Source: http://dutytodefend.com/settle-and-sue/
Timestamp: 2019-04-22 08:42:17+00:00

Document:
2 Should the Policyholder and Plaintiff Cooperate?
5 Should a Settlement Include an Arbitration?
6 What Is the Impact of Two Lawsuits?
7 Who Gets What Part of the Pie?
Should the Policyholder and Plaintiff Cooperate?
Many civil lawsuits are motivated by money and vengeance. Vengeance is very difficult to achieve in the court system since the overwhelming majority of cases settle. Settlement rarely determines who was “right” and who was “wrong” nor does either the plaintiff or the policyholder emerge from litigation with a sense of victory. However, the courts are very effective at redistributing money. If a policyholder or a plaintiff insist on vengeance, it is unlikely that they may choose to cooperate with each other. But if a policyholder and a plaintiff seek prompt closure and an equitable settlement at an insurer’s expense, they may choose to cooperate.
Many policyholders and plaintiffs mistakenly assume that they may not possibly cooperate with one another for the simple reason that they are adversaries in a liability dispute. However, when an insurer disclaims coverage, the policyholder and the plaintiff share goals in a simultaneous coverage dispute. Thus, California law is clear that cooperation between a plaintiff and a policyholder to protect their common interests in a coverage dispute is perfectly proper. Nonetheless, iInsurer’s and their lawyers frequently threaten that cooperation between a policyholder and a plaintiff constitutes collusion. And certainly California courts will not tolerate fraud. “The principles of fraud and collusion are self-evident and require no extended discussion. The facts and circumstances which will lead a court to conclude that either are present are limited only by the imagination of those who would cheat and deceive.” However, collusion is a well developed and very limited defense. A review of all major California collusion cases provides clear guidance as to what is and is not permissible. Accordingly, policyholders and plaintiffs who choose to cooperate may do so lawfully.
California law clearly defines limits of permissible cooperation. Standard liability policies do include a cooperation clause, the meaning of which may be easily discerned. Significantly, no language in a standard liability policy prohibits the policyholder and the plaintiff from cooperating with each other. There are, of course, limits to such cooperation. Neither a policyholder nor a plaintiff may lie. But a plaintiff may properly plead into coverage. Both the policyholder and the plaintiff may truthfully testify into coverage. Indeed, it is improper for an insurer or its lawyers to put up a sham defense.
However, there are no California reported opinions that litigate and decide whether a policyholder may settle with a plaintiff where the insurer agrees to defend but fails to pay for it.
Every lawsuit is an unique as a snowflake. Policyholders and plaintiffs who choose to cooperate and who are satisfied that the insurer is wrongfully failing to provide a defense may also choose to exercise a well recognized option to settle without insurer consent on terms that include an assignment by the policyholder to the plaintiff of all assignable rights and grant a lien on all non-assignable rights. While courts, insurers and their lawyers are highly suspicious of covenants not to execute because the policyholder has little incentive to vigorously resist a plaintiff’s claim, such settlements may be enforced against defaulting insurers. Indeed, California law is clear that such settlements create evidentiary presumptions that are quite favorable to the policyholder and the plaintiff. When the policyholder and the plaintiff settle and sue, a rebuttable presumption may arise that: 1) the policyholder is legally liable to the plaintiff; and 2) the monetary amount of the policyholder’s liability to the plaintiff is established.
Should a Settlement Include an Arbitration?
A policyholder and plaintiff who choose to settle and sue may also decide whether to conduct an arbitration. When issues of liability and damages have been determined by an impartial judicial determination, the policyholder and the plaintiff may enjoy conclusive evidentiary presumptions to which the insurer may not assert the defense of collusion. “The farther down the continuum from contested judgment to voluntary payment the facts lie, the more difficult it will be to prove the existence of an ‘amount which the insureds are legally obligated to pay.” An independent adjudication that litigates and resolves the issues of liability and damages is viewed as satisfying procedural due process to protect interests of the defaulting insurer and the interests of the court system to establish the bona fides of a settlement. A default judgment and an uncontested trial “in which the injured party was required to present some evidence, is sufficient to satisfy the ‘no action’ clause requirement of an ‘actual trial’ and would bind the insurer that had denied coverage or refused to provide a defense [but not] a good faith determination pursuant to section 877.6. That determination, however, may well have evidentiary value in the ultimate resolution of the bona fides of the settlement. ¶ [Due process must be served by] sufficient judicial oversight to make the resulting judgment binding on the defendant insurers.” It appears that California courts respect impartial adjudications of liability disputes because the court system and society as a whole have a stake in the action such that even defaulting insurers are not stripped of all rights to avoid a collusive outcome of a liability dispute. As a result, the policyholder and the plaintiff must always have their day in court to establish the bond fides of a settlement.
What Is the Impact of Two Lawsuits?
When an injured plaintiff hires a lawyer to seek redress, a practical consideration that a plaintiff’s counsel should consider is whether the defendants have sufficient wealth to respond to a favorable judgment. If the defendant is impecunious and/or the parties elect to look to liability insurance to satisfy a settlement or judgment, the plaintiff may suffer substantial dilution of recovery as a result of the need to file two lawsuits (one against the defendant and one against the defendant’s insurer). Plaintiff’s counsel has a fiduciary duty to the plaintiff to explain this dilution to the client at the outset of the liability dispute.
Who Gets What Part of the Pie?
“For love of money is the root of all evil.” Policyholders and plaintiffs negotiating to settle and sue procedure usually have very hard negotiations of specific terms of settlement. Although a plaintiff has suffered a genuine loss for which just compensation is due, frequently the policyholder has also suffered a loss at the hands of the insurer such as unpaid costs of defense. Usually, the cooperation of the policyholder and the plaintiff will be required to successfully sue a defaulting insurer. While contractual claims are assignable, personal claims for emotional distress and punitive damages are not. The policyholder and the plaintiff may waive conflicts of interest pursuant to Rule 3-310 and agree to be represented by just one lawyer in a suit against a defaulting insurer. Alternatively, they may require separate counsel, each of whom will require payment of their fees and costs from a joint recovery against the defaulting insurer. The more lawyers involved, the greater the likelihood that conflicts will arise.
• As between the policyholder and the plaintiff, who will be entitled to how much in settlement or after judgment?
• Which lawyers are entitled to how much for past work?
• Which lawyers are entitled to how much for future work?
• Who will represent whom in the future?
• How will emotional distress and punitive damage claims be valued in settlement?
• What tax consequences befall the policyholder and the plaintiff in settlement or judgment?
• How will liens from others be satisfied?
 See, Defaulting Insurer Forfeits Control of Defense.
 See, Cooperation: A Strategic Choice.
 See, Collusion – A Limited Defense.
 Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 530 (Pruyn); see also, Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal. App.4th 501, 501 (Xebec); Pacific Estates, Inc. v. Superior Court (1993) 13 Cal.App.4th 1561, 1574-75.
 See, Prize: Price or Pride.
 See, Elusive Definition of Collusion.
 See, Policyholder’s Duty to Cooperate.
 See, Plead Into Coverage Properly.
 See, Testify Into Coverage Truthfully.
 See, Defaulting Insurer Forfeits Control of the Defense.
 Pruyn, supra, 36 Cal.App.4th at 514.
 Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 882.
 Housing Group v. PMA Capital Ins. Co. (2011) 193 Cal.App.4th 1150, 1156-1157 (emphasis added; citations, quotation marks and ellipses omitted).
 See, Assignment and Covenant Not to Execute.
 See, Binding Effect of Liability Suit on Coverage Dispute.
 Pruyn, supra, 36 Cal.App.4th at 528-29.
 Xebec, supra, 12 Cal. App.4th at 535-536.
 Pruyn, supra, 36 Cal.App.4th at 523 (citations and ellipses omitted).
 See, Duty to Analyze Conflicts.
 See, Dilution: Plaintiff’s Monetary Curse.
 See, State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, 123 S.Ct. 1513.
 See, Code of Regs §2644.10.

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