Source: http://dutytodefend.com/a-40-day-regulatory-deadline-to-deny-liability-insurance-coverage-is-poorly-enforced/
Timestamp: 2019-04-22 08:38:36+00:00

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When a policyholder tells a liability insurance company that an injured plaintiff claims damages, technically the policyholder makes two claims: 1) a third party claim by the injured plaintiff for damages; and 2) a first party claim by the policyholder for defense and indemnification for the plaintiff’s claim. California law variously requires that an insurer deny a claim “immediately,” “promptly,” and within 40 days. However, some courts have permitted insurers to deny coverage up to two years after accepting the defense and on the eve of trial. As a result, many litigants are confused about California law regarding when a liability insurer must reserve its rights.
Nothing in the cases that allow a liability insurer to assert a late reservation rights suggests that the courts were aware of insurance regulations requiring an “immediate” reservation of rights nor did these courts discuss whether the insurer had fulfilled its duty to investigate a claim promptly.
Policyholders seeking to secure insurance coverage should promptly reject a liability insurer’s late assertion of a reservation of rights as untimely, inadequate, and unlawful, and not acquiesce meekly to whatever position the insurer takes. The discrepancy between the statutory and regulatory requirement that reservations of rights be asserted promptly and poor judicial enforcement may be the result of poor lawyering. Counsel representing policyholders should cite the legislative requirements to courts when seeking to limit the scope of a reservation of rights. One recent case found that a “cut and paste” reservation of rights was ineffective because it failed to adequately advise its policyholder of the basis upon which coverage might be denied.
“[I]f a liability insurer, with knowledge of a ground of noncoverage assumes and conducts the defense without [a] reservation of rights, it is thereafter precluded from setting up such ground of noncoverage. [T]he insurer’s unconditional defense constitutes a waiver and an estoppel.” This rule emphasizes two elements: (1) knowledge of grounds to deny coverage; and (2) defending without a reservation. A purpose of a reservation of rights is to empower the policyholder to takes steps to protect herself from the insurer. Late notice of a reservation of rights undermines this purpose.
An insurance statute prohibits and insurer from knowingly failing to acknowledge and act reasonably promptly upon communications, failing to adopt and implement reasonable standards for the prompt investigation of claims arising, failing to affirm or deny coverage within a reasonable time, not attempting to effectuate prompt, fair, and equitable settlements, failing to inform of the coverage under which payment has been made, failing to settle claims promptly, and failing to provide promptly a reasonable explanation in relation to the facts or applicable law, for the denial of a claim.
A liability insurer may lose the rights otherwise available to it by one of three separate legal standards: (1) when the insurer voluntarily relinquishes a known right (waiver); (2) when the policyholder detrimentally relies on a reasonable belief that the insurer would provide coverage (estoppel); and (3) when the courts prohibit an insurer from asserting a right as a matter of public policy (forfeiture). Reported California opinions have limited an insurer’s reservation of rights on the basis of waiver and estoppel, but none have enforced a forfeiture.
Notwithstanding that an insurer must defend “immediately”, must deny a claim within 40 days, and explain its denial “promptly”, several courts have allowed insurers to assert a reservation of rights after significant delays. In one case, the court found no waiver of the insurer’s right to deny coverage after a delay of 2 years before first asserting a reservation of rights. In another case, the court found that an insurer did not waive coverage defense despite a nine-month delay in sending a reservation of rights letter after acceptance of defense. In yet another, the court found that an insurer did not waive coverage defenses despite a fifteen-month delay in reserving its rights. However, in one case, the court found that the insurer was estopped to deny coverage after a delay of 2 1/2 years, which was only three weeks before the trial. This court identified detriment to the policyholder because it had a right to independent counsel, who had no time to prepare for trial.
 Code of Regs. § 2695.7(b) (ellipses omitted).
 See Insurer Silence May Concede Full Coverage, and Estoppel, Waiver, and Forfeiture.
 Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754 (ellipses omitted).
 Alta Cal. Regional Center v. Fremont Indemnity Co. (1994) 25 Cal.App.4th 455, 459 (Alta).
 Alta, supra, 25 Cal.App.4th at 459.
 Buss v. Superior Court (1997) 16 Cal.4th 35, 48 (Buss); Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.
 See, Estoppel, Waiver, and Forfeiture.
 Old Republic Ins. Co. v. FSR Brokerage (2000) 80 Cal. App. 4th 666, 678 (citations and quotation marks omitted).
 Ringler Assocs. Inc. v. Maryland Cas. Co. (2000) 80 Cal.App.4th 1165, 1189 (Ringler).
 In National Union Fire Ins. Co. v. Siliconix, Inc. (N.D.Cal.1989) 726 F.Supp. 264, 270, the insurer indicated that it “was ‘investigating this claim under a reservation of rights’ and that it had some “coverage questions” about two months after accepting the defense, but it consented to an paid for the policyholder’s defense through independent counsel. However, the insurer did not “fully reserve” its right for 15 months. Despite the delay, the court found no intentional relinquishment of a known right to support waiver and no prejudice to policyholder, whose independent counsel knew of the coverage questions from a early date.
 Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810, 1839.

References: § 2695
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