When Should An Insurer Deny Coverage For The Insured’s Unconsented To Settlement With The Claimant? Not When The Insured Is Settling Only Uncovered Claims

Most standard liability policies contain a clause either as a condition of coverage or as an exclusion that the insured cannot make a “voluntary” payment to settle claims without the insurer’s consent. Sounds relatively simple, right? Not really. The paradigm case where an insurer will be well within its rights to deny coverage for the insured’s voluntary payment is where the insured settles a covered claim without tendering the claim to the insurer first but then demands that the insurer reimburse the insured for the settlement. Unlike other “notice” provisions, in California, the insurer is not required to show prejudice before standing on the voluntary payments clause to deny coverage. Because an insurer is not required to show prejudice from late notice of the tender of indemnity for voluntary settlement payments, California courts have denied coverage for voluntary payments and settlements made post tender and while the insurer was defending the claim.

One might think then that anytime an insured settles a claim, pre or post-tender, the insurer could deny coverage. The answer? Sort of. Why? It depends on what the insured is settling. The following example illustrates the problem. Say the insurer is defending covered and uncovered claims under a reservation of rights, and is also reserving its right to seek reimbursement for defending uncovered claims as authorized by the California Supreme Court’s Buss decision. A mediation is scheduled and the insured and the insurer are participating in the mediation. The insured is worried about a large uncovered judgment being entered against. You, the claims adjuster, believe you have a good chance of defensing the covered claims or obtaining a result far less than the plaintiff’s demand. You offer nothing towards the settlement of the non-covered claims. The insured ponies up his own dough to effect a settlement with plaintiff for all the non-covered claims because the insured is afraid of:

(1) A massive judgment for which there is no insurance coverage as per the insurer’s reservation of rights letter; and

(2) A second lawsuit by the insurer for reimbursement for the defense of the uncovered claims.

Presently, no California state court has addressed this exact factual scenario, despite this becoming a more common situation. Do you believe you could justifiably deny all coverage to the insured if the insured settled only the non-covered claims, thereby leaving only the covered claims to be litigated?

The Ninth Circuit Court of Appeals said no, in a case involving Tosco oil refineries in the context of worker’s compensation insurance for claim arising out of the Northern District of California. (See Travelers Prop. Cas. Co. of America vs. ConocoPhillips Co. [Tosco] (9th Cir. (Cal.) 2008) 546 F.3d 1142, 1146.) The Ninth Circuit recognized that in ever case where a California court denied coverage for the insured’s breach of the “no voluntary payments” clause of the policy, the insured was seeking reimbursement for the settlement of covered claims, thereby denying the insurer the right to defend the claim as the insurer saw fit. (Recall that though insurer’s have a duty to defend in liability insurance, it always described as the “right” and duty to defend.) In the Tosco case, the insurer denied coverage for the covered claims it was defending because the insured had settled the non-covered claims that the insurer was defending under a reservation of rights. Tosco was not seeking reimbursement for its settlement of the non-covered claims, but merely sought the continued defense and indemnity for the admittedly covered claims. The Ninth Circuit found that Tosco’s insurer could not rely on the no voluntary payments coverage provision to deny Tosco coverage for the insured claims. (The court also found that the insured didn’t technically “pay” money to the claimant but did not take an authorized “credit,” which the court also found did not technically qualify as a “payment” so as to amount to a breach of the policy’s “no voluntary payments” exclusion.)

Even the California state cases that have denied coverage for breach of the “no voluntary payments clause” recognize an exception to the insurer’s ability to lawfully deny coverage where the insured “faces a situation requiring an immediate response to protect [the insured’s] legal interests.” (Truck Ins. Exch. vs. Unigard Ins. Co. (2000) 79 Cal.App.4th 966, 977, fn. 15.) 

The above fact pattern is snake pit to the unwary. Relying on the “no voluntary payments” clause to deny coverage for the covered portion of the claim is a high risk proposition. The insured will argue that he or she was forced to settle to avoid a large uncovered judgment and to avoid a subsequent Buss action. There is little equity in arguing to a judge or jury that the insurer has the legal right to:

(1) Bar the insured from capping the insured’s personal, non-covered liability exposure; and

(2) Run up defense costs and fees on the uncovered claims only to seek reimbursement for defending the non-covered claims in addition to the insured having to pay the claimant the uncovered portion of the judgment.

“That dog don’t hunt.” It will likely result in a successful breach of contract/insurance bad faith action because it won’t look like the insurer gave at least as much consideration to the insured’s interests as the insurer gave itself. The solution? Don’t deny all coverage if the insured wants to settle claims you are disclaiming coverage for. But, do remind the insured that the insurer has no obligation to reimburse the insured for settling non-covered claims. There may even be times when it would be worth making a small costs of defense contribution to resolve non-covered claims, thereby eliminating the need for independent or Cumis counsel.


Dealing With Difficult People-Kill ‘Em With Kindness Is The Best Policy—No Matter How Much It Hurts You

By John Armstrong

Being in business means dealing with people. Being involved in insurance claims means dealing with difficult people. Normal, good, decent people tend to be difficult or impossible when under stress. You and your company may be wrongly accused of all kinds of things. You may be threatened with lawsuits or worse. What to do? Turn the other cheek! Don’t given into the temptation to write about how you really feel to the claimant, in your claimants, or to anyone. If you really feel the need to do, write what you want to say on waste paper, and then shred your personal thoughts. While valid, they have no place in the insured’s claim file. 

Why? Well… I began my career defending insurance bad faith property cases arising out of the 1994 Northridge Earthquake. The most difficult cases to defend where ones in which the claims adjuster wrote “less than nice things” about the insured.The lawyers armed with the claims correspondence all obtained recoveries and better ones, than where there wasn’t this added “bad fact” in defending the claim. (Of course only this information was only produced after valiant efforts were made to protect the claims file.) The sad part was that if you carefully reviewed the entire file, you understood where the adjuster was coming from. But all that anyone on a jury would be focused on would be the “bad”  comments by the adjuster.

From a juror’s perspective, the claims adjuster, as the insurer’s agent, has all the cards in his or her favor. The claimant has suffered a loss, and may be out thousands of dollars or more and may even have sustained permanent bodily injury from the event giving rise to the claim. In contrast, the claims adjuster’s stress “only” has to deal with fairly adjusting the loss. No doubt the adjuster must deal with the verbal and written threats by the insured and insured’s attorney. No doubt it its unpleasant. But adjusters are held to a higher level. They are expected to be professional at all time because, after all, claims is their profession. 

To illustrate what I’m writing about, I once had to defend a claimant who was also an attorney. I had to copy all of correspondence to the handling and senior claims adjuster and coverage counsel since there was such a high chance of the insured suing for bad faith. But not matter how nasty the multiple tomes of single-spaced emails I received every day, I always responded with kindness and professionalism. The result? We got the claim resolved, and when it was all over, the insured sent me a very nice and unexpected thank you. That is a much happier result than trying to defend your words once your company is sued for bad faith. The moral? Kill ‘em with kindness. It’ll save you and your employer countless headaches and plenty of $$$ in the long run.

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Good Faith Claims Handling–Not As Hard You Think

By John Armstrong

“Good faith” is terrible as a legal standard because it is inherently subjective. It means different things to lawyers, judges, regulators, legislators, and claims professionals, except in the more extreme circumstances.

The most workable definition I’ve seen is in California’s official jury instructions, which define it as “unreasonable insurer conduct.” This of course doesn’t tell us what qualifies as “unreasonable,” but what is reasonable is dependent on the circumstances, that is, what information was both known and available at the time the claim was denied.

Where mistakes get made and where litigation often occurs is when an incomplete analysis of the claim was made when the claim was denied.

Business today literally moves at light speed. We are all expected to do more in less time. Time management tells us to delegate tasks that can be delegated to promote efficiency. The problem with delegation however is your results are only as good as the information you’ve passed on.

For example, a new claim comes in, and you’ve delegated the task of whether there is coverage to coverage counsel as you suspect the claim isn’t covered under the company’s standard policy. You send the claim to coverage counsel along with a copy of the standard policy issued the insured. Coverage ghost writes a letter for you denying coverage just as you thought. Routine, right? “Good faith,” right? WRONG! Why?

Well, the insured did have the standard policy but also bought extended coverages, including coverage for the specific claim at issue. “Bad faith”? 9 times out of 10, yes. Why? Because the underwriting file was available and would have showed coverage existed. It’s unreasonable not to look at what coverages the insured bought before denying a claim. The advice of counsel defense won’t work because coverage counsel was not given a complete copy of the policy. To a jury, it will like this was intentionally withheld. And, if your compensation is tied in any way to the number of claims denied, your company may even be exposed to punitive damages by providing an economic incentive to deny claims. It won’t matter that you made a simple, common mistake because deny coverage for the very risk the insured purchased is the heart of insurance bad faith.

The point? No matter how busy, no matter how overloaded, you must make sure you have a COMPLETE copy of the policy before denying the claim, and it’s always a good idea to run the claim and all applicable policies by coverage counsel to make sure you have the added protection on the good faith reliance on coverage counsel. Getting a second opinion will itself often be considered as evidence of your good faith conduct in denying a claim that is not covered.