“Insurance Matters”

Insurance issues find their way into 60% of all California civil suits, in all manner of disputes

Rex Heeseman
2016 September

Over sixty percent of the civil litigation in larger California counties involves some aspect of insurance. In order of frequency: plaintiff vs. policyholder defendant (with insurer defending and/or settling); policyholder vs. insurer (e.g., bad faith and coverage litigation); and, insurer vs. insurer (e.g., contribution and subrogation claims). It thus behooves attorneys to understand key insurance topics, many of which are summarized below and which often come up in MSCs/mediations and trials/arbitrations.


Although usually aware of the defendant’s personal and business assets, especially for settlement and collection purposes, plaintiff attorneys are often unaware of whether the defendant has any applicable insurance and, if so, the type of coverage, the policy limits, and so forth. Basic rules generally allow discovery of such information. See in particular section 2017.210 of the Code of Civil Procedure and Judicial Council Form Interrogatory No. 4. These rules should invariably be utilized, usually in the early stages of the matter. And, discovery is sometimes available in other areas of insurance, e.g., loss reserves (Lipton v. Sup. Ct. (1996) 48 Cal.App.4th 1599, 1614) and other insureds’ claim files (Colonial Life and Acc. Ins. Co. (1982) 31 Cal.3d 785, 750).

Duty to defend and controlling the defense

In third-party controversies (i.e., suit against defendant policyholder), the insurer normally must pay for defense expenditures (attorney’s fees and costs) if under its policy there is a “potential of coverage,” if for even only one cause of action. (Buss v. Sup. Ct. (1997) 16 Cal.4th 35.) And, the insurer may also have the duty to indemnify (pay for any judgment if there is “actual coverage”). Of course, to avoid future defense expenditures and/or the danger of an adverse verdict, insurers frequently put up money (often the full amount) to settle that lawsuit.

Defense expenditures normally do not reduce policy limits; sometimes from a practical perspective, the total amount paid for such expenditures can exceed those limits. However, with respect to “burning limits” (aka “self-consuming” or “wasting”) policies, those limits are reduced by such payments; in other words, the more spent on such expenditures, the less money is available to settle.

There are pitfalls when an insurer refuses to defend. For example, the insurer cannot control the defense (e.g., select counsel), and usually cannot complain about the defense’s lack of effectiveness, the amount of the judgment, or the taking of a default. (See, e.g., Eigner v. Worthington (1997) 57 Cal.App.4th 188, 195-196.) That insurer will frequently be bound by issues expressly or impliedly adjudicated in that lawsuit. (See, e.g., Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.3d 500, 514.)

Furthermore, absent some type of fraud, that policyholder can normally settle with the third party on appropriate terms, including an assignment and a covenant not to execute. If a “potential for coverage” is subsequently found with respect to that lawsuit, that insurer can be responsible for that policyholder’s defense expenditures, even if there is no “actual coverage.” (See, e.g., Amato v. Mercury Cas. Co. (1997) 153 Cal.App.4th 825, 831.) If coverage is actually present, that insurer is often responsible for any judgment, absent collusion with the third party; extracontractual damages may further be available if that insurer acted tortiously. (See, e.g., Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 880.)

On the other hand, a defending insurer invariably controls the defense, with the policyholder having very limited rights to settle, and a stipulated judgment (absent insurer consent) is invariably ineffective. (Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718.) Still, if concerned about the insurer’s handling of the defense, prior to verdict and without insurer consent, the policyholder may assign contract and “bad faith” claims (but not for emotional distress damages and punitive damages); such an assignment, though, is not legally effective unless and until a judgment in excess of policy limits is actually rendered against the policyholder. (Ibid. at 732.)


A policy’s insuring clause (aka the “promise to pay”) is the typical locale for a key word or phrase, including “occurrence.” The latter word is also found in other places, e.g., deductibles and policy limits. For instance, with respect to a single “occurrence,” a single deductible (“per occurrence”) may apply; multiple “occurrences” may mean multiple deductibles. Similarly, policy limits are often tied to an “occurrence” during the policy period.

“Occurrence” typically means “the underlying cause of the injury, rather than the injury or claim itself.” (FMC Corp. v. Blaisted & Cos. (1998) 61 Cal.App.4th 1132, 1161.) With respect to a first-party policy and its typical claim of policyholder vs. insurer, “accidental direct physical loss or damage” means unintended and unexpected by the insured. (MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co. (2010) 187 Cal.App.4th 766, 782.)

Current insurance forms (e.g., CGL) define an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In a third party context, “occurrence” refers to something (e.g., an act) resulting in damage during the policy period, even if the related claim is not made until after the policy’s expiration. An “occurrence” may therefore result in prospective coverage. (Merrill & Seeley, Inc. v. Admiral Ins. Co. (1990) 225 Cal.App.3d 624, 628.)

Some decisions in the relatively distant past have observed that, even if the policyholder intended the act resulting in the injury in question, an “accident” still may be present if the policyholder lacked the requisite intent to cause the injury; that is, coverage may be extant “if some additional, unexpected, independent and unforeseen happening occurs that produced the injury.” (Merced Mut. Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41.)

However, recent case law is going the other way − for instance, the California Supreme Court’s decision in Delgado v. Inter. Exch. of Auto. Club of So. Calif. (2009) 47 Cal.4th 302. There, Delgado asserted Reid acted “without intent to injure … but with intent to defend himself and his family… from what [Reid] perceived was an imminent threat of harm….” Reid’s insurer, though, was not obligated to defend inasmuch as the key was the “wrongdoing” by Reid, the policyholder, not Delgado’s acts which purportedly provoked Reid; the “word ‘accident’ refers to the conduct of the insured for which liability is sought to be imposed.” 

In State Farm Gen. Ins. Co. v. Frake (2011) 197 Cal.App.4th 568, the trial judge opined that Delgado declared “new law in the ‘self-defense context’ and did ‘not affect … that an insurer has a duty to defend where the facts [are] such that the insured acted deliberately, but did not intend the resulting injury.’” The Court of Appeal reversed, pointing out Frake admitted his intent to strike King and just because “Frake did not intend to injure King does not transform his intentional conduct into an accident.” (See also Albert v. Mid-Century Ins. Co. (2015) 236 Cal.App.4th 1281 [Albert’s subjective thoughts irrelevant as she intended acts causing damage].)

In short, a “pro-insurer” trend has recently surfaced in connection with what is an “accident.” From a policyholder perspective, this trend sometimes presents meaningful challenges. Additionally, most recent decisions concerned a denial of the tender; issues involving an “occurrence” thus often surface near the inception, not towards the end, of the dispute.

Bad Faith

Griffin Dewatering Corp. v. Northern Ins. Co. of N.Y. (2009) 176 Cal.App.4th 172, 195 noted the existence of three levels of potential analysis in “bad faith” lawsuits.

  • Contractual Liability? Are policy benefits (or more such benefits) owing?
  • Compensatory Damages Liability? If and only if policy benefits are owing, is the insurer liable for compensatory damages (e.g., emotional distress and attorney’s fees)? That is, was the insurer’s delay or denial of policy benefits “unreasonable or without proper cause”? (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072-1073.) Mere negligent conduct, by itself, is not actionable. (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 880. Additionally, was the insurer’s delay or denial objectively reasonable? Its subjective belief in the validity of its position is irrelevant. (Bosetti v. United States Life Ins. Co. in City of N.Y. (2009) 175 Cal.App.4th 1208, 1236.)
  • Punitive Damages Recoverable? Even if the insurer acted tortiously, that may not be enough for an award of punitive damages which must be proven by “clear and convincing evidence” of “oppression, fraud, or malice” as defined in Civil Code section 3294, subdivision (a), together with other elements (e.g., authorization, ratification and/or the presence of a managing agent).

Invariably for a “bad faith” failure to settle, the insurer must have had the opportunity to settle the claim within the policy limits. (Graciano v. Mercury Gen. Corp. (2014) 231 Cal.App.4th 414, 425.) The reasonableness of a policy limits demand is appraised with respect to covered damages only, because an insurer has a duty to accept such a demand only with respect to a covered matter. (DeWitt v. Monterey Ins. Co. (2012) 204 Cal.App.4th 233, 250.)

Genuine Dispute Doctrine

Over twenty years ago, California courts started to summarily adjudicate out a bad-faith cause of action if the insurer provided a sufficient rationale for its position (whether ultimately correct or not) regarding a legal issue relating to coverage. (See, e.g., Opsal v. United Services Auto. Assn. (1991) 2 Cal.App.4th 1197.) This “genuine dispute” doctrine has been extended to factual issues. (See, e.g., Chateau Chamberay Homeowners Assn. v. Associated Inter. Ins. Co. (2001) 90 Cal.App.4th 335.) Counsel for insurers invoke the doctrine in an attempt, before trial, to remove the tort claims. In the alternative, such counsel often seek to strike the claim for punitive damages on the ground there is no clear and convincing evidence to prove the standards of section 3294.

Notably, in Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, the Supreme Court observed that “21st Century rejected the claim on the asserted ground that [its policyholder] had suffered only soft tissue injuries in the collision and had ‘preexisting’ degenerative disc disease. Because, based on the undisputed facts in the summary judgment record, a jury could reasonably find 21st Century reached this medical conclusion without a good faith investigation of the claim and without a reasonable basis for genuine dispute … summary judgment on plaintiff’s bad-faith cause of action was improper.”

Wilson repeated many legal standards that favor policyholders. For instance, “denial of a claim on a basis unfounded in the facts known to the insurer, or contradicted by those facts, may be deemed unreasonable …. ‘The insurer may not just focus on those facts which justify denial of the claim.’”


Arbitration provisions are commonly found in many health insurance policies and in the uninsured (UM) and underinsured (UIM) portions of automobile insurance. However, that list is expanding (e.g., WRAP policies in the construction world).

In sum, insurance issues find their way into all manner of disputes, and counsel is always well served to be cognizant of those issues.

Rex Heeseman Rex Heeseman

Rex Heeseman, who retired from the LASC bench in 2014, is at JAMS, Los Angeles, rheeseman@jamsdar.com. Besides speaking at MCLE programs, he co-authors The Rutter Group’s practice guide on Insurance Litigation, and has taught courses on Insurance Law at Loyola and UCLA law schools.

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