Purchasing an insurance policy establishes a relationship of trust that extends not only to the policy holder but also to those who are injured and need to make a claim. Two cases illustrate the damages that are imposed on consumers when insurance is bought and paid for and the insurance companies then refuse to honor their obligation to defend their insured and how the victims can be helped when a lawyer pursues their rights. The first case illustrates the hardship caused to an innocent victim of a dangerous piece of equipment. The second shows how an insurance company’s own customer is severely injured by the refusal to defend against a claim by an irate neighbor.

A machinery malfunction caused the loss of a portion of a workers arm. The injured worker had a good paying but physically demanding job that provided an opportunity for a person with limited education to make a decent living. This was lost along with the arm. The victim suffered severe physical, financial and emotional damages due to the injury. The worker sued a company that was responsible for improperly maintaining machinery that malfunctioned causing the injury.

The company had obtained substantial insurance to pay for defense and coverage of claims worldwide. The insurance policy had a customary “retention” clause that was similar to a deductible that required the insurance companies to pay expenses and damages after the company exhausted its retention amount. Unfortunately the company went into bankruptcy and was unable to pay the retention amount. The insurance company in charge of providing coverage was notified of the lawsuit but decided not to provide a defense of the case or pay the claim despite being advised that the plaintiff would be seeking to lift the bankruptcy stay and proceed with the case. Eventually a multi-million dollar judgment was entered for the plaintiff with a follow up insurance collection and bad faith suit which allowed the worker to reconstruct their life.

In the other case a California resident obtained a liability insurance policy that was negotiated, issued and paid for in California. The policy provided worldwide duties to defend and indemnify against claims for “bodily injury”, “property damage”, and “personal injury” caused by an “occurrence”.

A letter was sent to the insured alleging claims of negligently caused personal injuries and property damages that occurred in another state. A lawsuit was then filed against the insured. The insured, who was retiring, had purchased some property in a the other state that he eventually planned to build on. The property was purchased after he became an insured under the California policy and while it was still in effect. The duty to defend against tort claims was world wide. The letter referring to the tort claims and the lawsuit was filed against the insured by an irate neighbor in the other state. Although the letter before the suit mentioned the tort claims, the initially filed suit did not and only referred on its face to some real estate issues. The tort claims in the letter and the lawsuit were tendered to the insurance carrier who refused to provide a defense. The letter from the insurance company denying the claim and abandoning the insured ended the communication between insured and insurer. The complaint was subsequently amended many times and eventually incorporated in its body the tort claims originally set out by the letter. By this time, however, there was no ongoing communication with the insurance company. The insured was forced to pay a six figure defense cost out of his retirement savings to defend against the tort claims before obtaining a dismissal of the claims with no payment of damages. After the dismissal of the tort claim, the insured contacted us and coverage issues were pursued against the insurance company.

This insurance coverage and bad faith denial of the duty to defend claim involved a choice of law issue which needed to be decided as a matter of law. The insurance company claimed there was no coverage and that their denial of coverage was proper because the original complaint did not have the tort claim set out in the text of the complaint. Instead, the initial notice to their insured and to them of the tort claim was in a letter from the neighbor. Under California law an insurance company can not hide its eyes to claims that are a potential part of a suit, even if they are not specifically spelled out in the text of the lawsuit. As long as the claimant has put the insured (and the insured has put the insurance company) on notice of the covered claim, the insurance company is required to hire an attorney to defend its insured. Unlike California, a few states including the one where this lawsuit occurred have a “4 corners” rule that does not require the insurance company to look beyond the “4 corners” of the complaint. If the covered claim is not specifically set out in the body of the complaint, then the insurance company can close its eyes to other notice it receives such as demand letters and investigative reports. The legal question that was decided by the court in the insured’s favor was that California law would require a California issued insurance policy to pay for the defense and that an insurance company could not avoid its obligation by using the law of the state where the claim was made. As a result the insured was able to regain some security for the remainder of his retirement.

c 2009 Lee S. Harris

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Harris & McSparran based in San Francisco including the North and South Bay Areas. He has represented injury and insurance clients in numerous disaster claims. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and serves on the board of Consumer Attorneys of California.