Published on February 18, 2014
American Conference Institute 2013 Duty to Defend – Consequences for Breach Arnold Levinson Pillsbury & Levinson LLP San Francisco, CA firstname.lastname@example.org (888) 433-8335 Timothy E. Delahunt Kenney Shelton Liptak Nowak LLP Buffalo, NY TEDelahunt@kslnlaw.com (716) 853-3801
Defense • Duty to pay for an attorney to defend action against the insured • Determined at the beginning of the case • Duty to defend is much broader than duty to indemnify • Attaches if there as any possibility that there will eventually be coverage
Essential Elements - Duty to Defend • Issue of fact mandates defense coverage • Any possibility of coverage triggers defense obligation • Unless summary judgment can be granted for the insurer, there s a duty to defend
Consequences of Breach • Duty to Defend • Attorneys fees • Amount of the judgment regardless of whether there is coverage if the judgment was the result of the failure to defend • Uncontested trial is binding • Insurance company has no right to re-litigate underlying action to attempt to prove that it should have been a smaller judgment
What is the Difference Between a Stipulated Judgment and an Uncontested Judgment? • Stipulated Judgment is By Agreement • Settlement Agreement • Parties stipulate to one issue (such as liability, agency, scope of employment, comparative negligence) • Parties stipulate as to the amount of damages, or • Parties stipulate to the amount of the judgment
What is the Difference Between a Stipulated Judgment and an Uncontested Judgment? • Judgment after uncontested trial is in nature of default in which judge hears evidence and enters a judgment • Judge determines all legal and factual issues, including liability and damages • Evidence is submitted • Judge enters judgment based on evidence and argument
Uncontested Judgment Is Enforceable “These circumstances necessarily involve significant independent adjudicatory action by the court, thus mitigating the risk of a fraudulent or collusive settlement between an insured and the claimant. Final judgments entered under either of these circumstances are binding on the insurer [which] has wrongfully abandoned its insured . . .” Pruyn v. Agricultural Ins. Co. (1995) 36 Cal. 4th 500, 517
Insurer Cannot Relitigate Underlying Action “Transamerica officials were aware of the lawsuit, had notice of Transamerica’s potential liability, and chose to stay out of the lawsuit. Transamerica is bound by the result of that lawsuit as fully as if it had participated in it from the start.” Samson v. Transamerica Ins. Co. (1981) 30 Cal.2d 220, 229
“An insurer which has breached its contract [to defend] is properly bound by the result of such [uncontested] trial proceedings”. Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 517
• The insurer “knew or should have known that judgment against its insured would form the basis for a later claim against it... Instead of protecting itself... it chose to remain silent, resting on its claim of noncoverage. Having failed to pursue remedies thus available to it, it cannot now claim prejudice or lack of opportunity to litigate damages.” Clemmer v. Hartford Ins. Co. (1979) 22 Cal.2d 865, 886
• “He need not indulge in financial masochism, however. Whatever may be his obligation to the carrier, it does not demand that he bare his breast to the continued danger of personal liability. By executing the assignment, he attempts only to shield himself from the danger to which the company has exposed him.” Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 519, n.19
Rights Of Parties After Uncontested Trial • Insurance company cannot re-litigate underlying action • No discovery directed at re-litigation the underlying action • Policy and statutory requirements for an “actual trial” are satisfied • Insured no longer required to cooperate “Need not commit financial Masochism”
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