General Principles of Insurance Coverage & Bad Faith Litigation


Insurance Coverage

Any analysis of coverage must begin with the language of the policy. The usual goal of policy interpretation is "to give effect to the mutual intention of the parties," while reading the policy’s "language in context with regard to its intended function in the policy." ( Bank of the West v. Superior Court (1992) 2 Cal. 4th 1254, 1264, 1265 [10 Cal. Rptr. 2d 538, 833 P.2d 545].) Galanty v. Paul Revere Life Insurance Co., 23 Cal. 4th 368 (Cal. 2000)

 

“Interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation. … ‘The fundamental rules of contract interpretation are based on the premise that the interpretation of a  contract must give effect to the “mutual intention” of the parties. “… Such intent is to be inferred, if possible, solely from the written provisions of the contract. … The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ …, controls judicial interpretation.” ’ ” (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 647–648 [3 Cal. Rptr. 3d 228, 73 P.3d 1205], The goal is to protect the mutual intentions of the insured and the insurer. (See Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 754, 756–757 [27 Cal. Rptr. 3d 648, 110 P.3d 903]; Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 774–775 [49 Cal. Rptr. 3d 531]; California Automobile Ins. Co. v. Hogan (2003) 112 Cal.App.4th 1292, 1299 [5 Cal. Rptr. 3d 761].) Safeco Ins. Co. of America v. Fireman's Fund Ins. Co., 148 Cal. App. 4th 620, 629 (Cal. Ct. App. 2007)

In the insurance context, the fundamental principle is that an insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear. As we have declared time and again ‘any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.’ ” (State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201 [110 Cal. Rptr. 1, 514 P.2d 953].) Coverage may be limited by a valid endorsement and, if a conflict exists between the main body of the policy and an endorsement, the endorsement prevails. (Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 50, fn. 4 [70 Cal. Rptr. 2d 118, 948 P.2d 909].) But to be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be “conspicuous, plain and clear.” (Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 878 [27 Cal. Rptr. 172, 377 P.2d 284] (Steven).) Thus, any such limitation must be placed and printed so that it will attract the reader's attention. Such a provision also must be stated precisely and understandably, in words that are part of the working vocabulary of the average layperson. (National  Auto. & Casualty Ins. Co. v. Stewart (1990) 223 Cal. App. 3d 452, 458 [272 Cal. Rptr. 625]; Ponder v. Blue Cross of Southern California (1983) 145 Cal. App. 3d 709, 719, 723 [193 Cal. Rptr. 632].) The burden of making coverage exceptions and limitations conspicuous, plain and clear rests with the insurer. (State Farm Mut. Auto. Ins. Co. v. Jacober, supra, at pp. 201–202; Harris v. Glens Falls Ins. Co. (1972) 6 Cal.3d 699, 701 [100 Cal. Rptr. 133, 493 P.2d 861].) Haynes v. Farmers Ins. Exchange, 32 Cal. 4th 1198 (Cal. 2004)

 

If the meaning a layperson would ascribe to insurance contract language is not ambiguous, courts will apply that meaning. (AIU Ins. Co. v. Superior Court (1990) 51 Cal. 3d 807, 822 [274 Cal. Rptr. 820, 799 P.2d 1253] (AIU).)

Even if a provision raises doubts as to coverage in the minds of legally trained observers due to a sophisticated legal distinction, courts will not assume the distinction was incorporated into the policy. (See AIU, supra, 51 Cal. 3d 807, 825.) Whatever ambiguity a phrase possesses due to a party's legal knowledge is resolved in favor of coverage. Vandenberg v. Superior Court, 21 Cal. 4th 815 (Cal. 1999)

 

The term “trigger of coverage” is often used in connection with the duty to defend. “The word  ‘trigger’ is not found in the … policies themselves, nor does the Insurance Code enumerate or define ‘trigger of coverage.’ Instead, ‘trigger of coverage’ is a term of convenience used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise. The issue is largely one of timing—what must take place within the policy's effective dates for the potential of coverage to be ‘triggered’?” (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655, fn. 2 [42 Cal. Rptr. 2d 324, 913 P.2d 878] (Montrose II).) Safeco Ins. Co. of America v. Fireman's Fund Ins. Co., 148 Cal. App. 4th 620 (Cal. Ct. App. 2007)

 “Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability. … [¶] ‘Excess’ or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.” (Olympic Ins. Co. v. Employers Surplus Lines Ins. Co. (1981) 126 Cal. App. 3d 593, 597–598 [178 Cal. Rptr. 908], italics & fn. omitted.) Transcontinental Ins. Co. v. Insurance Co. of the State of Pennsylvania, 148 Cal. App. 4th 1296 (Cal. Ct. App. 2007)

 

 

Duty to Defend

‘[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. “[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy.” …‘The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. …’ … ‘[F]or an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. … Hence, the duty “may exist even where coverage is in doubt and ultimately does not develop.” ’ ” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295 [24 Cal. Rptr. 2d 467, 861 P.2d 1153], citations omitted.) Safeco Ins. Co. of America v. Fireman's Fund Ins. Co., 148 Cal. App. 4th 620 (Cal. Ct. App. 2007)

 

Duty to Indemnify

The obligation to indemnify must be distinguished from the duty to defend.   The duty to defend arises when there is a potential for indemnity.” (Montrose II, supra, 10 Cal.4th at p. 659, fn. 9.) …“The obligation to indemnify, on the other hand, arises when the insured's underlying liability is established. … Although an insurer may have a duty to defend, it ultimately may have no obligation to indemnify, either because no damages were awarded in the underlying action against the insured, or because the actual judgment was for damages was not covered under the policy.” (Id. at p. 659, fn. 9, citations omitted.) “Whether coverage is ultimately established in any given case may [also] depend on … the existence of express conditions or exclusions in the particular contract of insurance under scrutiny, the availability of certain defenses that might defeat coverage, and a determination of whether the facts of the case will support a finding of coverage.” (Id. at p. 655, fn. 2.) “The insurer's duty to indemnify runs to claims that are actually covered, in light of the facts proved. … By definition, it entails the payment of money in order to resolve liability.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 46 [65 Cal. Rptr. 2d 366, 939 P.2d 766], citations omitted.) “Both the duty to indemnify and the duty to defend are in fact dependent on coverage—the former on actual coverage, the latter on at least potential coverage.” (Id. at p. 47, fn. 10.) Safeco Ins. Co. of America v. Fireman's Fund Ins. Co., 148 Cal. App. 4th 620 (Cal. Ct. App. 2007)

 

Insurance Bad Faith

An insurer owes to its insured an implied-in-law duty of good faith and fair dealing that it will do nothing to deprive the insured of the benefits of the policy. [Crisci v. Security Ins. Co., supra, at p. 429] Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (Cal. 1973)

 

Duty to Investigate

The covenant of good faith and fair dealing is implied in every contract as a method to protect the interests of the parties in having the contractual promises and purposes performed. [Citation.] … [¶] … An insured does not enter an insurance contract seeking profit, but instead seeks security and peace of mind through protection against calamity. [Citation.] The bargained-for peace of mind comes from the assurance that the insured will receive prompt payment of money in times of need. [Citation.] Because peace of mind and security are the principal benefits for the insured, the courts have imposed special obligations, consonant with these special purposes, seeking to encourage insurers promptly to process and pay claims. Thus, an insurer must investigate claims thoroughly [citation]; it may not deny coverage based on either unduly restrictive policy interpretations [citation] or standards known to be improper [citation]; it may not unreasonably delay in processing or paying claims [citation].” (Ibid.) Lincoln Property Co., N.C., Inc. v. Travelers Indemnity Co., 137 Cal. App. 4th 905 (Cal. Ct. App. 2006)

 

Duty to Settle

The covenant of good faith and fair dealing implied in every insurance policy obligates the insurer, among other things, to accept a reasonable offer to settle a lawsuit by a third party against the insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits. (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 401 [97 Cal. Rptr. 2d 151, 2  [**249]  P.3d 1]; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658–659 [328 P.2d 198].) The insurer must evaluate the reasonableness of an offer to settle a lawsuit against the insured by considering the probable liability of the insured and the amount of that liability, without regard to any coverage defenses. (Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 16 [123 Cal. Rptr. 288, 538 P.2d 744].) An insurer that fails to accept a reasonable settlement offer within policy limits will be held liable in tort for the entire judgment against the insured, even if that amount exceeds the policy limits. (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 725 [117 Cal. Rptr. 2d 318, 41 P.3d 128]; Comunale, supra, at p. 661.) An insurer's duty to accept a reasonable settlement offer in these circumstances “is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer's gamble—on which only the insured might lose. [Citation.]” (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941 [132 Cal. Rptr. 424, 553 P.2d 584].) Rappaport-Scott v. Interinsurance Exchange of the Automobile Club, 146 Cal. App. 4th 831 (Cal. Ct. App. 2007)

 

The withholding of benefits due under the policy may constitute a breach of contract even if the conduct was reasonable, but liability in tort arises only if the conduct was unreasonable, that is, without proper cause. (Ibid.) In a first party case, as we have here, the withholding of benefits due under the policy is not unreasonable if there was a genuine dispute between the insurer and the insured as to coverage or the amount of payment due. (Id. at pp. 347–348.) Rappaport-Scott v. Interinsurance Exchange of the Automobile Club, supra.

 

An insurer owes to its insured an implied-in-law duty of good faith and fair dealing that it will do nothing to deprive the insured of the benefits of the policy. ( Crisci v. Security Ins. Co., supra, at p. 429.) Included within this duty in the case of a liability insurance policy is the duty to act reasonably and in good faith to settle claims against the insured by a third person. ( Crisci v. Security Ins. Co., supra.) The violation of that duty sounds in tort notwithstanding that it may also constitute a breach of contract. ( Crisci v. Security Ins. Co., supra, at pp. 432-434 . . . .) We think that, similarly, the implied-in-law duty of good faith and fair dealing imposes upon a disability insurer a duty not to threaten to withhold or actually withhold payments, maliciously and without probable cause, for the purpose of injuring its insured by depriving him of the benefits of the policy. We think that, as in Crisci, the violation of that duty sounds in tort notwithstanding that it also constitutes a breach of contract. [Citation.]" (Id. at p. 401.)  It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is immanent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (Cal. 1973)

 

Damages

In an action by an insured against insurance companies alleging breach of the duty of good faith and fair dealing implied in all insurance contracts, it was not essential to plaintiff's claim for damages for emotional distress that he allege, as required in an action for the independent tort of intentional infliction of emotional distress, "extreme" and "outrageous" conduct by defendants, where, in addition to the alleged mental distress, plaintiff alleged that he suffered loss of earnings, that he was compelled to go out of business and that as a result he was unable to pay his business creditors and incurred the costs of defending law suits brought by them, and that he incurred medical expenses. Where mental distress allegedly results from a substantive invasion of property interests and tort liability has arisen apart from mental distress, the rules governing actions for the independent tort of intentional infliction of mental distress are inapplicable. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (Cal. 1973)

 

Tort remedies are available for a breach of the covenant [of good faith and fair dealing] in cases involving insurance policies. (Hunter, supra, 6 Cal. 4th at pp. 1180-1181; Foley, supra, 47 Cal. 3d at p. 684.) In the insurance policy setting, an insured may recover damages not otherwise available in a contract action, such as emotional distress damages resulting from the insurer's bad faith conduct (see Gruenberg v. Aetna Ins. Co. (1973) 9 Cal. 3d 566, 580 [108 Cal. Rptr. 480, 510 P.2d 1032 v. Aetna Ins. Co. (1973) 9 Cal. 3d 566, 580 [108 Cal. Rptr. 480, 510 P.2d 1032]) and punitive damages if there has been oppression, fraud, or malice by the insurer (see Civ. Code, § 3294).  Cates Constr. v. Talbot Partners, 21 Cal. 4th 28, 44 (Cal. 1999)