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The following discussion thread excerpt is from an ongoing law.com online seminar “Insurance Coverage Disputes” moderated by David E. Weiss of Brobeck, Phleger & Harrison. For information on this program and other law.com seminar offerings, please visit www.law.com/seminars. MODERATOR DAVID E. WEISS, PARTNER, BROBECK, PHLEGER & HARRISON, SAN FRANCISCO In essence, the policyholder’s performance under an insurance policy is completed when it pays the premium, as that is the primary obligation of the policyholder under a contract of insurance. The insurance company’s performance, on the other hand, is not triggered unless and until a claim is submitted under the policy. Because the submission and processing of many claims will require a great deal of time and effort to be devoted by both the policyholder and the insurer, policyholders should take some time to review the circumstances surrounding a potential claim before it is submitted, to make sure that there is a colorable argument for coverage. By “colorable” I don’t mean a claim that the insurance company is likely to accept without trouble (in my experience there aren’t too many of those situations), “colorable” refers to a claim where a reasonable argument for coverage can be made under the policy language or under existing legal precedents. Submitting claims when there is no colorable argument for coverage is a waste of time and resources. Once the policyholder decides to submit a claim, the insurance company must respond in a timely manner, and must conduct a good-faith investigation, meaning a thorough, complete and fair investigation. It is inappropriate for an insurance company to conduct an investigation aimed simply at uncovering facts necessary to support a denial of coverage. Most jurisdictions, including California, have insurance regulations which govern various aspects of the claims handling process, including the establishment of time periods in which the insurer must complete various activities during the process. Policyholders and insurers should become familiar with these requirements, and insurers should follow them. While the insurance company must conduct a good-faith investigation, the policyholder must cooperate with the insurance company in its investigation. This means that the policyholder should respond to reasonable requests for information from the insurer, and should make witnesses under its control reasonably available to the insurance company to assist in the investigation. PANELIST KIRK A. PASICH, PARTNER, HOWREY, SIMON, ARNOLD & WHITE, LOS ANGELES A few thoughts expanding upon David’s comments. First, I believe that a carrier’s duties may arise before a claim for coverage is made. This would be the case, for example, when notice is given to an insured of an event that could give rise to a claim (the insured should investigate and open a claims file). Second, the carrier has a duty to conduct a thorough investigation, including of facts that could support coverage. See Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819 (1979) (“[I]t is essential that an insurer fully inquire into possible bases that might support the insured’s claim. … [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”). Third, while an insured has a duty to reasonably cooperate, its duty may be excused if the carrier breaches its duties (for example, if the carrier denies coverage and then requests that insured do something). Fourth, even though the insured has a duty to cooperate, that duty does not constitute a waiver of the attorney-client privilege. See Rockwell Internat’l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1260, 1262-66 (1994) (“The carriers contend the cooperation clause … requires [the insured] to disclose the content of any and all communications it had with defense counsel representing it in the underlying actions. We consider the theory fanciful …”). Fifth, many first-party insurance policies contain an examination under oath provision that obligates the insured to provide books and records and appear to be examined under oath. Such provisions generally are enforceable (subject, of course, to requirements of reasonableness and performance by the carrier of any duties owing before the examination is requested). If an insured does not comply, it may lose its right to coverage (although a breach by the insured should not relieve the carrier of its duty of good faith and fair dealing). PANELIST LAURA A. FOGGAN, PARTNER, WILEY, REIN & FIELDING, WASHINGTON, D.C. (Kirk Pasich wrote) A few thoughts expanding upon David’s comments: Fourth, even though the insured has a duty to cooperate, that duty does not constitute a waiver of the attorney-client privilege. See Rockwell Internat’l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1260, 1262-66 (1994) (“The carriers contend the cooperation clause … requires [the insured] to disclose the content of any and all communications it had with defense counsel representing it in the underlying actions. We consider the theory fanciful … “) I note that, while Rockwellmay be the prevailing rule in California, it is certainly not universal. A number of jurisdictions do require disclosure of communications with defense counsel. For example, in Illinois, there is case law supporting disclosure of substantial information to the insurer, and concomitant protection of such shared materials from discovery by others. PANELIST KIRK A. PASICH Laura is correct that not all jurisdictions follow the view expressed in Rockwell. However, Rockwelldoes discuss, and reject, the Illinois law that Laura references, stating, in part: “In Illinois, they don’t let little things like conflicts of interest get in their way.” 26 Cal. App. 4th at 1264 n.3. PANELIST GITA F. ROTHSCHILD, PARTNER, MCCARTER & ENGLISH, NEWARK, N.J. To elaborate on a few points David has made, it may be the case that a colorable claim for coverage is not apparent from the face of the policy. As a result of the development of a complex, jurisdiction-specific body of law involving the interpretation of insurance contracts, exclusions may not be effective, or may be more limited than a literal reading of the policy would reveal; words or phrases might be construed more broadly or more narrowly than found in the dictionary; custom and practice may impact on interpretation, etc. Some of the most obvious examples are the vastly differing applications of the “sudden and accidental” pollution exclusion, the “owned property” exclusion, and the requirement in every occurrence-based policy that the damage be “unexpected and/or unintended.” In many jurisdictions under a variety of circumstances, this language — contrary to a literal application — does not bar coverage. And there are many more examples. Thus, although the purpose of this seminar is not to generate business for coverage lawyers, this is an area where a hasty conclusion of “no coverage” by a risk manager without reference to applicable policy interpretation law could cost a company millions of dollars. Additionally, although the policyholder does have an obligation to respond in a timely fashion to requests for information, sometimes those requests are not genuine. The purpose of providing information to an insurer is so that the insurer can make a determination about whether there is coverage under the policy and inform the policyholder of its decision. There have been many instances where insurance companies use repeated requests for information (for far more information than is needed to make a coverage determination) to forestall sending a declination letter in cases where a declination of coverage is inappropriate. By not accepting coverage and requiring burdensome amounts of information, the insurer may cause the policyholder to become fed up and abandon its claim. And if the policyholder does not go away and later sues the insurer, the insurer can defend the bad-faith claim on the ground that the policyholder did not respond to its information requests. Thus, it is a win/win for the insurer. On the other hand, a judge or jury may ultimately consider whether the requests were reasonable or whether they were made in bad faith. There is a strange dichotomy in New Jersey bad-faith law which requires that, in order to recover consequential damages in excess of policy limits, the policyholder must demonstrate that it would have prevailed on its coverage claim on summary judgment. There is no such requirement, however, to recover punitive damages. For the latter, the policyholder must show that the insurer’s conduct was willful and egregious or in wanton disregard of the insured’s rights. I have litigated a case where the court ruled that the insurer’s claim that the policyholder’s failure to respond to its repetitive and duplicative information requests raised a colorable failure to cooperate defense that would have prevented summary judgment on the coverage claim and, therefore, consequential damages in excess of limits were not recoverable. The policyholder was permitted, however, to demonstrate that, among other things, the insurer’s assertion of defenses it knew to be false at the time they were asserted was in wanton disregard of the insured’s rights, thereby meriting an award of punitive damages. PANELIST FRANK N. DARRAS, PARTNER, SHERNOFF BIDART & DARRAS, CLAREMONT, CALIF. While you are contemplating all the sage advice from the panelists on claim handling and the duty of cooperation, remember this is a two-way street. The insured bought peace of mind and security, trust and confidence in the event of calamity. They usually earned those premiums a dollar at a time with their hands … . And when you really think about what the carrier was selling, it was fear with the mighty corporate promise to protect when the insured needed it most. So as we look at the respective responsibilities of the parties, remember who holds the insured within the pages of a billion dollar checkbook. Who has the greater assets and capabilities in terms of conducting an investigation? While the insured has a duty to present the claim in a timely fashion, it’s the carrier that has the duty to thoroughly investigate the claim and fully inquire into all possible bases that might support the insured’s claim ( Egan, already cited, and Mariscal v. Old Republic Ins. Co.(1996)42 Cal. 4th 1617.) The carrier must objectively evaluate the insured’s claim and give at least as much consideration to the insured’s interests as it does to its own (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566). The carrier must promptly investigate the insured’s claim (Cal. Ins. Code 790.03(h)(3)). The carrier must timely respond to the insured’s inquiries and communicate with the insured ( Delgado v. Heritage Life Ins. Co.(1984)157Cal. App.3d 262). The carrier must refrain from misrepresenting what is covered under the policy or committing other fraudulent claims practices or oppressive conduct and they cannot seek to reduce what is legitimately payable under the policy ( Moore v. American United Life Ins. Co.(1984)150 Cal. App.3d 610, Delos v. Farmers Ins. Group(1979) 93 Cal. App. 3d 642.) The carrier must fully pay the benefits owing, particularly that portion of the claim that is undisputed (10 Cal. C. Regs. 2695.7(h)). The carrier must promptly settle claims where liability has become reasonably clear and refrain from making lowball offers (790.03 (h)5 and 10 Cal. Regs. 2695.7(g)). The carrier may only reserve their rights when it has a good-faith basis and may not institute a declaratory relief action unless it has a reasonable basis for doing so. MODERATOR DAVID E. WEISS A recent California case that should be mentioned here is Schwartz v. State Farm(May 9, 2001) 01 C.D.O.S. 3747, where the Court of Appeal held that an insurance company cannot favor one insured under a policy over a co-insured. In that case, an excess insurer paid out its limits to one insured, even though it was aware of a claim by another insured that had the potential to reach the excess layer of coverage. The court held that “an excess insurer, with notice of potentially competing claims that exceed policy limits, has an obligation to treat both insureds fairly. That obligation encompasses the duty to refrain from favoring one insured over the other and from impairing either insured’s right to benefits.” What is significant about this case is the fact that the claim of the complaining insured had not yet reached the excess layer of coverage at the time the excess insurer paid out its limits to the other insured. Nevertheless, the court held that the excess insurer could breach its duty of good faith by favoring one insured over the other even under those circumstances. PANELIST LAURA A. FOGGAN Frank makes a number of interesting points, but some of them may be overstated. In particular, the policyholder generally is in the position of having more information about the claim than the insurer, since it is the actions of the policyholder (or property interests of the policyholder in a first party situation) which are at stake. PANELIST KIRK A. PASICH This may be true in many situations. However, it still is incumbent upon the carrier to conduct a thorough investigation. And, the carrier cannot simply ask the insured for information — it must affirmatively seek information. See Hughes v. Blue Cross, 215 Cal. App. 3d 832, 836 (1989), cert. dismissed, 495 U.S. 944 (1990). PANELIST GITA F. ROTHSCHILD What constitutes a good-faith investigation has become a fairly hot legal issue recently. It is clear that the complete absence of an investigation is evidence of bad-faith conduct (except, of course, if the insurer delegates the investigation to its outside counsel, in which case the attorney’s claims handling files are probably not privileged). The more interesting question is: How much is enough? If it is clear from the files that the purpose of the investigation was to establish a basis for denying coverage as opposed to learning about the claim, that is bad-faith conduct. But what about a not very thorough investigation? A New Jersey appellate panel has held that it doesn’t have to be a perfect or the best investigation to support a denial of coverage; however, the decision was in a case where the court found that there was no coverage under the policy, and the policyholder was asserting an independent claim for failure to investigate. The issue of whether failure to investigate is a stand-alone cause of action, irrespective of whether there is coverage, hasn’t been litigated very often but there are cases going both ways. PANELIST DAVID M. OSTRANDER, PARTNER, GREENAN, PEFFER, SALLANDER & LALLY, SAN RAMON, CALIF. The duty to pay and the duty to cooperate are affirmative duties of the insured, but they are not in my experience the ones that lead to the most difficult coverage disputes. The insured has to be aware that it also has a duty to NOT do certain things (or more precisely, the insured’s coverage is conditioned upon it not doing certain things). The most important of these involve not defending and/or settling claims or lawsuits without the insurer’s consent. This is more than an issue of lack of notice (which, as noted, requires a showing of prejudice by the insurer before it can detrimentally effect coverage). Pre-tender payments to defense counsel or pre-tender settlements are not covered, regardless of how reasonable they may have been and regardless of whether the insurer would have consented had the opportunity been presented to it. No prejudice need be established (at least in California — this does vary by state). There are arguments to be made as to why some pre-tender defense fees should be paid — the most compelling involving situations where an immediate legal response is required. But these arguments buy the insured at most a few days, and are of doubtful legal support given recent case law. As to settlements, however, there is no legitimate legal basis for, on the one hand, entering into a settlement without notifying the insurer, and giving it a chance to evaluate the claim and participate in and consent to the settlement, and then, on the other hand, demanding that the insurer pay for it. As a business matter, some insurers may agree to pay for all or some portion of settlements entered into without their knowledge or consent — but it is not because the policy requires them to do so. Insureds are well advised to avoid this whole issue by getting the insurer involved in any litigation, or any dispute likely to lead to litigation, as soon as possible. PANELIST GITA F. ROTHSCHILD However, in some jurisdictions, if a carrier disclaims coverage, it can only disclaim a pre-notice settlement if it was not made in good faith and at arm’s length. PANELIST DAVID M. OSTRANDER True. My comments as to settlements entered into without the insurer’s consent assume California law applies. The “no action” provision (which is the usual source of the settlement consent requirement) is enforced with varying degrees of enthusiasm in other jurisdictions. In almost any jurisdiction, however, the insured is well advised to not get itself into the position where it has to ask a court to not enforce policy conditions. For example, sometimes when the “no action” clause is not enforced, the “voluntary payment” provision is, leading to the same result. Thus, an insured who asks for consent to settle and is refused is almost always in a better situation than an insured who settles without even letting the insurer know there is something to settle. MODERATOR DAVID E. WEISS I think that a good lesson to take from all of this is that open communication between the parties is necessary to avoid disputes and potential litigation. It has been my experience that most disputes over claims-handling issues arise because of a breakdown in communication between the policyholder and the insurance company, particularly in the area of liability insurance, and especially where the insurance company has an obligation to defend or reimburse defense costs. Policyholders need to keep the insurance company informed about the status of the litigation, including significant developments, settlement opportunities, etc. At the same time, carriers have to be prompt about paying bills and have to take an interest in the conduct of the litigation. It is not enough to wait months to pay a bill and then complain that the bills are too high, after never displaying any interest at all in what is going on in the case. PANELIST LON BERK, PARTNER, SHAW PITTMAN, MCLEAN, VA. (Regarding Kirk A. Pascich’s comment: This may be true in many situations. However, it still is incumbent upon the carrier to conduct a thorough investigation. And, the carrier cannot simply ask the insured for information — it must affirmatively seek information. See Hughes v. Blue Cross, 215 Cal. App. 3d 832, 836 (1989), cert. dismissed, 495 U.S. 944(1990). ) A policyholder cannot rely upon this idea to argue that an insurer has an obligation independently to uncover information that the policyholder may have. As the Hughescase recognized, good faith is a two-way street. That is, both contracting parties must refrain from doing anything to impair the rights of the other. It follows that the policyholder should have an obligation to make a full disclosure to the insurer of all information the policyholder has so that the insurer can fully investigate the claim. This should include information that may support coverage as well as information that may support a disclaimer. MODERATOR DAVID E. WEISS Policyholders are not in the business of insurance; insurance companies are. Accordingly, policyholders cannot be made to guess at what the insurance company might need or want to investigate a claim. The insurance company is supposed to be the expert as to what is or is not covered, and is supposed to ask questions to uncover information in an even-handed manner. PANELIST DAVID M. OSTRANDER Getting back to the scope of the insurer’s right, or lack thereof, to privileged defense information, the Rockwellcase does NOT stand for the proposition for which it often seems to be cited — i.e., that an insured has an unfettered right to refuse disclosure to its liability insurer of all arguably privileged communications between the insured and its defense attorney. What it actually holds is that an insurer does not automatically have a right to ALL privileged communications with defense counsel when its defense is subject to a reservation of rights. Instead, the insurer’s right to privileged information is measured by the provisions of Civil Code 2860, which distinguishes between privileged communications as to defense issues (to which even an insurer defending under reservation is entitled as part of its right to participate in all aspects of the defense) and privileged communications as to coverage issues (to which an insurer defending under reservation of rights is not entitled). There may be gray areas as to when a communication is truly liability- or coverage-related, and Rockwellcan probably be used to justify erring on the side of protecting the insured’s right to maintain the privilege with respect to coverage related communications. But it is highly inappropriate for an insured or its counsel to hide behind Rockwellas a way of keeping the insurer in the dark about facts that have been discovered, or about counsel’s evaluations of liability, or about counsel’s advice regarding defense strategy or other information basic to defending or settling a lawsuit, merely because that information may also be relevant to a coverage issue that exists between insurer and insured. The insured’s counsel’s advice or analysis of how facts or defense strategy may affect coverage issues is plainly protected from disclosure to the insurer defending under reservation, but the existence of the facts or strategy is not.

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