Duty to Defend
By Alice Wolfson & David Lilienstein
C. Duty to Defend
Q: Do the same legal standards apply to an insurer’s duty to defend as to its duty to indemnify an insured?
A: No. The duty to defend is much broader than the duty to indemnify. (CNA Casualty Co. of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 222 Cal.Rptr. 276.) Insurers have a duty to defend all suits which potentially seek covered damages. They have a duty to indemnify only where judgment has been entered on a theory which is actually, not just potentially, covered by the policy. (Collin v. American Empire Ins. Co. (1994) 21 Cal.App. 4th 787, 26 Cal.Rptr.2d 391.)
Q: What are some examples of fact patterns triggering a duty to defend?
A: At least in the following situations:
The suit potentially seeks damages within the scope of coverage. (Horace Mann v. Barbara B. (1993) 4 Cal.4th 1076, 17 Cal.Rptr.2d 210; Gray v. Zurich, supra, 65 Cal.2d at 276 & 278, 54 Cal.Rptr. at p. 112.)
The complaint is capable of being amended to include covered damages. (Ibid.)
The insurer learns of facts, from any source, which would trigger coverage. (Gray v. Zurich, supra, 65 Cal.App.2d at p. 277.)
The insured reasonably expects coverage. (Gray v. Zurich, supra, 65 Cal.App.2d at p. 281.)
If an insurer is required to defend at least one cause of action, they must then defend all causes of action. (Horace Mann, supra, 17 Cal.Rptr.2d at p. 214; City of South El Monte v. Southern California Joint Power Ins. Authority, supra, 28 Cal.App.4th 701.)
Q: Can an insurer wait until litigation progresses before deciding whether it is obligated to defend its insured?
A: No. An insurer’s duty to defend must be assessed promptly at the outset of a case. If it is not, it could be construed as the basis of an insurance lawsuit in San Jose or elsewhere. (CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d 598.) This does not mean, however, that the insurer must continue to defend even after it becomes certain there is no potential for coverage. (Montrose Chemical Corporation of California v. American Motorists Insurance Company, supra, 6 Cal.4th 287.)
Q: Can an insurer, defending under a “reservation of rights,” be held liable for breach of the covenant of good faith and fair dealing even if it is ultimately determined that the insurer had no duty to defend or indemnity?
A: Yes, an insurer may be held liable for improperly handling the defense. They may then subsequently face San Jose insurance policy litigation. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791.)
Q: When the insurer provides a defense under a “reservation of rights,” does the insured have the right to independent counsel?
A: Often. The carrier’s reservation of rights to assert non-coverage at a later date can give rise to the insured’s right to an independent “Cumis” attorney. (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494.) Civil Code section 2860 requires that Cumis counsel be qualified and willing to charge reasonable fees. (Center Foundation v. Chicago Ins. Co. (1991) 227 Cal.App.3d 547, 278 Cal.Rptr. 13.)
Q: Does an insured’s willful wrongdoing in the underlying case necessarily relieve the carrier of its duty to defend or indemnify in a civil damages action?
A: Insurance Code section 533 prohibits a carrier from indemnifying the insured from injury caused by the insured’s “willful act.” (Aetna Casualty & Surety Co. v. Sheft (9th Cir. 1993) 989 F.2d 1105.) However, some umbrella policies, including some State Farm policies and promotional materials, actually represent that intentional torts are covered. Generally coverage depends on the nature of the claim and the allegations being made against the insured. Intentional action by an insured may not automatically relieve an insurer of its duties. (Studley v. Benicia Unified School Dist. (1991) 230 Cal.App.3d 454, 281 Cal.Rptr. 631.) The same is true if the claim against the insured arises out of vicarious liability for the acts of others. (Arenson v. National Auto & Cas. Ins. Co., (1955) 45 Cal.2d 81, 286 P.2d 816; Fireman’s Fund Ins. Co. v. City of Turlock (1985) 170 Cal.App.3d 988, 216 Cal.Rptr. 796; Allstate Ins. v. Gilbert (9th Cir. 1988) 852 F.2d 449 [acts of co-insureds].)
Q: Must a liability insurer defend an insured against a claim for punitive damages?
A: Often yes, in the absence of a clear and express policy provision to the contrary and/or if it is reasonable for the insured to expect the insurer to do so. (Ohio Casualty Insurance Co. v. Hubbard (1984) 162 Cal.App.3d 939, 208 Cal.Rptr. 806.)
Q: Can an insured settle with a third party when his/her insurer wrongfully denies coverage and/or improperly refuses to defend against a covered claim?
A: The insured is entitled to make a reasonable settlement and may then maintain a San Jose insurance lawsuit against the insurer to recover the amount of the settlement as well as appropriate damages for bad faith. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, Cal.App.4th 631, 33 Cal.Rptr. 2d 690.)
Q: May a third party who has entered into a stipulated judgment with the insured in exchange for an assignment of a cause of action against the carrier with a covenant not to execute, bind the insurer to the agreement?
A: Certainly not if the arrangement is collusive or fraudulent. Even in the absence of collusion, courts question the validity of such agreements. Issues such as the basis for the stipulation, liability, the amount of the settlement and the effect of a covenant not to execute are all potential problems, and attorneys should be very cautious in this area. (Smith v. State Farm Mutual Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 7 Cal.Rptr.2d 131; Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726; Roman v. Uniguard Ins. Group (1994) 26 Cal.App.4th 177, 31 Cal.Rptr.2d 501; Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998, 14 Cal.Rptr.2d 588; Glenbrook Homeowners Assoc. v. Scottsdale Ins. Co., supra, (N.D. Cal. 1994) 858 F.Supp. 986.)
Q: Can the third party victim of an insurer’s bad faith refusal to defend take an assignment of the insureds’ claim for general and punitive damages?
A: Probably not. Most general and punitive damage claims cannot be assigned in California and must be reserved and prosecuted by the insured. (Murphy v. Allstate Insurance Co. (1976) 17 Cal.3d 937, 132 Cal.Rptr. 424.)