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Excess Carrier Owes Duties to Insured

Attorneys may sometimes find themselves in the position of having a primary and excess carrier involved and the excess carrier takes a back seat and does nothing while settlement negotiations are ongoing.

Jimmy “The Bud” Weedman was expanding his warehouse for his medical marijuana growing facility. Bud Weedman owns and operates the largest chain of medical marijuana dispensaries in Southern California. Bud invented and patented a technique for trimming his plants to make his marijuana a more potent pain killer. His company slogan is “It will kill your pain and anything else that ails ya!” Bud’s friend, Crackhead Craig, was working part time in the construction of the addition to the marijuana warehouse. The San Diego Building Department sent its code inspector, Inspector Maxwell Smart Gadget, to ensure that the warehouse met the applicable building codes. Inspector Gadget was walking through the warehouse when Crackhead Craig was lifting some bales of marijuana with a forklift and accidentally dropped one of the bales onto Inspector Gadget’s head. Inspector Gadget suffered serious spinal injuries.

Inspector Gadget retained Attorney Sickem Bulldog to represent him in his claims against Bud Weedman. Attorney Bulldog was the eldest son of a Pakistani mother and Colonel Nathan “Doberman” Bulldog of Navy Seal Team 6 who met while he was performing covert operations in Pakistan. Attorney Bulldog submitted a claim for damages for Inspector Gadget against Bud Weedman. Bud tendered the defense to his insurance carriers. Bud Weedman had a primary insurance policy of $1 million through Deliverance Insurance Company. Bud also had a $2 million excess liability insurance policy issued by Allsnake Insurance Company.

Bud Weedman authorized his insurance companies to reveal his policy limits to Attorney Bulldog. Attorney Bulldog submitted a policy limits settlement demand for $3 million for the two policies and enclosed a settlement package establishing that Inspector Gadget had undergone two spinal surgeries and will have permanent paralysis of his left arm. Inspector Gadget was 29 years of age at the time of his injury.

Deliverance Insurance Company was willing to pay its $1 million policy limits, but Allsnake Insurance Company refused to accept the policy limits demand. Allsnake claimed that its policy had lapsed for non-payment of premium. Upon learning of the basis of the denial, Bud Weedman sent in copies of the cancelled checks proving that the policy premium had been timely paid. Allsnake verified through its internal investigation that it had credited the payments to an incorrect policyholder instead of Bud Weedman’s policy. Allsnake feared that it had acted unreasonably so it continued to assert that the policy had lapsed in order to try and negotiate a better settlement.

Attorney Bulldog filed suit on behalf of Inspector Gadget against Bud Weedman. During the course of the lawsuit, a settlement was reached where Deliverance Insurance Company and Bud Weedman stipulated to liability and had the trial court make a finding as to the amount of damages. In exchange for a stipulation of liability and allowing the court to make the finding of the actual damages, Attorney Bulldog negotiated an assignment of rights from Bud Weedman against Allsnake with a covenant not to execute against Bud Weedman’s medical marijuana business. Judgment was entered for $6 million against Weedman.

Attorney Bulldog filed suit against Allsnake Insurance Company under Insurance Code Section 11580(b)(12) and as the assignee of the rights of Bud Weedman under the Allsnake Insurance policy. The attorney for Allsnake filed an answer asserting lack of coverage based upon cancellation of the policy for nonpayment of the premium and also answered interrogatories claiming that the policy had lapsed for nonpayment of the premium.

During discovery, Allsnake was forced to produce its underwriting file, claim file, and billing and accounting records. It was clear that Bud Weedman’s premium payment had been received by Allsnake and that it had incorrectly credited the payment to the wrong insurance policy issued to a different insured. Despite its awareness of its error, Allsnake had continued to assert noncoverage based upon the failure to pay the premium. The matter proceeded to trial against Allsnake. At trial, Allsnake contended that it owed no duties to Bud Weedman because the Deliverance Insurance policy was not exhausted until after the underlying trial had been held and the judgment was entered. It was only after judgment was entered that Deliverance Insurance had exhausted its policy limits. Allsnake claimed that, as the excess carrier, it owed no duties to the insured until the primary policy had been exhausted. It also claimed that it had a right to assert the cancellation for nonpayment of premium and had no duties to speak truthfully about that because there was no implied covenant of good faith and fair dealing that could be breached after litigation had been brought against Allsnake.

Attorney Bulldog seeks out your advice upon receiving Allsnake’s pretrial brief. What do you tell him?

Duty of Good Faith Owed by Excess Carriers Exists from Inception of Insurance Contract

Courts repeatedly assert in their opinions the fundamental principle that the covenant of good faith and fair dealing is implied in every insurance contract that neither party will do anything to injure the other’s right to receive benefits under the agreement. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, *573.) Another general principle is that the breach of the implied covenant of good faith and fair dealing cannot occur if no benefits are due under the insurance policy. (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, *1151.) When dealing with an excess policy, there is a third principle that no benefits are due under an excess policy unless and until the underlying primary coverage has been exhausted. (See Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511, *1528—generally an excess liability insurer has no duty to participate in insured’s defense or contribute to a settlement on its behalf until primary coverages are exhausted.) However, excess carriers still owe the implied covenant of good faith and fair dealing to its insured. “An excess insurer’s implied covenant not to injure an insured’s right to receive the benefits of the insurance contract exists from the inception of the agreement with the insured, . . . so long as a potential for coverage under the insurance contract exists.” (Schwartz v. State Farm Fire & Cas. Co. (2001) 88 Cal. App.4th 1329, *1335.)

In addition, “the legal principle that a breach of the implied covenant cannot occur ‘unless policy benefits are due’ refers to whether the policy will eventually cover the claim, and does not depend on when such coverage finally attaches.” (Id.) California courts have rejected excess carriers’ contentions that there are no obligations owed to its insured because a condition precedent to its obligation to pay has not yet occurred. The implied duty not to impair the insured’s right to insurance policy benefits “arises from [the] contractual relationship existing between the parties,” and indeed is “unconditional and independent of the performance of [the insured’s] contractual obligations.” (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d 566, *577-578.) (Schwartz v. State Farm Fire & Cas. Co. (2001) 88 Cal. App. 4th 1329, 1337, as modified on denial of reh’g (June 5, 2001).) An insured has a reasonable expectation that, if the injuries of the thirdparty claimant exceed the limits of the primary policy, coverage will be provided under the excess policy and the excess carrier has an implied-in-law contractual obligation to its insured not to injure their right to receive the benefits under the insurance agreement. (Schwartz at *1337.)

The duties arising from the implied covenant of good faith and fair dealing owed by an excess insurance carrier include the obligation “to evaluate settlement options realistically and in good faith where a claim may exceed primary policy limits.” (Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal. App.4th 958, *987.)

In summary, Allsnake’s position that it owed no duties to Bud Weedman because the primary policy had not exhausted, which was a condition to its obligation to pay contractual benefits, has been rejected by our courts. The implied covenant of good faith and fair dealing arises from the inception of the insurance policy and not at the time the duty to pay the contractual benefits has been triggered. As long as there is a potential for coverage in the excess policy, Allsnake had a duty to evaluate settlement options and to participate in the settlement discussions and attempt to settle the claim, if possible. Consistent with its good faith duty, the excess insurer does not have the absolute right to veto arbitrarily a reasonable settlement and force the primary insurer to proceed to trial, bearing the full costs of defense. A contrary rule would impose the same unnecessary burdens upon the primary insurer and the parties to the action, among others, as does the primary insurer’s breach of its good faith duty to settle: “ ‘... [I]t imperils the public and judicial interests in fair and reasonable settlement of lawsuits....’ ” (Valentine v. Aetna Ins. Co., supra, 564 F.2d at *297; see Northwestern Mut. Ins. Co. v. Farmers’ Ins. Group, supra, 76 Cal. App.3d at *1045, 143 Cal.Rptr. 415.) (Diamond Heights Homeowners Assn. v. Nat’l Am. Ins. Co. (1991) 227 Cal. App. 3d 563, *580–81.)

In addition to Allsnake’s breach of the implied covenant by its failure to become involved in the settlement discussions and attempt to settle the case when the policy limits demand was made, Allsnake also breached the implied covenant of good faith and fair dealing by its continued assertion that the policy had lapsed for failure to pay the premium after it had determined that the argument had no merit. “[A]n insurer’s duty of good faith and fair dealing does not evaporate after litigation has commenced.” (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, *885.) Insurance Code Section 790.03(h) identifies certain acts by insurance carriers as constituting unfair methods of competition and unfair and deceptive acts and practices in the business of insurance. Insurance Code Section 790.03(h)(1) provides that it is an unfair claims settlement practice to misrepresent to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

While the original denial based upon its erroneous belief that the policy had lapsed due to nonpayment of premium may have been proper, once it had received proof of payment and its own investigation had determined that the policy had been erroneously cancelled by Allsnake because of its improper allocation of the premium to the wrong policy, Allsnake had a duty to correct its error and speak truthfully to both the claimant and its insured concerning the policy provisions. In this case, Allsnake’s policy had not lapsed for nonpayment of premium. Allsnake’s continued assertion of that defense constituted a breach of the implied covenant of good faith and fair dealing that continues to exist even during an insurance bad faith lawsuit.


Attorneys may sometimes find themselves in the position of having a primary and excess carrier involved and the excess carrier takes a back seat and does nothing while settlement negotiations are ongoing. When settlement demands are made, the excess carrier frequently claims that it has insufficient information to accept the settlement demand. Such a cavalier attitude should not be condoned or permitted by claimant’s counsel or the courts. When it appears likely that the excess layer of insurance coverage will become involved, attorneys representing claimants should make sure that all communications concerning settlement demands or discussions are copied to the excess carrier so that it is kept informed. Try to avoid relying upon the primary carrier to fulfill its own obligations to the excess carrier to keep it informed. Should the excess carrier choose to bury its head in the sand and conduct no investigation and refuse to participate in settlement discussions because the primary policy has not been exhausted, counsel should remind the excess carrier of its duty of good faith and fair dealing to protect its insured. That implied covenant of good faith and fair dealing begins when the excess policy is issued and not when the primary policy is exhausted.

This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2017). Excess carrier owes duties to insured. Trial Bar News, 40(5), 7-8, 28-29.

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