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The ins and outs of California insurance law: The duty to defend

In California, insurance companies generally owe two very important duties to liability policyholders. First, insurance companies have an obligation to indemnify an insured policyholder in circumstances covered by his or her policy - which means insurance companies must pay legitimate insurance claims. And second, insurance companies owe a duty to defend an insured against third-party lawsuits based on covered risks.

For instance, if the insured is involved in a car accident and an injured third-party files suit claiming the insured was at fault, then the insurance company must defend the insured against these allegations. Interestingly, if an insurance company wrongfully refuses to defend an insured in California, the insurance company may ultimately face stiff consequences.

When California's duty to defend exists

Generally, an insurance company will clearly have a duty to defend its insured in any action in which the complaint proffers a claim that is covered by the policy. When determining possible coverage, California courts will look to the plain language of the policy and the insured's "reasonable expectation" of coverage. In California, all lingering doubts as to whether the circumstances create a duty to defend must be decided in favor of the insured.

It is important to note that California case law has determined that it does not need be shown that an action against an insured is actually covered by the policy for the insurance company's duty to defend to exist - it is merely enough for the action to be "potentially" covered by the policy.

Risks for insurance companies that fail to defend

An insurance company that erroneously refuses to defend an insured may also experience several adverse consequences. For example, an insurance company will have no right to subsequently complain if the court awards a large judgment against the insured. Furthermore, an insurance company that elects not to defend an insured cannot challenge any of the matters adjudicated in court.

However, one the biggest risks associated with an insurance company's incorrect choice not to defend an insured is that it may be held liable for breach of contract. Specifically, if the insured can prove that his or her third-party lawsuit is, in fact, covered by the policy - and the insurance company fails to defend - it is considered a breach of contract in California.

In addition, an insurance company can also be found in violation of California's implied covenant of good faith and fair dealing if it erroneously refuses to defend an insured against a third-party claim - so long as some additional element of "unreasonableness" on the part of the insurance company is proven. Ultimately, in California it is left up to the insured to prove that the insurance company's actions:

  • Demonstrate a refusal or failure to discharge contractual obligations;
  • Are not prompted by bad judgment, negligence or an honest mistake, but instead a "conscious and deliberate" act;
  • Unfairly frustrate agreed upon common purposes; and
  • Disappoint the reasonable expectations of the insured, which in turn deprive the insured of the benefits of the policy

Obviously, the law surrounding an insurance company's duty to defend is quite complex in California. Accordingly, if you are involved in a lawsuit in which your insurance company wrongfully refuses to provide you a defense, you may be entitled to damages. In instances such as these, it is often advisable to contact an experienced insurance claims attorney who can help with navigating California's complicated laws and assist in protecting your rights.