Bay Area Insurance Coverage Attorney John Podesta brings us this “how to” article on insurance litigation. John has handled hundreds of coverage cases in the ares of construction litigation and other complex matters for over twenty years. He is a nationally known speaker on insurance coverage issues in construction and has written several articles on the subject.
Your clients have been sued by their insurance company for Declaratory Relief. The insurer asserts that there is no coverage under your clients’ liability insurance policy for a claim made against them. In deciding how to proceed, there are a few things to remember in dealing with insurance litigation. First, the duty to defend is a legal question based upon the “potential” that the lawsuit against your client could result in damages covered by the insurance policy. Montrose Chemical Corp. v. Superior Court (1995) 6 Cal. 4th 287, 300 (pdf). For the duty to defend, therefore, think summary judgment, rather than trial. Second, for indemnity (actual coverage): is the carrier defending or not? With regard to indemnity, whether the insurance company is defending affects the burden of proof. Ultimately, the insured should be prepared to prove, in order to recover indemnity or settlement costs, that their liability is in fact covered by the insurance policy.
With regard to establishing the duty to defend early, you will want to prepare two sets of Requests for Admissions. First, you should prepare a series of “truth of fact” admissions seeking confirmation that there is no dispute that the critical facts and allegations against your client demonstrate there is at least a bare potential for liability in the underlying case that is covered by the insurance policy. The fact admission must be carefully tailored to “fill in the gaps” of a broadly written complaint to show the potential for covered damages or that the complaint could be amended to state different causes of action which would be covered. You should also prepare a series of “authentication of documents” requests to establish the written record for purposes of the insurance litigation. Remember that discovery, pleadings and contracts from the underlying liability case is likely not admissible in the insurance case as unauthenticated hearsay, and a foundation must be laid separately. Critical documents will include the insurance policy, pleadings from the underlying case, discovery from the underlying case regarding the factual allegations, and the coverage position letter from the insurer.
Aside from the tactical discovery (the RFAs) obtain a complete copy of the insurer’s claim file which should contain the facts which the insurance company believes supports their claim of non-coverage, and may limit the insurer from new or different facts discovered during the coverage litigation. The company will likely assert privileges based upon attorney-client privilege (if coverage counsel was involved), where the carrier decided to insurance litigation. The carrier may also assert privileges based on confidential commercial information (reinsurance information, reserve information, and pricing information). In the context of early discovery, however, this kind of withheld information is rarely important to the limited legal issue of a duty to defend.
Be prepared, however, to deal with the time limits regarding a motion to compel when such privileges are raised. You may need to compel production if the coverage issues surround the issuance of the policy rather than the terms of the policy as issued. Also, it is possible that certain withheld information might be compelled, and could be used to support a bad faith claim later. If your case involves a dispute regarding the operative terms of the policy that were negotiated, you will want the underwriting file. That file will likely contain the application, the insurer’s quote (offer to provide coverage), the binder (confirmation of the key policy terms negotiated), the policy (whether it was issued consistent with the binder), and any communications between the insurance company and the insured’s representative concerning the policy terms, pricing and issuance.
Interrogatories and depositions are, for the most part, premature in the early stages of the case. They are critical, however, after the duty to defend has been established and the issues turn towards the company’s evaluation and position regarding indemnity.
Once the defense is established, if the coverage issues overlap with the liability issues facing your client, then the coverage case can likely be stayed by making a motion. That means that the carrier will continue defending until the case is resolved, and then use the facts from the liability case to prove non-coverage for any indemnity or settlement amounts. Montrose, supra. The trial court will stay the action after it determines:
what is the exact nature of the claims asserted in the underlying action,
what defenses to coverage are asserted by the insurers, and to what extent, if at all, are they logically related to the liability issues raised in the underlying action,
what factual questions have to be resolved in order to sustain or defeat such defenses,
what is the likely nature of the available evidence,
to what extent, if at all, will the insured suffer prejudice by the enforced discovery of the evidence which tends to support or defeat its claim of coverage or the defenses raised by the insurers and
to what extent, if at all, will a confidentiality order realistically protect the insured from prejudicial disclosure. Haskel, Inc. v. Superior Court (Cal. App. 2d Dist. 1995) 33 Cal. App. 4th 963, 980 (pdf) However, if the coverage issues are unrelated to the liability issues, the court will not stay litigation of the coverage issues. If your client wants a stay, think about these factors as part of the Requests for Admission.
Turning to indemnity, the obligation of the carrier to pay damages on behalf of the insured, the burden of proof is critical. If the insurer is not defending, and the insured is successful in establishing the carrier should have defended, the burden on indemnity shifts to the insurer to prove that there is no coverage under the policy. For example in a case between insurers brought by an one who defended and indemnified an insured against a coinsurer who did not defend or indemnify the insured, the participating insurer has met its burden of proof when it makes a prima facie showing of coverage under the nonparticipating insurer’s policy—the same showing necessary to trigger the recalcitrant insurer’s duty to defend. The burden of proof then shifted to the nonparticipating insurer to prove the absence of actual coverage. Safeco v. Superior Court (Second District, 2006) 140 Cal. App.4th 874, 881 (pdf).
On the other hand, if the insurer is defending the insured and the dispute concerns whether the actual liability is covered by the policy, the burden is on the insured “ to establish that the insured’s actual liability to the plaintiff is on a covered occurrence under the insurance policy. And, once an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded. Aydin Corp. v. First State Ins. Co. (1988) 18 Cal. 4th 1183, 1188 (pdf) Secure the defense first, using the facts at your disposal. Determine whether you can obtain a stay of the coverage case or if you want one. Then, focus on establishing the facts necessary to establish coverage.