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What Is The Time for Responding to a Defense Tender?

An insurer has 15 days to acknowledge the receipt of a claim notice.  Cal. Code Regs. tit. 10, § 1695.5(e).

An insurer must accept or deny a claim within 40 days of receipt of proof of claim. Cal. Code Regs. tit. 10, § 2695.7(b). If more time is needed to investigate the claim, the insurer has 40 days of its receipt of proof of loss to inform the insured of that fact and every 30 days thereafter if still more time is needed.   Cal. Code Regs. tit. 10, § 2695.7(c)

Does Reserving Rights Create a Conflict of Interest? 

When an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.  Cal. Civ. Code § 2860(b).

Although an insurer’s agreement to provide a defense pursuant to a reservation of rights may give rise to a conflict of interest requiring appointment of independent or “Cumis” counsel, it is not inevitable.[1]  Long v. Century Indem. Co., 163 Cal.App.4th 1460, 1470 (2008).  

When the facts on which resolution of the reserved coverage dispute depends are at issue in the underlying action, independent counsel must be appointed because counsel selected and controlled by the insurer could determine the outcome of those factual issues in the third-party action. Long v. Century Indem. Co., 163 Cal.App.4th 1460, 1471 (2008).

Does a Reservation of Rights Create Additional Duties?

None found.

What Must Be Done If A Conflict of Interest Exists?

If a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured, unless insured waives the right.  Cal. Civ. Code § 2860(a).

Who Is Responsible for Fees of Independent Counsel?

The insurer is responsible but its obligation is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended, unless otherwise specified in insurance contract. Cal. Civ. Code § 2860(c).

What Are Independent Counsel’s Obligations?

Independent counsel and the insured shall disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Cal. Civ. Code § 2860(a).

What Settlement Duties Exist?

Insurers must make reasonable efforts to settle a third party’s lawsuit against the insured.  PPG Industries, Inc., v. Transamerica Ins. Co., 20 Cal.4th 310, 312 (1999).  

Even with independent counsel assigned, insurer holds right to settle claim.  Hurvitz v. St. Paul Fire & Marine Ins. Co., 109 Cal.App.4th 918, 934 (2003).

What Actions May Result in a Claim for Bad Faith?

Breach of duty to defend:  Tibbs v. Great American Ins. Co., 755 F.2d 1370, 1375 (9th Cir. 1985)(California law).

Breach of duty to indemnify:  Pistorius v. Prudential Insurance Co., 123 Cal. App. 3d 541 (3d Dist. 1981). 

Breach of the duty of good faith and fair dealing: “An insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”  Egan v. Mutual of Omaha Ins. Co. 24 Cal.3d 809, 819 (1979).

Are Attorney’s Fees Recoverable in Insurer-Insured Dispute?

Yes, if an insurer denies coverage in bad faith.  Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal.4th 1252, 1257 (2006). 

Are Punitive Damages Recoverable in Insurer-Insured Dispute?

Absent tort liability, there is no liability for punitive damages.  Behnke v. State Farm General Ins. Co., 196 Cal.App.4th 1443, 1447 (2011); Cal. Civ. Code § 3294(a).

Alternative Coverage Options

While the underlying action is pending, the insurer can file an action for declaratory relief and attempt to obtain a declaration that no duty to defend or indemnify exists. Such a determination would allow it to withdraw from the defense without subjecting the carrier to a claim of breach of contract or bad faith. Hartford Accident & Indemnity Co. v. Superior Court, 23 Cal.App.4th 1774, 1778 (1994).

Bifurcation of trial so as to try issue of insurance coverage before that of insurer’s alleged bad faith was proper.  Equitable Life Assurance Society v. Berry, 212 Cal.App.3d 832, 836 (1989).

Relevant Statutes

Declaratory Judgment – Cal. Civ. Code § 3367.

“By declaring and determining the rights of parties, otherwise than by an award of damages.”

Unfair Claims Settlement Practices Statute – Cal. Ins. Code § 790.03(h).

Unfair claims handling by insurers is regulated under Cal. Ins. Code § 790.03(h). This statute does not create a private right of action for insureds but the listed conduct can be evidence of bad faith under common law.  Moradi-Shalal v. Fireman’s Fund Ins. Co. 46 Cal. 3d 287 (1988).

[1] The term “Cumis counsel” derives from the holding of San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984), which recognized the insurer’s duty to appoint independent counsel for its insured under certain circumstances. The Legislature codified that duty in 1987 by enacting Cal. Civ. Code § 2860.

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