Full Investigation: Insurer's Discovery Rights Are Intact

Periodical: Los Angeles Daily Journal

Date: July 17, 1995

In the wake of the decision in Haskel Inc. v. Superior Court (Aetna), 33 Cal. App. 4th 963 (1995) policyholders and their attorneys have argued that insurance companies must make an "immediate" coverage decision on claims tendered by their insureds. However, such a position ignores California law that specifically allows insurers the right to conduct a reasonable investigation of claims before issuing a coverage decision. Moreover, the reading of Haskel put forth by policyholders would provide an unwelcome inducement to insureds to obstruct their insurers' claims investigation, thus breaching both the contractual duty of cooperation and the covenant of good faith and fair dealing insureds owe their insurers.

The actual Haskel holding is relatively narrow. The trial court had taken Haskel Inc.'s motion for summary adjudication of the duty to defend off calendar until Haskel, the policyholder, had "fully complied" with the defendant insurers' discovery requests. On review, the California Court of Appeal stated that Haskel was entitled to have its motion heard because the information sought through discovery was, in its view, irrelevant to whether the insurers had a duty to defend Haskel at the time the denied coverage. The court also held that the trial court had improperly failed to comply with California Code of Civil Procedure Section 437c(h), which provides for continuance of noticed motions for summary adjudication.

Significantly, however, the court noted that "[w]hile an insured may obtain an early summary adjudication of a defense obligation, the insurer is entitled to seek a contrary ruling at an time it acquires the requisite evidence to conclusively eliminate any potential for coverage." The court stressed the even if the Haskel insurers lost the plaintiff's initial motion for summer adjudication on the defense duty, "such a result will not mean that the insurer may not thereafter continue to search for and develop evidence that will ultimately enable them to conclusively defeat Haskel's coverage claim. Indeed, they are entitled to pursue all appropriate discovery toward that end."

Thus, policyholders cannot argue that Haskel bars any discovery going to the duty to defend. Rather, the case simply holds that insurers may not delay summary adjudication of the defense duty while obtaining such discovery, which cannot be avoided absent a specific showing of prejudice warranting a stay of the coverage action.

Moreover, a policyholder's contention that Haskel requires insurers to provide an "immediate" defense ignores not only that this pronouncement is dictum but also the clear mandate of California law to the contrary. The California Department of Insurance regulations (California Code of Regulations Title 10, Chapter 5, Subchapter 7.5, Section 2695.1-.17) governing the claims handling practices of carriers specifically provide that insurers have 40 calendar days from the date of tender to accept or deny an insured's claim, in whole or in part, and affirm or deny liability. Section 2695.7(b).

Additionally, an insurer may take longer than 40 days to reach a coverage decision, so long as it provides the insured with written notice stating why it needs more time, including specification of any additional information the insurer requires to make its determination. Indeed, if a coverage decision cannot be made until some event, process or third‑party determination is made, the insurer may fulfill its duty to the insured by advising the policyholder of the situation and providing an estimate as to when the determination can be made. Section 2695.7(c)(1).

Tellingly, these regulations, which were adopted to protect the insured from unfair claims‑handling practices, recognize the necessity of allowing insurers adequate investigation before making a coverage decision. Moreover, requiring an "immediate" coverage decision is also contrary to the many California cases mandating that an insurer base its coverage determination on a "reasonable" investigation of the facts underlying the claim against its insured. See, e.g., Betts v. Allstate Insurance Co., 154 Cal.App.3d. 688, 706 (1984).

Interpreting Haskel to impose a duty to defend prior to investigation would also create perverse incentives for policyholders to conceal relevant facts from their insurers. Suppose, for example, that an insured is sued and is preparing to tender a claim for coverage under a policy. Under Montrose Chemical Corp. v. Superior Court (Canadian Universal Insurance Co.), 6 Cal.4th 287, 298‑299 (1993), insurers may use facts extrinsic to the complaint to negate a defense duty, and may do so even in the face of a contrary allegation in the complaint. As the Montrose court stated, "neither logic, common sense nor fair play supports a rule allowing only the insured to rely on extrinsic facts to determine the potential for coverage." 6 Cal.4th at 298‑299.

Additionally, assume that undisputed facts extrinsic to the complaint and known only to the insured make clear that no potential for coverage exists under the policy. Although insurance policies generally require insureds to cooperate with their insurers' claims investigations, divulging such facts to its insurer when tendering its claim would, under Montrose, properly result in a denial of a defense to the policyholder. Accordingly, if Haskel is read as insureds have suggested, policyholders would have a strong incentive to conceal unhelpful facts from their insurers in order to obtain coverage. Insureds would face similar incentives to avoid even investigating claims internally (at least until after receiving a coverage decision) for fear that facts would be unearthed which would defeat coverage.

If the insureds' reading of Haskel is adopted, policyholders who concealed facts from their insurers would obtain a defense, leaving insureds little incentive to be forthcoming. Although their insurers would be entitled to seek a declaratory judgment relieving them of their defense duty, policyholders would then likely move to stay the coverage action to avoid allegedly  "prejudicial" discovery‑‑i. e. discovery of coverage‑defeating facts that they have concealed from their insurer. Such a motion, if successful, would require insurers to expend substantial funds defending actions in which no potential for coverage ever existed.

It is hoped that most policyholders, like most insurers, will operate in good faith. However, scenarios such as those above are not chimerical. For example, in California Casualty General Insurance Co. v. Superior Court (Gorgei), 173 Cal.App.3d 274 (1985), the insured refused to supply information relevant to its insurers' coverage investigation. The court held that this behavior was bad faith and could be used by the carrier as a defense to a bad faith claim. 173 Cal.App.3d at 283.

Thus, refusing to allow a reasonable time for a coverage investigation not only flies in the face of California's claims‑handling regulations and case law, it would encourage policyholders to breach their contractual duty to cooperate in the insurer's investigation, as well as to breach the reciprocal duty of good faith and fair dealing implied in every insurance contract.

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