I recently participated in a negotiation with an insurer who had denied coverage for an underlying errors and omissions claim in the mid-seven figures. The insurer’s counsel and I exchanged stern letters, each explaining why our respective client’s position was absolutely correct, and the other’s absolutely wrong. The client’s broker arranged a meeting with principals and counsel on both sides. At the meeting, the insurer’s counsel and I debated our respective positions once more. Neither of us conceded any possibility that the other could be right. After 25 minutes, my client put a stop to the debate competition and, aided by the broker, moved into negotiations with the insurer’s principal.

The opening offer and demand were miles apart. But within an hour, the case settled, to the clear satisfaction of both sides. With no mediator. No wrangling about which mediator to select. No waiting three months to get a date on the mediator’s calendar. No mediation briefs or reply briefs. No waste of non-refundable mediator’s fees. No shuttle diplomacy, bracketing or mediator’s proposals. No mediator reserving jurisdiction to hammer out disputed settlement terms. It felt almost too easy.

Are lawyers too dependent on mediators to settle their cases? Whether you answer that question yes or no, there are many situations where a neutral can resolve a case where party negotiations would fail. This is particularly true in a “three-way” mediation, where the defendant’s insurer is participating but is reserving rights, denying coverage, or rejecting defense counsel’s settlement recommendations. These mediations present unique challenges that require a skilled mediator and savvy defense and coverage counsel. Continue Reading A Policyholder Perspective on the Unique Challenges of a Three-Way Mediation

An insurance carrier has declined to defend a claim asserted against its insured, arguably without meeting its obligation to investigate the claim. For whatever reason— a change in personnel, loss of a file, or some other motivation—the carrier has done little, if anything, to investigate the claim tendered to it: no Google search, no phone calls, and very little factual investigation other than the information tendered by the insured. The carrier has, however, relied on the plain language of the policy, and the few facts of which it was aware supported its denial.

But when a court later finds that the carrier’s coverage position was wrong— the facts in existence created a potential for coverage and hence triggered the carri­er’s duty to defend—the insured may argue that its carrier’s failure to investigate sup­ports a finding that it breached the implied warranty of good faith and fair dealing; that is, the insurer acted in bad faith. Continue Reading The Ramifications of a Less-Than-Thorough Investigation

settlement-statementFor decades, California courts have mandated that an insurer is obligated to accept a “reasonable” settlement demand within policy limits on behalf of its insured. If it fails to do so, it is liable for the entire judgment, including amounts in excess of the policy limits. Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 659. Subsequent cases have addressed whether an insurer can escape excess liability if its decision-making process, as opposed to the settlement itself, was “reasonable”. California law is clear that even an honest mistake as to whether the claim is covered does not absolve an insurer from excess liability. Johansen v. Calif. State Auto Association Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-16. However, courts have also considered whether an insured must show the insurer acted “unreasonably” in assessing the value of the claim. In Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425, 431, the California Supreme Court held that the very fact of an excess judgment created an inference that the insurer was liable for the excess judgment. Other cases, however, looked at whether the insurance company properly investigated all facts relating to liability and damages. See, e.g., Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 707. Continue Reading Insured May Bear the Consequences of Insurer’s Negligence

On July 29, 2014, I spoke on a panel about recent developments in California bad faith law and related trends.  My co-presenter was Robert K. Scott of The Law Offices of Robert K. Scott, and we gave the presentation at ACI’s 28th National Advanced Forum on Bad Faith Claims & Litigation in San Francisco.  The title of the presentation was “The Positions of the Policyholder’s Bar:  How insurers can avoid bad faith claims and tailoring your litigation strategies to the latest wave of first-party and third-party claims.” Some of the highlights included:  

  • the recent trend of bad faith claims handling conduct by insurers in responding to defense cost submissions by independent counsel under Section 2860, including the hiring of outside auditors to justify reduced insurer payments on defense bills;  
  • the state of the “genuine dispute” doctrine in bad faith claims arising out an insurer’s breach of the duty to defend (i.e., Mt. Hawley v. Lopez, 215 Cal. App. 4th 1385 (2013)); and 
  • 2013 case law on whether insurers have an affirmative duty to proactively seek settlement in excess-of-limits exposure cases (i.e., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) and Travelers Indem. Of Conn. v. Arch Specialty Ins. Co., 2013 WL 6198966 (E.D. Cal. Nov. 26, 2013)).  See John Green’s article about Reid posted on this blog

These are evolving areas of law that are likely to produce further disputes between insurers and insureds.  Early insurance coverage advice can help avoid these disputes, or at least position the insured for a more favorable outcome if litigation becomes necessary.  I’ll be writing in more detail about these on this blog over the next couple months.

Published in the ABTL Report, Vol. 22, No. 3, Winter 2013.

Insurers and insureds have long disagreed whether an insurer’s duty to settle is limited to the duty to accept a reasonable settlement offer made by a plaintiff, or whether the insurer has a duty to affirmatively seek a settlement within limits.  This issue was recently addressed in Reid v Mercury Insurance Co., 220 Cal.App.4th 262 (2013).  In Reid, the insurer recognized shortly after the accident that the exposure exceeded the $100,000 policy limits, but decided it needed a witness interview and the claimant’s medical records before making a policy limits offer.  It requested this information, but didn’t tell the claimant it was considering a policy limits offer.  While the claimant later testified he would have accepted $100,000 to settle at that time, his counsel did not make a policy limits demand.  A few months later, after getting the medical information, the insurer offered policy limits,  which the claimant promptly rejected. The matter went to trial and judgment was entered for $5.9 million, forcing the insured into bankruptcy.  

Continue Reading California Court of Appeals Clarifies Carrier’s Duty to Settle

Two seminal New York cases have brought that state, along with potentially many more, into line with California’s position on the recovery of consequential damages.

The effects of Bi-Economy Market v. Harleysville, 886 N. E. 2d 127 (N.Y. 2008) and Panasia Estates v. Hudson Insurance Company, 886 N. E. 2d 134 (N.Y. 2008) are beginning to take shape in New York and beyond. The court in both cases allowed for the recovery of consequential damages for the insurers’ breach of their respective contracts even without bad faith conduct, holding that consequential damages beyond policy proceeds were foreseeable as a matter of law. Courts in many states have taken notice, and at least nine states have followed suit. California courts, however, have long recognized such recovery – the infamous Hadley v. Baxendale rule states that if the damages are within the reasonable expectation of the parties at the time of contracting they are recoverable.

Continue Reading New Developments in the Recoverability of Consequential Damages

When the liability of its insured is clear, must an insurer proactively attempt to settle a claim within policy limits in order to avoid bad faith liability?  Or is it sufficient to wait until a reasonable settlement offer is made?  A court of appeals panel in the Ninth Circuit recently weighed in on the issue, holding that when liability is clear, an insurer has a duty to attempt to reach a settlement, even absent a demand from the claimant. 

Continue Reading Insurers Can’t Wait Around for Settlement Offer If Liability Is Clear (the Ninth Circuit Addresses Bad Faith, part 1)

Sometimes an insurer declines coverage in either a first- or third-party context, and later, a court determines that this declination was in error and that coverage existed. Not infrequently in such circumstances, the policyholder asserts that the insurer did not conduct a thorough investigation prior to the declination and thus breached the implied covenant of good faith and fair dealing.

When an insurer fails to conduct an investigation that would have uncovered facts supporting the possibility of coverage, the insurer may be imputed with knowledge of those facts. Safeco Ins. of America v. Parks, 170 Cal. App. 4th 992 (2009). Interesting questions are presented where, during discovery in the ensuing bad faith litigation, the insurer discovers new facts that tend to support the denial of coverage. In such event, can an insurer rely on these new facts in arguing that its denial was reasonable and in good faith? The law is not entirely clear, and insurers and insureds – not surprisingly – may reach different conclusions.

Click here for the complete article previously published in The Recorder.

The California Supreme Court recently issued a decision in Century-National Ins. Co. v. Jesus Garcia, No. S179252, holding that California Insurance Code section 533, which bars coverage for intentional conduct, does not apply to coverage for innocent co-insureds.  The Court examined this issue in the context of a fire insurance policy.  The insureds, Jesus and Theodora Garcia, suffered substantial property damage to their home when their adult son – who was also an insured under the policy – set fire to his bedroom.  Century-National denied coverage for the Garcias’ claim citing the policy’s exclusion for claims based on the intentional acts or criminal conduct of “any insured.”  The trial court agreed and granted Century-National’s demurrer on the grounds that 1) the Century-National policy defined the term “any insured,” to include relatives of the insured who lived at the insured property; 2) courts generally interpret policy exclusions for intentional or criminal acts to exclude coverage for innocent co-insureds; and 3) Insurance Code section 533 expressly sets forth California’s public policy of denying coverage for willful wrongs. Continue Reading Section 533 Does Not Bar Coverage for Innocent Co-Insureds

On November 23, 2010, the California Supreme Court declined review of the First Appellate District’s decision in Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498 (2010).  As I noted in a prior blog postHoward provides powerful, additional support for policyholders demanding that their liability insurer fund a settlement.

In Howard, the Court of Appeal considered whether an insurer can be held liable for bad faith breach of its duty to settle if it rejects a settlement offer that is within the total available limits of all the insurers’ policies, but which exceeds the limits of its own individual policy.  In the first clear statement of California law on this issue, the First Appellate District concluded that in a “multiple insurer case, the law cannot excuse one insurer for refusing to tender its policy limits simply because other insurers likewise acted in bad faith.  If this were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.”  The Court of Appeal went on to find that an excess judgment is not necessarily required in order to support a finding of bad faith failure to settle, particularly where the insured also sustains consequential damages arising out of the insurer’s conduct.

California policyholders and their counsel frequently face the situation presented in Howard:  a loss giving rise to a potential for coverage under multiple policies.  Before the Howard decision, each insurer would often take the position that it had no duty to settle unless the plaintiff’s settlement demand was within the limits of its own individual policy.  The First Appellate District clearly rejected this premise, holding that each such insurer faces bad faith exposure if it rejects a reasonable settlement demand that is within the combined indemnity limits of all triggered policies.  Now, the California Supreme Court has both denied review and denied the defendant insurer’s depublication request.  Thus, Howard remains a citable authority on which policyholders can rely to demonstrate that their insurer has a present duty to fund settlement.