Getting Your Insurer To Favorably Resolve Litigation

• Published date: 13 October 2022
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Insurance Laws and Products, Trials & Appeals & Compensation
• Law Firm: Ervin Cohen & Jessup
• Author: Mr Peter Selvin

Where a liability carrier has assumed its insured's defense under a reservation of rights, a variety of conflicts between those parties may arise when there are settlement discussions to resolve the underlying litigation. These conflicts include:

• The insurer wants to settle to end its exposure for defense costs and the insured wants to continue to fight for business or reputational reasons.
• Where the policy has "burning limits"'i.e defense costs reduce the amount of coverage available to pay a settlement or judgment'the insured has an incentive to have the carrier settle with the claimant early in the litigation.
• When coverage may be nullified if so-called "conduct exclusions" (typically found in directors and officers policies) may be supported by findings in the underlying case if it goes to trial, the insurer has a disincentive to settle. This is because the carrier cannot litigate those "conduct exclusions" in a coverage suit if the underlying liability case is settled.

The question then arises: what tools does the insured have to influence its insurer to accept a settlement or to otherwise protect the insured's interests despite these potential conflicts?

Obtain Independent Counsel. Under Civil Code section 2860, an insurer is required to fund independent counsel for its insured when a conflict of interest arises between the parties. Such a conflict is deemed to arise when "an insurer reserves it 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." Cal. Civ. Code ' 2860(b).

This option, however, has limitations. While independent counsel may more effectively advocate for settlement than the counsel selected by the insurance company, the insurer retains control of settlement, even where it is defending under a reservation of rights. See, e.g., Rose v. Royal Ins. Co. of Am., 2 Cal. App. 4th 709, 715 (1991).

Leverage the Insurer's Duty to Accept a Reasonable Settlement to Increase the Insurer's Settlement Contribution. If the insured faces the prospect of a judgment in excess of policy limits, the insurer has an obligation to accept a reasonable settlement demand within policy limits. See Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654, 659-60 (1958). In considering whether to accept the claimant's settlement demand, an insurer has an implied duty of good faith that requires it to consider the interests of its insured on at least an equal level...