25th Oct 2011

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Proving bad faith denial of a duty to defend or a refusal to settle by cross-examination of the insurance company adjuster and/or claims supervisors; third party liability policy

The insurance company resolves claims under its policies by “adjustment of losses”. See § A30 ADJUSTMENT OF LOSSES. An insurer has a non-delegable duty to adjust an insured’s loss fairly and in good faith. The insurer through its adjuster or independent adjuster or claims supervisor must make independent inquiry into the facts of any serious accident as soon as practicable after the loss. See § C32.03 CLAIMS HANDLING TACTICS [§ C32.03:1 In general]. Whether there exists a breach of the implied covenant of good faith and fair dealing to a great extent depends upon the acts, conduct or inaction of the claims supervisor or adjuster. Questions to the insurance company’s representative regarding relevant standards, special rules, that he or she knew, having said persons admit to the existence of such claims adjusting standards, would significantly assist in a jury understanding the framework within which a claim is made and must be handled. Regarding evidence concerning the third party liability allegation of mishandling as it relates to a wrongful denial of a defense or a wrongful refusal to settle, the following are relevant. For first party property claims see § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.2.2].

1. The insurance company representative will admit that a liability policy provides the insured with a defense to any third party suit brought against the insured potentially seeking damages within the policy coverages. A promise to defend the insured is a primary provision in a liability policy. [Gray v. Zurich Ins. (1966) 65 Cal.2d 263, 269, 54 Cal.Rptr. 104] See § D85 DUTY TO DEFEND [§ D85:1 In general].

2. The representative of the insurance company will admit that the policy promises to pay all damages up to the policy limits for which the insured becomes legally obligated to pay due to bodily injury or property damage suffered by a third party during the policy period. § D84 DUTY OF INSURER TOWARD INSURED [§ D84:2].

3. The insurance company representative will admit that liability insurance is purchased to provide the peace of mind and security that comes with knowing that if the insured is sued for risks covered under the policy, the insurer will defend against the claim. [Campbell v. Superior Court (1996) 44 Cal.App.4th 1308, 1319, 32 Cal.Rptr.2d 385]

4. The insurance company representative will admit that insureds obtain liability insurance in substantial part in order to protect against the trauma and financial hardship of litigation as well as the cost of litigation. [State v. Pacific Indem. (1998) 63 Cal.App.4th 1535, 1556-1557, 75 Cal.Rptr.2d 69, 82] See § P126 PURPOSE AND OBJECT OF INSURANCE.

5. The insurance company representative will admit that the insurance company has a duty to defend, provide an attorney, provide costs for the defense where the third party complaint filed against the insured alleges facts to support a ‘potential of liability under the policy’. See § C48 COMMERCIAL GENERAL LIABILITY POLICY [§ C48:4]; § P67 POTENTIAL LIABILITY UNDER POLICY [§ P67:1.3].

6. The insurance company representative will admit that if any of the facts stated in the third party complaint, or known or discoverable by the insurer suggests a possibility of coverage under the policy, the insurer has a duty to defend. This duty is not terminated or extinguished until the insurance company negates all facts suggesting potential coverage. [Scottsdale Ins. Co. v. MV Transport (2005) 36 Cal.4th 643, 655, 31 Cal.Rptr.3d 147] See § P67 POTENTIAL LIABILITY UNDER POLICY [§ P67:1.2 Facts ‘fairly inferable’ – duty to defend exists]. Proof of the potential or possible coverage need not be shown by the insured to be likely or even reasonably likely. [Montrose Chem. Corp. v. Superior Court (1993) 6 Cal.4th 287, 299-300, 24 Cal.Rptr.3d 467] See § D85 DUTY TO DEFEND [§ D85:1 In general].

7. If the duty to defend, its existence or nonexistence, depends upon a factual dispute, an unresolved factual dispute existing in the time of the tender of the complaint to the insurer requires the defense be given to the insured. [Howard v. American National Fire Ins. (2010) 187 Cal.App.4th 498, 520, 115 Cal.Rptr.3d 42] See § U25.02 UNRESOLVED FACTUAL DISPUTES.

8. The insurer must view the insuring clause, which describes the risks that will be covered, broadly in favor of the named insured. See § B22 BROAD CONSTRUCTION [§ B22:2].

9. If there is a limitation upon coverage in the insuring clause, or an exclusion in the policy set forth in the exclusion portion of the policy, the insurer must, in deciding whether an exclusion applies, construe the exclusion strictly against the insurance company. See § B22 BROAD CONSTRUCTION [§ B22:2].

10. The insurance company representative will admit that an insurer cannot refuse to defend without having all of the facts before it. In order to accomplish this, the insurer may have a duty to investigate. Failure to perform a thorough investigation of all facts must occur before a denial of coverage can take place. § I80 INVESTIGATE: DUTY OF INSURER – DUTY TO DEFEND [§ I80:3 Duty to investigate: Constructive notice to the insurance company].

11. Factors supporting a finding of bad faith may include:

a. The discontinuance of investigation by the insurer without determining the cause of the loss,

b. No attempt to obtain statements from responsible parties, See § I81 INVESTIGATE: DUTY OF INSURER – FIRST PARTY POLICY [§ I81:2 “Thoroughly investigate” defined].

c. No attempt to consult with experts to assess the cause of loss, See § C32.03 CLAIMS HANDLING AND TACTICS [§ C32.03:3 Illustration].

d. The claims adjuster acknowledging lack of any evidentiary basis for inferring how the accident occurred,

e. The insurer’s failure to develop a plausible theory of the cause of loss,

f. The adjuster being unable to cite any evidence in support of factual assumptions underlying the insurer’s reliance on exclusions,

g. While the insurer could raise arguments against coverage, it could not reasonably maintain that there was no potential for coverage under the policy,

h. There was initially large reserves set up, subsequently withdrawn. [Shade Foods v. Innovative Products (2000) 78 Cal.App.4th 847, 883] See § I80 INVESTIGATE: DUTY OF INSURER – DUTY TO DEFEND [§ I80:7 Factors supporting a finding of bad faith].

12. The insurance company representative will admit that where there exists both covered and noncovered claims in the third party complaint, the insurer must defend the insured completely. [Buss v. Superior Court (1997) 16 Cal.4th 35, 48, 65 Cal.Rptr.2d 366; Hendrickson v. Zurich American Ins. (1999) 72 Cal.App.4th 1084, 1089, 85 Cal.Rptr.2d 622. See § D85 DUTY TO DEFEND [§ D85:5 – 6].

13. Any investigation performed regarding the third party complaint must be “thorough”. See § D85 DUTY TO DEFEND [§ D85:23.1]; §I81 INVESTIGATE: DUTY OF INSURER – FIRST PARTY POLICY [§ I81:2].

14. The insurance company representative will admit that the third party complaint is to be liberally construed in favor of potential coverage. See § D85 DUTY TO DEFEND [§ D85:24 Factors to consider in deciding whether insurer must defend] ; § B22 BROAD CONSTRUCTION [§ B22:2]

15. The insurance company representative will admit that if facts are obtained during a thorough investigation regarding the third party complaint allegations, facts discovered that are not described in the complaint may be considered in order to determine whether a duty to defend must be given. Even if the face of the third party complaint does not suggest a potential of liability under the insured’s policy, extrinsic facts known to the insurer can generate a duty to defend. See § E59 EXTRINSIC FACTS – DUTY TO DEFEND.

Also see § B3 BAD FAITH LAWSUIT – THIRD PARTY [§ B3:2.02].

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