Duty to Defend and Duty to Indemnify
Barry Zalma
Apr 20, 2023
Reservation of Rights Requires Reimbursement of Settlement Paid
Read the full article at https://lnkd.in/g3-kBxCR and see the full video at https://lnkd.in/gHQkYQ8r and at https://lnkd.in/gsU7UegD and at https://zalma.com/blog plus more than 4500 posts.
Massachusetts Bay Insurance Company (MBIC) sought reimbursement of $2 million that it paid under a reservation of rights to settle litigation brought against its insured, Neuropathy Solutions, Inc. (Neuropathy).
In Massachusetts Bay Insurance Company v. Neuropathy Solutions, Inc., dba Superior Health Centers, and Rigoberto Bernal, an individual; et al., No. 22-55272, United States Court of Appeals, Ninth Circuit (April 3, 2023) the Ninth Circuit determined who owed the settlement payment.
The District Court Decision
On cross-motions for judgment on the pleadings, the district court held that MBIC had a duty to defend and indemnify Neuropathy in the underlying case (the Bernal action), and that MBIC was thus not entitled to any reimbursement.
MBIC satisfied the prerequisites for seeking reimbursement of the amount it paid to settle the Bernal action on Neuropathy’s behalf. To seek reimbursement under California law, an insurer must provide (1) a timely and express reservation of rights; (2) an express notification to the insured of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insured that it may assume its own defense in the event that the insured does not wish to accept the proposed settlement.
The Reservation of Rights
MBIC provided a timely and express reservation of rights and informed Neuropathy of its intention to settle the claims for the $2 million policy limit, subject to Neuropathy’s approval and MBIC’s reservation of rights. This letter also informed Neuropathy of its “right to assume the further handling of this matter going forward” if Neuropathy did not wish to settle the claims for $2 million. Neuropathy signed the settlement agreement on May 28, 2021. Contrary to Neuropathy’s argument, MBIC gave Neuropathy sufficient time to consider the proposed settlement.
Under California law, the insurer’s duty to indemnify runs to claims that are actually covered, in light of the facts proved. By contrast, the insurer’s duty to defend runs to claims that are merely potentially covered, in light of facts alleged or otherwise disclosed. Thus, the insurer’s duty to defend is broader than its duty to indemnify.
The District Court Erred
The Ninth Circuit concluded that the district court erred by invoking the broader duty-to-defend standard (potentiality of coverage) to require MBIC to cover not just the cost of defending the underlying Bernal suit but also the $2 million paid to settle it.
To the extent that the underlying Bernal action falls within the coverage provisions of the insurance policy coverage is excluded under the policy’s “Professional Services” exclusion. That provision excludes: “’Bodily injury’, ‘property damage’, [and] ‘personal and advertising injury’ caused by the rendering of or failure to render any professional service, advice or instruction: (1) By [the insured]; or (2) On [the insured’s] behalf; or (3) From whom [the insured] assumed liability by reason of a contract or agreement, regardless of whether any such service, advice or instruction is ordinary to any insured’s profession.”
Then Ninth Circuit concluded that based on California case law, the insurance policy’s text, and the operative complaint in the Bernal action, Neuropathy’s liability in Bernal fell within the “Professional Services” exclusion.
The “Professional Services” exclusion extends to wrongdoing in the supervision and monitoring of others in the provision of professional services, and Neuropathy incurred liability because of its provision of professional advertising and medical services, not inadequate recordkeeping or poor customer service. Finally, the complaint’s allegation that Neuropathy engaged in discriminatory marketing techniques and high-pressure sales tactics falls within the Professional Services exclusion for advertising services and health advice or instruction.
Neuropathy’s liability in the Bernal action was thus excluded from coverage, and MBIC is entitled to reimbursement of the $2 million it paid to settle that lawsuit.
ZALMA OPINION
Liability insurance provides a very broad duty to defend an insured that is more than the duty to indemnify. In this case MBIC paid to defend its insured and properly gave the insured to take over the defense if it did not want to settle. It refused and the Ninth Circuit required the insured to reimburse the insurer for the $2 million paid to settle.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.
Consider subscribing to my publications at substack at https://barryzalma.substack.com/publish/post/107007808
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected]
Follow me on LinkedIn: http://www.linkedin.com/comm/mynetwork/discovery-see-all...
Write to Mr. Zalma at [email protected]; http://www.zalma.com; http://zalma.com/blog; daily articles are published at https://zalma.substack.com.
Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; https://creators.newsbreak.com/home/content/post; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library.
Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://lnkd.in/gfFKUaTf.
Consider subscribing to my publications at substack at https://lnkd.in/gcZKhG6g
Barry Zalma, Esq., CFE is available at http://www.zalma.com and [email protected].
Follow me on LinkedIn: https://lnkd.in/guWk7gfM
Go to the Insurance Claims Library – https://lnkd.in/gWVSBde.
The Largest Residential Burglary of All Time
Post 5407
Fraud & the Fear of Bad Faith Suits
Posted on July 22, 2026 by Barry Zalma
See the full video at https://lnkd.in/gWQQEySW and at https://lnkd.in/gyhdK6wv
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime.
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime.
After ...
Chutzpah is not Enough
Post 5397
Posted on July 20, 2026 by Barry Zalma
See the video and at https://lnkd.in/gNUs2XzT and at https://lnkd.in/g2MawyzX
Magistrate Issues a Search Warrant if there is a Fair Probability that Contraband or Evidence of a Crime will be Found in a Particular Place.
In United States Of America v. Frank Suess, et al., CRIMINAL No. 3:24-308, United States District Court, M.D. Pennsylvania (July 16, 2026) a federal grand jury indicted Frank Suess, Melissa Driscoll, and others in a 55-count health care fraud and anti-kickback prosecution arising from an alleged scheme involving medically unnecessary prescription “foot baths.”
As part of the investigation, the FBI obtained an August 19, 2022 warrant to search Driscoll’s Sterling Pharmacy Yahoo email account for emails from January 1, 2018 through December 31, 2020. Driscoll moved to suppress the resulting evidence, arguing that the warrant lacked probable cause, was overbroad, and rested on material misstatements and omissions.
LAW:
The ...
Fraud Shouldn’t Pay
Post 5396
See the video and at https://rumble.com/v7ctgmq-the-great-jewel-theft.html at https://youtu.be/aRbQ2sJfGwA
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the ¬¬¬Perpetrators than any Other Crime.
The Insured purchased, for the first time in his life, a policy of Personal Articles Floater Insurance (PAF) scheduling $125,000 worth of ladies jewelry. He advised the insurer that the jewelry was always kept in a class E safe at his residence. He also told the insurer that he was employed full time as the owner of a gasoline service station and that he had never been canceled or suffered a previous loss.
One month after the policy was ...
Day Care Owner Loses Subsidies Because She Criticized State
Post 5421
Posted on August 11, 2026 by Barry Zalma
First Amendment Right Will be Allowed to Go to Trial
In Betsey J. Grant v. Maine State Department Of Heath And Human Services, No. 1:25-cv-00490-JAW, United States District Court, D. Maine (August 6, 2026), Betsey J. Grant, a licensed childcare provider and operator of Tiny Tikes Daycare in Trenton, Maine, sued Maine DHHS and several employees after she publicly criticized DHHS before Maine’s Government Oversight Committee and alleged that officials retaliated against her.
She claimed DHHS imposed and extended a conditional license, published stigmatizing information, interfered with subsidies and program funding, removed her from a food program, rescinded an expansion grant, and used biased or falsified evidence in licensing proceedings. Following the March 10, 2023, GOC testimony, Ms. Grant alleges that foster children's subsidies (approximately $30,000) were withheld; she was removed from the ...
Rescission for Material Misrepresentation
Post 5418
Posted on August 5, 2026 by Barry Zalma
An Insurer May Rescind An Insurance Policy Where The Applicant Made A Material Misrepresentation In The Application.
In Union Mutual Fire Insurance Company v. 844 Knickerbocker, LLC, et al. No. 2024-10359, Index No. 602824/22, 2026 NY Slip Op 04789, Supreme Court of New York, Second Department (July 29, 2026) Union Mutual Fire Insurance Company issued commercial insurance policies to 844 Knickerbocker, LLC, and Sanjaya Mallick based on applications stating that the insured property contained two apartment units. After an underlying personal injury action was filed, Union Mutual determined that the property actually contained three apartment units and rescinded the policies on the ground that the defendants had made a material misrepresentation in the applications.
LAW:
A misrepresentation is material if the insurer would not have issued the same policy, or would have issued it only on different terms, had the true ...
Rescission for Material Misrepresentation
Post 5418
Posted on August 5, 2026 by Barry Zalma
An Insurer May Rescind An Insurance Policy Where The Applicant Made A Material Misrepresentation In The Application.
In Union Mutual Fire Insurance Company v. 844 Knickerbocker, LLC, et al. No. 2024-10359, Index No. 602824/22, 2026 NY Slip Op 04789, Supreme Court of New York, Second Department (July 29, 2026) Union Mutual Fire Insurance Company issued commercial insurance policies to 844 Knickerbocker, LLC, and Sanjaya Mallick based on applications stating that the insured property contained two apartment units.
LAW:
A misrepresentation is material if the insurer would not have issued the same policy, or would have issued it only on different terms, had the true facts been disclosed. To establish materiality as a matter of law, the insurer must submit documentation of its underwriting practices, such as manuals, guidelines, bulletins, or rules addressing similar risks.
DISCUSSION/ANALYSIS:
As a result, the...
