Opinion ID: 2590298
Heading Depth: 3
Heading Rank: 1

Heading: The relationship between an insurer's duty to defend and the implied covenant of good faith and fair dealing

Text: Primary liability insurance policies create a cascading hierarchy of duties between the insurer and the insured. At the top of this hierarchy are two general duties: the duty to defend and the duty to indemnify. The obligation of the insurer in the duty to indemnify is narrower than the insurer's duty to defend. Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541, 79 Cal.Rptr.3d 721, 187 P.3d 424, 427 (2008). But we do not address the duty to indemnify in this case. Instead, this case implicates the scope of an insurer's duty to defend. The duty to defend contains two potentially conflicting rights: the insurer's right to control settlement discussions and its right to control litigation against the insured. 14 Couch on Insurance 3d §§ 200:1, 203:1 (2005). Each of these contractual rights creates additional duties for the insurer. The right to control settlement discussions creates the duty of good faith and fair dealing during negotiations. See Couch, supra, at § 203:1 (stating that the insurer's right to control settlement negotiations may create a conflict of interest between the insurer and the insured, and therefore, the insurer must act in good faith and give the insured's interests equal consideration with its own). The right to control litigation creates the duty to defend the insured from lawsuits within the insurance policy's coverage. Couch, supra, at § 200:1. A primary insurer's duty to defend attaches upon notice of a demand against its insured. Thus, an insurer's duty to adequately inform the insured begins upon receipt of a settlement demand and continues through litigation to final resolution of that claim. As a result, if an insurer fails to adequately inform an insured of a known reasonable settlement opportunity prior to the filing of a claimant's lawsuit, the insurer may breach its duty of good faith and fair dealing. If the insurer fails to adequately inform an insured of such an opportunity after the filing of a claimant's lawsuit, then the insurer has breached its duty to defend the insured against lawsuits.