Once you determine which statute of limitation applies to your case, you may be surprised to learn that in California all claims are subject to the toughest statute of limitation when suing someone who has died.

Under California law, there’s an absolute one-year statute of limitations to bring a lawsuit against someone who’s died—no matter the underlying statute of limitations. For example, you generally have four years to bring a lawsuit for breach of written contract. But if the person breaching your contract dies, you no longer have four years—you only have one year to file suit. This one-year statute comes up all the time in California Trust, Probate, Estate, and Civil litigation.

For example, there are times when a married couple creates a revocable Trust that cannot be revoked (in whole or in part) by the surviving spouse after the death of the first spouse.  Yet, notwithstanding this requirement, the surviving spouse may take all the assets out of the revocable Trust and transfer them to a new Trust she creates.  This is a breach of Trust because it violates the Trust terms and the new Trust may favor different beneficiaries than the old one did.  Maybe the old Trust made gifts to the husband’s children, whereas the new Trust only favors the wife’s children.  So the husband’s children sue the successor Trustee of wife’s new Trust after wife dies.

But that is a mistake.  In fact, it’s a fatal mistake because the successor Trustee has no legal liability for the wife’s breach of Trust.  The correct procedure is to sue the deceased wife’s estate.  But under California’s statute of limitation for suing deceased individuals, a lawsuit against wife’s estate must be filed before the one-year anniversary of her death.  Most of the time, husband’s children miss this deadline and file, if at all, after the statute has run.  Too late—case over.  The one-year statute of limitations will defeat the deceased husband’s children from recovering the property.

Thus, the one-year statute of limitations can be a powerful weapon to defeat lawsuits, or an impossible hurdle to overcome in prosecuting a lawsuit, against a decedent—depending on which side of the case you find yourself.  Even where longer statutes of limitations would otherwise apply to a case if the decedent had continued living, this one-year limitation prevails. You are now forewarned!

Bringing and prosecuting a legal malpractice case against an attorney who improperly drafted a California Living Trust or Will is complex, to say the least. It is particularly difficult because knowledge of three distinct areas of law is required for a hopefully successful outcome. First, you need to understand the law as it applies to estate planning (i.e. Living Trusts, Wills, etc.); you also need to understand the rules of civil litigation; and finally, you need to understand the rules and laws as they apply to insurance and bad faith insurance litigation.

Estate Planning: It takes years of experience to become a good estate planning attorney. Over the years, Trusts and Wills have become more complex due to multiple asset classes owned by individuals, married couples with children from previous marriages, and ever changing Trust, Will and Tax laws. Competition between attorneys that provide estate planning services is intense. What used to be only available from large and well-known law firms is now readily available across the spectrum of service providers–now large, medium, small, and solo law firms offer estate planning services. Even nonlawyers provide “assistance” in drafting estate plans. The costs for these estate plans range into the thousands of dollars to as low as $50 through several web-based providers. Unfortunately, with the intense competition between these providers, mistakes are made when attempting to convey the intent of the Trustors (the persons creating the Trust or Will) in the Living Trust or Will. This leads to beneficiaries being harmed if they do not receive the inheritance the Settlors intended. In all events, to successfully bring a successful malpractice claim in this area, one must have a good understanding of California estate plans, including Trusts and Wills.

Civil Litigation: Litigation is the process of filing a lawsuit, preparing for trial, and going to trial. The entire litigation process in California generally takes two to five years to complete. The majority of time in litigation is spent on discovery, which includes depositions, interrogatories, requests of admission, and demands to produce documents. Once discovery is completed the trial court will set a trial date. At trial a jury or a judge hears the case. The lawyers make opening statements, present evidence during direct and cross examination, and make a closing argument making their case why their client should prevail. The litigation process comes to a close with the jury or judge making a decision in favor of the plaintiff or defendant. One must not only understand the law as it relates to estate planning, but also civil litigation, to successfully prosecute a legal malpractice claim pertaining to California Trusts and Wills.

Insurance and Insurance Bad Faith Litigation: Most drafting attorneys have professional malpractice insurance, which covers the attorney up to a set amount for any lawsuit filed against them for legal malpractice. For example, if an attorney has an insurance policy of $1,000,000, then the insurance company who issued that insurance policy to the attorney will pay up to $1,000,000 for a successful litigation claim made against the attorney for legal malpractice. This is where an attorney bringing the legal malpractice lawsuit can do a lot for their beneficiary clients.

The goal is to force the insurance company to settle the lawsuit early on for the policy limits. If the goal is reached, the beneficiary obtains monetary damages for the loss they sustained by the drafting attorney’s malpractice without having to undergo the entire litigation process, which is time-consuming and extremely stressful. To implement the goal the attorney for the beneficiary simply needs to make a “reasonable” settlement offer (usually just inside policy limits) to the drafting attorney and the drafting attorney’s insurance company. If the insurance company refuses to pay the policy limit, it’s very likely the insurance company will be responsible for any judgment amount over the policy limit. This generally causes (and motivates) the insurance company to settle for policy limits.  Or if the company still refuses to settle, then it sets the stage for a bad-faith action against the insurance company down the road.  Either way, it’s a benefit to the beneficiary-plaintiff. Insurance and Insurance Bad Faith Litigation are perhaps the most misunderstood aspects of successfully bringing a legal malpractice lawsuit. You must know this area of the law.

Each of these three areas can be complex in their own right.  And in attorney malpractice cases in the California Trust and Will arena, you’ll need to combine knowledge of all three areas to be successful.

Feel free to call me if you have any questions about initiating and prosecuting a legal malpractice lawsuit against a drafting attorney. Also, if you would like the letter our firm sends to insurance companies for these types of cases, let me know.

As a general rule, an attorney only owes a duty to his/her client and can only be held liable for professional malpractice by that client.  But much of the legal malpractice involving Living Trusts and Wills is not detected or even ripe until after the client dies.  As such, under California law, attorneys who draft Trusts and Wills may be liable to nonclient beneficiaries in limited circumstances where the nonclient was the “intended beneficiary” of the attorney’s services.

For example, the California Supreme Court established that a nonclient beneficiary has the right to bring a legal malpractice lawsuit against an attorney who improperly drafted a Will, which caused an intended gift to the nonclient beneficiary to fail. The Supreme Court reasoned that an innocent nonclient beneficiary should not bear the loss of an attorney’s legal malpractice—even though there is no attorney-client relationship between the drafting attorney and the harmed beneficiary.

Thus, beneficiaries may bring a legal malpractice lawsuit against an attorney who improperly drafts California Living Trusts and Wills, provided that the beneficiaries are the “intended beneficiaries” of the attorney’s legal services.

In future posts on California Living Trust and Will legal malpractice, I’ll explain what it means to be an “intended beneficiary,” in addition to the complexity of bringing and prosecuting a malpractice case against an attorney who improperly drafts an end of life document.

In a recent case we handled an attorney drafted an amendment to a Trust for a mother. The mother intended the amendment to change the distribution scheme between her children. The original trust called for an equal division amongst the children, and now the amendment called for a different division. The mother signed the amendment, and believed that the distribution changes under the amendment would be followed after she died.

After the mother’s death, it was found that the drafting attorney did not properly draft the amendment. Due to the drafting attorney’s mistake, several of the children were significantly damaged; these children would not receive what their mother intended under the amendment because it was invalidly created.

That unfortunately led to a malpractice lawsuit being filed against the drafting attorney. The balance of this blog article outlines how we communicated with the attorney’s malpractice insurance carrier to settle the lawsuit prior to going to trial.

We want to make it clear that insurance companies do not settle lawsuits for fair value—if they settle at all. The insurance industry has taken the position that they will vigorously litigate all lawsuits even if meritorious allegations are made and liability and damages are clear. In response to this position, we needed a strategy for getting the drafting attorney’s insurance company to agree to settle for policy limits—before going all the way to trial.

To implement our strategy, we needed to know what the damages were to our clients—the children harmed by the drafting attorney’s mistake. We determined the damages were in excess of $1,000,000. Next, we needed to know how much insurance coverage the drafting attorney had for legal malpractice coverage. Through discovery we found out that the policy limit for this case was $500,000. That means that the insurance company was only required to pay the first $500,000 of any judgment for legal malpractice against the drafting attorney.

Once we determined damages and potential insurance coverage, we sent out the balance of our written discovery and took the depositions we needed to establish all the elements for legal malpractice. We were now in a position to force the insurance company to settle for $500,000 or risk being on the hook for the entire $1,000,000 in damages.

We spent a lot of time on a settlement demand letter to the opposing attorney, which we copied on the insurance adjuster. The letter set out the facts, the clear liability, and the clear damages. We gave the insurance company 30 days to think about whether they would accept or reject the offer. In this case, the insurance company ultimately accepted the settlement demand. If they had not, then we would have gone after them for bad faith for refusing to settle for a reasonable amount. In this case the $500,000 settlement amount was reasonable, because the total liability was easily in excess of $1,000,000.

As you can see, when you carefully plan your strategy in a case, you can obtain good outcomes for clients without exposing them to several years of litigation, which is exactly what the insurance company wants to do. But our proactive actions put the insurance company in a difficult position—either settle for a reasonable amount now, or likely end up paying a much larger amount for the damages sustained by the mother’s children. We (and our clients) were okay with the insurance company choosing either option.

If you would like a copy of the redacted letter I sent to the insurance company, please let me know.

The purpose of the meeting is to become a better attorney by learning from the strategic missteps I made during the course of the litigation. When I say “missteps”, I don’t mean legal malpractice, I mean what strategic decisions I made that had little or no value, versus the strategic decisions I made that have better or greater value in the eyes of the opposing attorneys. Of course I encourage the opposing attorney to ask me the same questions about his/her strategic decisions—which ones I felt were good or not so good.

Less than a third of opposing attorneys agree to do this exercise with me. I’m not sure why it’s not 100 percent after some of the meetings I’ve done in the past. I’ve learned so much about what is effective in prosecuting my case and what isn’t. Additionally, I hear opposing counsel tell me his/her thoughts of the case as the litigation was unfolding. What stressors they had. What stressor they didn’t have. His/her view on settlement versus going to trial. And on and on…

I agree to keep the postmortem meeting with the opposing attorney confidential. And I trust they will return the same courtesy.

I challenge all California attorneys to offer to do a postmortem analysis of their cases with opposing counsel. We would all be better for it—learning and becoming better attorneys based on the analysis of our work from the impressions formed by the opposing attorney during the lawsuit and vice versa. And, doing this type of meeting would help foster better relationships between plaintiff and defense attorneys who may meet again in future cases.

Okay, so you’ve gone to all the work of implementing your discovery response workflow before receiving discovery requests from a defense attorney. Now what? You proceed to working on other facets of your case, including, interviewing witnesses, hiring experts, getting releases signed by your client for medical records, serving deposition subpoenas, drafting and serving your own set of discovery to the defendant(s), and noticing depositions. (Perhaps most importantly, getting a solid trial date set at your first CMC. But more on that in another post).

At some point in time (early on in the lawsuit) you will likely receive the bulk of discovery from the defense attorney. Here’s where the most important part of your discovery response plan kicks in—your self-imposed deadline of 48 hours to respond. Yes, that’s right, even though you have 30 days (plus 5 days for discovery received by regular mail) you respond within 48 hours or less. It is quite simple to do this. Here’s how I do it:

Form Interrogatory Responses: I usually begin with Form Interrogatories. I use an application, TextExpander, that allows me to use keyboard short cuts for inserting applicable objections and responses. It takes some time to set up the “snippets” in TextExpander, but once there set up the keyboard shortcuts significantly reduce the time it takes to fill in your objections and preliminary responses to Form Interrogatories. Then, I use the answers I received from my client, before the lawsuit was filed, and complete the answers. (I answer all discovery for my cases—I don’t give that job to associates or paralegals. I find I know more about my cases if I actually do the heavy lifting.)

Invariably there will be a question or two that I need to get from my client after filling in the objections and preliminary responses, which I do by phone or email. (Please note, I do not answer Form Interrogatory 17.1 until after I have responded to Requests for Admission, which I do after responding to all other discovery requests).

Document Demand Responses: I like to respond to Demands to Produce right after answering Form Interrogatories. I review the opposing attorneys demands in one sitting making notes of likely objections I’ll make, and reviewing the documents I previously received from my client to see what documents are responsive.

Next, I use TextExpander to insert applicable objections and preliminary responses to the Demands to Produce. The Text Expander keyboard shortcuts include: (i) an agreement to comply option, (ii) a representation of an inability to comply option, and (iii) objection language. If documents are produced, I include in the response an identification of the documents being produced.

Finally, I put the documents that I will produce in a PDF with categories identified along with bates stamps (I use Adobe Acrobat Pro X for manipulating PDF documents). I then burn this PDF onto a DVD to produce with the responses. (I recently produced over 20,000 pages using this process in one of my cases.)

Special Interrogatory Responses: Since I now know the universe of documents in the lawsuit (and presumably what they mean) I now turn to answering Special Interrogatories. Special Interrogatories are generally simple to answer if I know the facts of my client’s case. If a Special Interrogatory is difficult to answer it is usually because I don’t know facts about that portion of my client’s case. This uncomfortable feeling is quickly cured in a phone call to my client to find out the facts I need to respond to the particular interrogatory; or perhaps I review the documents my client previously gave me to find the facts I’m missing. (This should not happen often if you have answered Form Interrogatories and fully reviewed all documents pertaining to the case.)

In answering the Special Interrogatories I use the same process of noting applicable objections and preliminary responses with TextExpander, which again, significantly reduces the time required to properly respond to discovery.

Requests for Admission Response: Finally, I now turn to Requests for Admission (“RFAs”) (and Form Interrogatory 17.1 if defense counsel selected it). It is my experience that RFAs are generally not drafted that well. In any event, you do your best to respond. I use TextExpander to insert applicable objections and then provide the response of admit, deny, or don’t know enough to admit or deny. I then turn to Form Interrogatory 17.1 and answer its subparts for all RFA responses that did not admit the truth of the RFA being asked. Once again, because I know the facts of my client’s case, responding to 17.1 is fairly routine.

I then finalize each of my client’s responses and save them in PDF format. I email them to my client, or have my client come into the office to review. I attach the required verifications from my client and I’m done. After my client reviews and verifies the responses, I give the final product to my paralegal for one final review. If everything is in order, my paralegal sends the responses to all parties in the suit. And, hopefully, I have completed the responses in 48 hours or less from the time I received them.

I sometimes wonder what defense attorneys think when receiving my client’s responses to written discovery within 48 hours of receiving them. But, I don’t implement my discovery response plan for the defense attorney’s reaction or thought—I implement it for my clients and myself. If I follow my discovery response workflow I end up with properly drafted discovery responses that don’t sit on the corner of my desk reminding me each day I still need to respond to them. Additionally, I don’t need to ask opposing counsel for a “favor” in getting an extension of time to respond. Most importantly, you are primed to show up to your first Case Management Conference with discovery mostly completed. (Of course, this does not occur in all cases, but I believe you should work hard to show up at your first CMC and inform the Court you are ready for a trial date to be set. Having your discovery completed, or mostly completed, will help in this regard.)

If you implement a discovery response workflow similar to mine, I’m sure you will not only know your cases better, but find that discovery is not overwhelming and is easy to respond to. Become a discovery ninja today—set up your discovery response workflow before receiving discovery requests.

A better option is to establish a workflow for responding to discovery before it is ever received. Then, once your workflow is in place, it is triggered and implemented when discovery is received.

The essential components of an effective workflow for responding to discovery includes the following:

Form Interrogatories:

Obtaining completed answers to likely Form Interrogatories from your client before you receive Form Interrogatories. I usually go over the Form Interrogatories with my client before I file the lawsuit, or shortly thereafter. In any event, I do it well before a defense attorney sends discovery.

Once I complete the likely responses I simply save them in my file to include in future formal responses I will need to provide once Form Interrogatories are actually received.

Documents:

Obtaining all documents (and things) in your client’s possession pertaining to the lawsuit before the lawsuit is filed (or shortly thereafter). This is important. Don’t think you can get all these documents once you receive the Document Demand from opposing counsel. Get every document from your client, including privileged documents, before the lawsuit is filed.

Once I have these documents, I scan them into my case management system under a file named “Documents”. I then break these documents down into natural categories, i.e., Communications, Special Damages, Medical Records, Medical Billing, FDA, Bank Account Info, Attorney-Client Communications, Photographs, 911 Transcripts, 911 Phone Calls, etc.

Contact information:

Obtaining the names, addresses, and phone numbers of all individuals and entities that have (or may have) documents pertaining to the lawsuit before it is filed (or shortly thereafter). This is important. If your client does not have actual possession of responsive documents after making a good-faith effort to find them, then the Discovery Act requires your client to identify any individuals or entities that may have these documents.

I enter all names, addresses, and phone numbers of these individuals and entities into my case management system indicating that they may have documents pertaining to my client’s case. It always surprises me how long this list of names gets when you actually think about all individuals and entities that may have documents pertaining to your client’s case.

Objections:

A list of likely objections to improper discovery requests. I’ve built this list up over time and find it very useful to review as I respond to each discovery request. I keep theses objections in a handy application, which I use when responding to discovery.

Self-imposed deadline:

Simply stated, respond in 48 hours or less.

And that’s it! You now have a feasible workflow for responding to discovery. In my next blog post I will introduce an application that significantly reduces the time it takes to respond to discovery—thus ensuring you make your 48-hour deadline.

The next case I’ll address is Horace Mann Insurance Company v. Barbara B., a California Supreme Court case decided in 1993.

Facts of Horace Mann:

The facts of Horace Mann are disturbing. A teacher sexually molested a 13-year-old student. In the criminal case that followed, the teacher pleaded nolo contendere to one count of violating California Penal Code section 288(a). Horace Mann had previously issued an insurance policy that covered the teacher’s nonintentional conduct. After the criminal case, the student filed a lawsuit against the teacher. In response, the teacher requested that Horace Mann defend him in the suit.

Horace Mann accepted to defend the case reserving its rights to disclaim coverage or an obligation to defend. After that, Horace Mann took the position that in light of the teacher’s criminal conviction, the allegations of the civil complaint did not fall within the policy’s coverage. Then, Horace Mann filed a declaratory relief action seeking a determination of its duty to defend or indemnify the teacher in the suit. Horace Mann then filed a motion for summary judgment on these issues.

Procedural History:

The Trial Court granted Horace Mann’s summary judgment motion, determining that the teacher’s acts were either sexual or intentional in nature. The California Appellate Court agreed with the Trial Court’s decision and affirmed it. The California Supreme Court reversed the Appellate Court’s decision, holding that evidence adduced in the summary judgment proceedings demonstrated the existence of unresolved factual issues as to the insurer’s potential liability under the policy based on misconduct separable from the sexual molestation, and as such, the insurer remained under a duty to defend the underlying lawsuit.

Issue:

Whether an insurer may owe a duty to defend a teacher who is insured under an educator’s liability policy in a minor student’s action seeking damages resulting from the teacher’s sexual and other misconduct.

Holding:

Yes. The insurer remained under a duty to defend the teacher in the underlying lawsuit because the underlying proceedings demonstrated the existence of unresolved factual issues as to the insurer’s potential liability.

Reasoning:

The Supreme Court stated:

It is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263.) As we said in Gray, “the carrier must defend a suit which potentially seeks damages within the coverage of the policy.” (Gray at p. 275.) Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. (Gray at p. 278.)

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. (Gray at p. 276.)

Once the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim. (Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 564.) Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s favor. (CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 607.)

Since an insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered (absent allocation, as noted above), the mere fact that Horace Mann could not indemnify Lee for the molestation did not eliminate its duty to defend other, possibly covered claims. (Hogan v. Midland National Ins. Co., supra, 3 Cal.3d 553, 564.)

Rules Created Under Horace Mann:

1.  The holding of Gray v. Zurich Insurance is now called a familiar principle in California law. Primarily, a liability insurer owes a broad duty to defend its insured against claims that create a “potential” for indemnity. Thus, all you have to show is the “potential” for coverage and the insurer has to defend the entire action.

2. The duty to defend is broader than the duty to indemnify. The carrier must defend a suit that “potentially” seeks damages within the coverage of the policy. Thus, make sure to point out to the insurer that the duty to defend is based on the “potential” (really any potential) for coverage. Don’t be confused by the insurance company arguing that they are not required to “indemnify”. “Indemnification” is not the issue—the only issue early on in the lawsuit is the duty to defend, which is construed broadly.

3.  Once the duty to defend attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to the noncovered claim(s). Take time to plead your client’s complaint. Make sure to include all facts supporting an award of damages. If you think the insurance company may deny a defense, be sure to include facts that likely fall within the policy’s coverage. File an amended complaint if required.

4.  Any doubt that gives rise to a duty to defend is resolved in the insured’s favor. This is a great principle in bad faith actions. The benefit of the doubt must go in the insured’s favor—not the insurer’s favor.

In my next blog post in this series, I’ll continue to look at an insurance company’s duty to defend under California law.

The first case I want to look at under an insurer’s duty to defend comes out of the California Supreme Court—Gray v. Zurich Insurance Company—which was decided in 1966.

In Gray, the insured was sued by a third party for intentional assault after a road rage incident. The insured notified his insurance company, stating that he had acted in self-defense, and requested that the insurer defend him. The insurer declined to provide a defense based on the following four arguments:

• The third party sued the insured on the basis of “intentional” assault, which did not fall within the indemnification coverage of the policy.
• The insured was unsuccessful in his defense and the third party recovered on the basis that the insured “intentionally” assaulted the third party.
• The insurer did not have a duty to defend its insured because of a hopeless conflict of interest.
• In any event, even if the insurer should have defended its insured, the damages against it should encompass only the insured’s expenses of defense and not the judgment (for intentional assault) against him.

The California Supreme Court was not impressed with any of the insurer’s excuses for not providing a defense to its insured. The Supreme Court held that the insurer was obligated to defend its insured in the third party lawsuit. The Supreme Court based its holding on the following rationale:

The insurer’s obligation to indemnify was not defined until the adjudication of the third party lawsuit that it should have defended in the first place. No one can determine whether the third party lawsuit does or does not fall within the indemnification coverage of the policy until that suit is resolved. After all, the insured had a “potential” to prove that he acted in self-defense. But we don’t know that until the jury decides the case.

Additionally, the insurer made two wide promises to the insured: First, to pay on behalf of the insured all sums which the insured is legally obligated to pay as damages; and, second, to defend the insured in any suit seeking damages which were payable under the terms of the policy.

Then, the Supreme Court dispatched with the insurer’s four excuses for not providing its insured a defense, as follows:

• As to the insurer’s first argument, the Court stated the insurance company couldn’t construct a fortress based on the third party’s complaint and retreat behind its walls. Rather, because the lawsuit presented the potentiality of a judgment based upon nonintentional conduct, and since liability for such conduct would fall within the indemnification coverage, the duty to defend became manifest at the outset. The Court went on, saying that it was ridiculous to designate the third party complaint as the arbiter of the policy’s coverage. After all, the insured might be able to show that in physically defending himself he did not commit an intentional act. Thus, because the loss “could have” fallen within the coverage afforded by the policy, the insurance company had a duty to defend the Insured.
• As to the insurer’s second argument, the Court stated the duty to defend does not dissolve simply because the insured was unsuccessful in his defense and because the third party recovered on the basis of intentional tort. If the insured was required to finance his own defense and then, only if successful, hold the insurer to its promise by means of a second lawsuit for reimbursement, that would defeat the basic reason for the purchase of insurance in the first place.
• As to the insurer’s third argument, the Supreme Court stated it found no merit in the insurer’s position that it would be embroiled in a conflict of interest with its insured if it were to provide a defense. The duty to defend is not the same as the duty to indemnify. Accordingly, the insurance company could agree to defend with a reservation of rights as to whether it must indemnify for the losses at a later date.
• As to the insurer’s forth argument, the Supreme Court stated not only the expenses of defending the suit should be paid as damages, but also the judgment itself—even though the judgment arose out of an act that was not covered by the policy. Because the insurer defaulted on its obligation to defend the insured, it was required to reimburse the insured for the full amount of the obligation incurred due to the judgment.

Gray is a fantastic case to use in deposition of an insurer’s claims adjustor and other employees. Here are the significant principles I’ve pulled from Gray:

1.  There is a significant difference between an insurer’s duty to defend and duty to indemnify. While an insurer may not be required to indemnify, it has a duty to defend a suit that “potentially” seeks damages within the coverage of the policy. The carrier’s obligation to indemnify will not be defined until the adjudication of the lawsuit against its insured. As such, the duty to defend is broadly construed and will apply in most cases—well before the determination of indemnification is made.

2.  The insurer cannot rely on the third party’s complaint to set the issues being litigated. The third party’s complaint can be amended, and in any event, there may be a defense—if proven true at trial—that would arguably be covered by the policy (i.e. self-defense vs. intentional battery). The mere chance that a judgment could be based on either theory is enough to lead to the conclusion the conduct may fall within the indemnification coverage.

3.  An insurer bears a duty to defend its insured whenever it ascertains facts that give rise to the potential of liability under the policy. That means any facts—not just facts pleaded in the third party’s complaint. If the insured argues that he acted in self-defense, rather than intentionally, then the insurer must provide a defense.

4.  An insurer’s duty to defend does not dissolve simply because the insured is unsuccessful in his defense and because the injured party recovers on the basis of a finding of the insured’s willful conduct.

5.  An insurer does not have a conflict of interest with its insured. If the insurer believes it is not obligated to indemnify for the loss, it can reserve its rights and provide a defense.

6.  If an insurer chooses not to defend its insured, when it was obligated to do so, it is responsible for the insured’s expenses in defending the third party action and for full payment of any judgment—even if the judgment is based on conduct not covered by the policy.

In my next blog post, I’ll continue to look at the duty to defend as articulated by California caselaw.

But there’s another duty that does not receive as much attention as the duty to indemnify—namely, an insurance company’s duty to defend its insured in a lawsuit where “potential” coverage exists under the policy. This may mean an insurance company must provide a defense to its insured even if it is ultimately not required to indemnify at a later date when it’s determined that coverage does, in fact, not exist.

For example, if the insured is involved in a road rage incident where a fight breaks out between the insured and another driver, an issue arises as to whether the insurance policy provides “coverage” for a fight involving its insured. What if the insured “intentionally” caused the fight? What if the insured wanted to fight? Or, what if the insured was simply defending himself from the other driver?

If the insured notifies his insurance company and requests that it defend him in a lawsuit brought by the other driver, does the insurance company have to provide a defense? After all, the insurance company is not required to cover “intentional” bad acts of its insured. In this example, the answer is likely yes—the insurance company is required to provide a defense because there is a “potential” for coverage if the insured was only defending himself from the other driver.

Thus, even if the other driver claims in a lawsuit that the insured “intentionally” caused the fight, the insurance company will likely be required to defend the insured because there is a “potential” for the insured to prove to a jury that he did not intentionally cause the fight with the other driver, but was merely defending himself.

What happens if an insurance company refuses to provide a defense where facts show a potential for coverage? Bad things—or stated differently—good things for the insured. Once the insurance company denies a defense, the insured can assign his claims against the insurer for violating its duty to defend to the injured party. The injured party will also offer to settle the claim with the insurance company within the policy limits—which will likely be rejected because the insurance company is taking the position that it does not have a duty to defend its insured. Now the policy is opened and the insurance company will likely have to pay any judgment in excess of policy limits. Punitive damages may apply as well.

Over the next few weeks I’ll be blogging about the cases in California that pertain to an insurance company’s duty to defend. We’ll find that only the rare case allows an insurance company not to defend its insured where “potential” coverage under the policy arguably exists.