Securing Policy Benefits Beyond Insurer Shell Games

Securing Policy Benefits Beyond Insurer Shell Games

By David A. Gauntlett[*]

Introduction

What’s the best approach to choosing an insurer based on policy language or service? As policy holder insurance coverage counsel, I am occasionally asked to assist policy holders in procuring coverage. In that capacity, I have analyzed a number of risks under CGL/Umbrella/Excess, D&O, E&O, Media, Cyber Media, Technology, IP, EPLI, Fiduciary, Crime, and a host of other forms of insurance coverage. My primary focus is policy language. That is what a court must interpret. Nonetheless, insurers that allow policyholder to retain independent counsel, where the law allows it, at rates they validate, and extend authority to resolve litigation within policy limits receive my recommendation.

Insurers Cannot Demand Answers to Questions Directed to the Merits

Insurer investigations typically focus on uncovering facts that allow them to assert exclusions that bar all coverage. In a typical scenario, a client was sued for infringement of copyright based on its advertising a particular fabric with a copyrighted design, which it allegedly displayed to promote sales of that product. On its face, the complaint allowed the policyholder to obtain a defense. Although infringement was excluded, an exception to that exclusion allows for the covered offense “copyright infringement ‘in your advertisement.’” “Advertisement” was broadly defined to encompass any publication of material to a targeted market segment as well as the general public,[2] as is the case in the ISO CGL 2013/2017 policy form presently in effect.

A typical example is where a claims representative asked the insured about how it advertised. It wished to know when it advertised and in what manner. The insured voluntarily disclosed that customers at trade shows were invited behind a closed curtain to see the material at the heart of the copyright suit. Because the insurer believed the disclosed conduct did not meet the broad definition of an “advertisement” in the policy, it promptly denied a defense.

The insured was only able to contest this analysis by arguing that the definition of advertisement was broad enough to cover the admitted behavior. Rather than meeting the ordinary definition of “advertisement” (i.e., marketing to the general public), we were forced to argue that private promotion to individuals constituted “publish[ing] to . . . specific market segments.” [3] Properly advised, the insured would have known to simply state that the complaint accurately characterized its conduct. The insured was not obligated to volunteer information related to an uncontested aspect of the allegations, [4] nor was it appropriate to disclose as it went to the merits.[5]

California law has long recognized the conflict of interest that exists due to an insurer’s incentive to develop facts supporting coverage exclusions.[6] When those conflicts exist, the insured must avail itself of the statutory right to independent counsel. Attorney-client privilege will allow free communication without fear of accidentally giving the insurer reason to invoke an exclusion, and the independent counsel can best determine which facts, if any, must be disclosed. [7]

Improper Delay in Payment of Fees—Plain English for Insurers

A policyholder asking the simple question of when they can expect money from the insurer will rarely be given an adequate answer. Instead of a concrete date, insurers offer noncommittal, vague, and generalized representations that lack substance and fail to meet the duty of good faith and fair dealing.

Various linguistic formulas are used in place of a genuine answer. Favored responses include “payment will arrive shortly”; “I am waiting to get word from the insurer”; “we will let you know when we hear”; “we anticipate receiving word soon”; “the request for payment has been escalated”; “I’m not sure what the delay is, and will try to get a more concrete payment date”; “we have forwarded the information to the insurer”; and “I have been following up with the insurer.”

Insurers Routinely Avoid Extending Settlement Authority

A liability insurer may be liable for breach of the implied covenant of good faith and fair dealing when it delays or refuses to settle a covered claim and that delay or refusal causes damage to the insured.[8]

In a recent case,[9] the court concluded that bad faith arose from a failure to settle. It expanded this doctrine beyond the prototypical situation in which “the third party claimant makes a reasonable settlement offer within the policy limits; the insurer rejects it; the third party claimant goes to trial; and the trial results in a judgment in excess of the policy limits.”[10] The insured argued it could not be held in bad faith since the only settlement offer left on the table was in excess of the policy limit.

The court relied on a prior decision for the principle that “the existence of an opportunity to settle within the policy limits can be shown by evidence other than a formal settlement offer.”[11] Based on standard practices within the insurance industry, the court determined a subrogation demand letter to be sufficient evidence of a willingness to settle within policy limits.[12] Insurers have tried and failed to justify delay because a claim had not yet become a lawsuit,[13] because the insured had not yet suffered,[14] and because there was not yet a final settlement or judgment.[15]

Conclusion

Insurers owe straightforward explanations of what facts they seek to determine potential coverage in connection with an investigation. Disputed facts require a defense, not an insurer pursuing a claim against its own insured as if it stood in the shoes of the plaintiff. [16] Where the inquiry addresses disputed facts beyond the allegations in the complaint, they may not inquire through demands for information that go to the merits of the underlying action against their insured.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] Zurich-American Insurance Group CGL Policy Form No. U-GU-313-A.

[3] Bear Wolf, Inc. v. Hartford Ins. Co., 819 So. 2d 818, 821 (Fla. Dist. Ct. App. (4th Dist.) 2002) (“[W]e see no reason to read ‘widespread public distribution’ so narrowly as to exclude a display at one of the industry’s largest trade shows, whether it was open to the general public or not.”)

[4] See Restatement of the Law, Liability Insurance, DD § 29 (“The rule that the insurer may not request cooperation in the form of information implicating a conflict of interest or violating a privilege is well-established.”)

[5] See Rockwell Internat. Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1262 (1994) (Rejecting the notion that a cooperation clause entitles an insurer to all documents because a cooperation clause’s purpose is “to permit an insurer to present a complete defense of its insured in the underlying action” and “to prevent collusion between the insured and the injured person.”)

[6] See David A. Gauntlett, Battling for Equity-Securing Appropriate Fee Rates in C. C. §2860 Disputes, https://www.gauntlettlaw.com/news/battling-for-equity-securing-appropriate-fee-rates-in-c-c-2860-disputes (Mar. 31, 2022).

[7] See David A. Gauntlett, Navigating Issues of Dual Representation Where Both Appointed Counsel and Independent Counsel Jointly Defend a Covered Lawsuit, https://www.gauntlettlaw.com/news/navigating-issues-of-dual-representation-where-both-appointed-counsel-and-independent-counsel-jointly-defend-a-covered-lawsuit-1 (July 15, 2021).

 [8] Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d 9, 15 (1975) (“An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract.”)

[9] Planet Bingo, LLC v. Burlington Ins. Co., 62 Cal. App. 5th 44 (2021).

[10] Id. at 54.

[11] Id. at 56 (Citing Boicourt v. Amex Assurance Co., 78 Cal. App. 4th 1390, 1393–99 (2000) (Concluding insurer was guilty of bad faith for its prelitigation tactic of refusing to disclose policy limits that resulted in an excess judgment.))

[12] Planet Bingo, 64 Cal. App. 5th at 57.

[13] United States Fire Ins. Co., v. Button Transp., Inc., A108419, 2006 Cal. App. Unpub. LEXIS 3472, at *28-29 (Apr. 26, 2006) (“[C]ontrary to U.S. Fire's contention at oral argument, it does not follow that an insurer is never obligated to settle or attempt to settle a claim in the absence of a lawsuits.”)

[14] Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 906 (2000) (“[A]n insurer may breach the implied covenant [of good faith] by unreasonably . . . delaying payment until the insured is subject to loss of business goodwill.”) (Emphasis in original.)

[15] Bodenhamer v. Superior Court, 192 Cal. App. 3d 1472, 1476 (1987) (Rejecting insurer’s argument that “[u]ntil liability is determined by a settlement admitting liability or a judgment against the insured, the duty [of good faith] is not breached.”)

[16] Mirpad, LLC v. Cal. Ins. Guarantee Ass'n, 132 Cal. App. 4th 1058, 1068 (2005) (“If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.”)