DUTIES OF THE INSURANCE COMPANY
Below are some of the basic responsibilities of an insurance company owed to the insured. If they are broken, the insurance company is likely to face liability for the resulting damages.
Duty to Defend
This is a duty to defend the policyholder when a third party brings a claim. The insurance company must hire a lawyer at its own expense to represent the policyholder to provide a meaningful defense and pay for all of the litigation costs. This duty is very broad and extends to all claims potentially covered under the policy based on facts alleged or otherwise disclosed in the claim. The courts have held that a meaningful defense is one that includes all claims and does not allow an insurance company to parse claims.
Duty to Indemnify
Indemnity as written and specified in contracts is often confusing. However, the concept is simple and refers to the obligation of one party to pay for the loss incurred by another party. As a policyholder, if you are found liable to a third party for damages, the insurance company must pay the damages – at least up to the policy limits. In insurance parlance, such a payment is called indemnity.
Duty of Good Faith and Fair Dealing
The courts have found that the special relationship between an insurance company and a policyholder creates a duty of “good faith and fair dealing.” The courts have often referred to what a policyholder is really buying as “peace of mind.” To get this peace of mind, an insurance company must do what is right to protect the policyholder. When an insurance company does not do what is right, they may be acting in “bad faith.” This bad behavior triggers very severe penalties for an insurance company: specifically the possibility of punitive – punishment– damages for their actions.
Duty to Fairly & Quickly Manage Claims
In both first party and third party claims, the insurance company has the duty to fairly and promptly investigate the claim and provide the benefits of the policy including paying valid claims. These duties are governed by the insurance company’s duty of “good faith and fair dealing” and must be carried out with reasonable speed.
Duty to Disclose Conflicts
Many types of conflicts can occur in an insurance case and the insurance company must disclose such conflicts to the insured. The defending attorney must equally weigh the interest of both the insurance company and the policyholder. If there is a conflict, the defense attorney must disclose it to both. Many conflicts then require a separate attorney for the insured – paid for by the insurance company. This is called Cumis counsel.
One conflict that exists in most cases is the possibility of the defending lawyer using policy limits as the upside risk to the insurance company at the risk of hurting the policyholder. Amounts over the limit would be the responsibility of the insured. The insured wants the defending attorney to aggressively settle the claim within the limits of the policy. A conflict may occur if the defending attorney knows he has a good chance of losing, but tries to minimize the settlement by threatening to go to trial. The defending attorney may use this tactic to scare the plaintiff’s attorney – remember, many law firms are small and don’t have trial experience and cannot pursue long and costly lawsuits.
Another common conflict is when an insurer believes certain claims are not part of the policyholder’s coverage and issues a “reservation of rights” letter stating that the insurance company reserves its rights to later deny the claim should facts surface that prevent coverage. These are conflicts that result in the defense developing a strategy that hurts the insured based on how the claims in a case are addressed and defended. In California, when an insurance company issues a “reservation of rights” letter, it is often acknowledging a conflict that may allow the insured to elect to hire a separate attorney.
Duty to Hire Separate Lawyer or Cumis Counsel
When conflicts prevent the insured from getting a proper defense, the insurance company must hire and pay for a separate lawyer to defend the policyholder. This lawyer is known as a Cumis counsel – an attorney representing a defendant in a lawsuit when there is an insurance policy covering the claim, but there is a conflict of interest between the insurance company and the insured. A separate attorney can lead to a better defense for the insured. Despite conflicts occurring frequently, their disclosure is not. Nor is it common for Cumis counsel to be appointed. We have litigated numerous cases where Cumis counsel should have been appointed but was not. Insurance companies have had to pay damages caused by the failure to provide Cumis counsel.
Duty to Settle Within Insurance Policy Limits
Recent California law indicates that an insurer should make a good faith effort to settle a case within its own policy limits regardless of whether or not the other party demands such a settlement. Failure to do so can lead to “bad faith” by the insurance company.
We want to help – call us at 1-877-316-2093 or request a free consultation online.