“Yes” – Insurer Concedes Full Coverage – AG



When a policyholder asks a liability insurer for help with a plaintiff’s lawsuit, the insurer must promptly answer: “Yes”, “No”, or “Maybe”.[1] If the insurer says “Yes”, accepting full coverage, the policyholder may still have three concerns: 1) Although “Yes” is implied by a failure to say “No”, an insurer may change its mind in the future; 2) If the contractual policy limit of coverage is small, the policyholder may try to “pop” the limit, requiring the insurer to pay the entire amount of an adverse judgment; and 3) if punitive damages are alleged, the policyholder should seek express confirmation that the insurer will pay compensatory damages.

Request an Express Waiver

“Yes” Is Implied by Silence

An insurer’s silence often implies that the insurer has thoroughly investigated a claim and concluded that it will concede full coverage to the policyholder for the lawsuit.[2] The insurer has a duty to investigate and may not properly deny a claim without conducting a thorough investigation.[3] An insurer that challenges coverage is required by regulation to issue a reservation of rights[4] within 40 days.[5] “The general rule supported by the great weight of authority is that 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. In other words, the 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 assert such grounds.”[6]

Insurers Can Delay a Coverage Denial

California courts have allowed insurers to deny coverage after a delay of as much as two years before first asserting a reservation of rights.[7] “In virtually every case discussing the waiver issue, the courts have found that there was no waiver if the insurer made a reservation of rights at any time, even if years after the defense was undertaken.”[8]

Confirm Full Coverage In Writing

Like dating on a modern college campus, it is important to expressly confirm and “Yes” really means what one hopes it means. To minimize the risk that the insurer may later assert a reservation of rights, the policyholder may request an express waiver[9] of all coverage defenses. If the insurer declines, the policyholder should recognize that the insurer’s true position is “Maybe” and may take appropriate steps to protect its own interests from the insurer.[10]

To protect against the uncertainty created by mere silence, the policyholder may ask the insurer to expressly conceding coverage.[11] To guard against any change in the insurer’s coverage position, the policyholder may consider sending to dependent counsel a letter clarifying the terms of representation by the lawyer.[12]

Avoid Excess Exposure

If the value of the plaintiff’s claim may exceed the amount of insurance the policyholder purchased, there is a way that the policyholder can “pop” the limit so that the insurer must either settle the case or pay an adverse judgment, even in excess of the stated policy limit. The insurer has an implied duty to settle.[13]

When an insurer says “Yes”, it is only obligated to pay the amount of money stated as the policy limit in the insurance contract. If a judgment is entered in excess of the stated limit, the policyholder must pay it.[14]

“There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. [This] implied obligation requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. [A]n insurer, who wrongfully refuses to accept a reasonable settlement within the policy limits is liable for the entire judgment against the insured even if it exceeds the policy limits.”[15]

A rationale for this rule is that “there is more than a small amount of elementary justice in a rule that would require that, in this situation where the insurer’s and insured’s interests necessarily conflict, the insurer, which may reap the benefits of its determination not to settle, should also suffer the detriments of its decision.”[16] Therefore, the insurer must advise the policyholder of settlement opportunities.[17]

The policyholder may encourage the plaintiff to make a policy limit settlement offer within the policy limit.[18] Doing so usually creates a “win-win” situation for the policyholder: the insurer must either: 1) settle the lawsuit; or 2) pay an adverse judgment in any amount.

Confirm Coverage for Compensatory Damages

Punitive Damages Are Uninsurable

If a plaintiff sues a policyholder for punitive damages, an issue may arise whether the insurer will pay compensatory damages if punitive damages are also found. An award of punitive damages requires a finding that the defendant committed willful conduct that is uninsurable as a matter of law. Most liability policies exclude damage that was “expected or intended from the standpoint of the insured.” However, courts usually draw a distinction between an intent to cause an injury for which coverage is excluded on the one hand, and a voluntary act that produces an unexpected result, that may be covered.[19]

A plaintiff may recover punitive damages from a defendant who has committed a wilful act that constitutes oppression, fraud or malice.[20] “An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.”[21] “All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”[22] A “wilful act” may be “an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result”[23], “an intentional and wrongful act in which the harm is inherent in the act itself”[24], or other acts that are inseparable from intentional misconduct.[25]

The Rationale

The rationale for this rule is that the “policy of this state would be frustrated by permitting the party against whom [punitive damages] are awarded to pass on the liability to an insurance carrier.”[26] “If we were to allow the intentional wrongdoer, the insured, to shift responsibility for its morally culpable behavior to the insurance company, which surely will pass to the public its higher cost of doing business, we would defeat the public policies of punishing the intentional wrongdoer for its own outrageous conduct and deterring it and others from engaging in such conduct in the future. The policy considerations require that the damages rest ultimately as well as nominally on the party actually responsible for the wrong. If that person were permitted to shift the burden to an insurance company, punitive damages would serve no useful purpose.”[27]

Therefore, if the plaintiff sues a policyholder for punitive damages, the policyholder, not the insurer must pay it.

Compensatory Damages May be Covered

While a policyholder must personally pay an award of punitive damages, an insurer may still be required to pay compensatory damages. The Supreme Court has recognized that a punitive damage claim may create a conflict of interest between the policyholder and the insurer. “[T]he issue of punitive damages might present a potential conflict of interests. Even in such cases, however, the insurer will be still be bound, ethically and legally, to litigate in the interests of the insured.”[28] “We reject [the insurer]’s claim that imposition of punitive damages negates an insured’s coverage for compensatory damages as well as punitive damages. Nonintentional torts may also form the basis for punitive damages. In those cases, section 533 is not applicable because the harm has not resulted from a ‘wilful act,’ thus only indemnification of the punitive damages portion of the recovery is prohibited. [W]here an act performed without intent to harm has nevertheless resulted in injury and possible exposure to punitive damages because it was done with conscious disregard of the rights or safety of others. Although indemnification of the punitive damages is disallowed for public policy reasons, the conduct is not wilful as contemplated by section 533. Thus, the policy of insurance would still cover the compensatory damage portion of plaintiff’s recovery.”[29]

No Automatic Disqualifying Conflict

A plaintiff’s assertion of a punitive damage claim alone does not create a disqualifying conflict of interest. “No conflict of interest shall be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”[30] “We hold that the mere allegation of punitive damages and a prayer therefor does not alone create a conflict between the insured and insurer and trigger the Cumis duty to provide the insured with independent counsel.”[31]

Denial of Coverage for Compensatory Damage May Create a Conflict

However, “[p]erhaps the most common situation in which a conflict of interest exists and independent or Cumis counsel is required occurs when the insured’s allegedly wrongful conduct could be found to be intentional, with coverage thus depending on the ultimate characterization of the insured’s actions.”[32] Accordingly, if the insurer disclaims an obligation to pay compensatory damages if punitive damages are awarded, the policyholder may be entitled to independent counsel.

Request that the Insurer Expressly Agree to Pay Compensatory Damages

If a plaintiff has asserted a claim for punitive damages, the policyholder may consider asking the insurer to expressly agree to pay compensatory damages notwithstanding the fact that punitive damages are awarded.[33]

[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] See, Insurer Silence May Concede Full Coverage

[3] See, Duty to Investigate

[4] See, Reservation of Rights

[5] “Upon receiving proof of claim, every insurer … shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part.” (Cal. Code Regs. § 2695(7).)

[6] Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754.

[7] See, Ringler Assocs. Inc. v. Maryland Cas. Co. (2000) 80 Cal.App.4th 1165, 1189); There Is No Deadline to Deny Coverage.

[8] Garamendi v. Golden Eagle Ins. Co. (2003) 113 Cal App 4th 861,889 (ellipses omitted).

[9] See, Estoppel, Waiver, and Forfeiture

[10] “Through reservation, the insurer . . . provides [the policyholder] an opportunity to take any steps that it may deem reasonable or necessary in response.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61, fn.27 (citations and ellipses omitted).) See, “Maybe” – Insurer Reserves Rights to Later Deny Coverage

[11] See, Coverage Questionnaire

[12] See, Ethical Compliance Questionnaire

[13] See, Duty to Settle

[14] See, Duty of Good Faith and Fair Dealing

[15] Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-61 (ellipses omitted).

[16] Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 431.

[17] “It is the duty of the insurer to keep the insured informed of settlement offers.” (Kinder v. Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 901.)

[18] See, Policy Limit Settlement Offer Made Properly

[19] See, Ritchie v. Anchor Cas. Co. (1955) 135 Cal.App.2d 245, 252.

[20] Civ. Code § 3294.

[21] Ins. Code § 533.

[22] Civ. Code § 1668.

[23] Mez Indus., Inc. v. Pacific Nat’l Ins. Co. (1999) 76 Cal.App.4th 856, 875-876 (Mez).

[24] Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 500; Mez, supra, 76 Cal.App.4th at 876-877.

[25] See, State Farm Gen. Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274, 289; Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1084.

[26] City Products Corp. v. Globe Indem. Co. (1979) 88 Cal.App.3d 31, 35.

[27] PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 317.

[28] Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 279, fn.18 (ellipses omitted).

[29] Peterson v. Superior Court (1982) 31 Cal. 3d 147, 158-159 (citations and ellipses omitted).

[30] Civ. Code § 2860(b) (ellipses omitted).

[31] Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251, 254.

[32] Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1471.

[33] See, Coverage Questionnaire

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