage outright or reserves its rights to later deny coverage, neither the insurer nor its lawyers may be friends of the policyholder or the plaintiff. As a result, the policyholder and the plaintiff may become allied friends to pursue a shared goal to secure coverage.[5]

5:      Reimbursement: A liability insurer can lawfully reserve its rights and settle a lawsuit over the objection of its policyholder and then sue its policyholder for reimbursement of both the cost of settlement[6] and the cost of defense.[7]

6:      Evidence: Evidence developed during the pendency of a plaintiff’s lawsuit may be used by the insurer against the policyholder to defeat coverage, but may not be used by the policyholder or the plaintiff against the insurer to support coverage.[8]

7:      Settlement: When a liability insurer wrongfully fails to defend, the plaintiff and policyholder may make a reasonable, non-collusive settlement that is presumed to establish liability and damages for use against the defaulting insurer.[9]

8:      Policy Limit: A liability insurer that rejects a reasonable settlement offer for a sum of money that is less than the contractual policy limit may be compelled to pay the entire amount of an adverse judgment, even in excess of the policy limit.[10]

9:      Bad Faith: A liability insurer is not guilty of bad faith simply because the policyholder or counsel don’t like its behavior. Bad faith liability requires that: 1) the insurer failed to pay policy benefits due as required by the terms of the insurance contact; and 2) its failure to pay was unreasonable.[11]

10:    Dilution: The net recovery of a plaintiff who pays a 40% contingent fee to sue a defendant and pays another 40% to collect from the defendant’s insurer may receive only 20% – and will have to wait twice as long to get it.[12]


[2] See, Article: Conflicts of Interest.

[5] See, Article: Collusion" href="">Line Dividing Cooperation from Collusion.

[11] See, Article: Duty of Good Faith and Fair Dealing" href="">Duty of Good Faith and Fair Dealing.

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