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.
Happy Law Day
ZIFL – Volume 30, Issue 9 – May 1, 2026
Read the full article at https://www.linkedin.com/pulse/zalmas-insurance-fraud-letter-may-1-2026-barry-zalma-esq-cfe-2tywc, see the video at at and at https://zalma.com/blog plus more than 5300 posts.
THE SOURCE FOR THE INSURANCE FRAUD PROFESSIONAL
ZIFL – Volume 30, Issue 9 – May 1, 2026
Zalma’s Insurance Fraud Letter (ZIFL) continues its 30th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year and is written by Barry Zalma.
DOJ Creates National Fraud Enforcement Division
Will the Feds Take on Insurance Fraud? Possibly as Part of a National Anti-Fraud Effort
On April 7, 2026, the Acting Attorney General, Todd Blanche, issued a memorandum establishing the Department of Justice National Fraud Enforcement Division (NFED). The memo describes an ambitious, but perhaps redundant, vision for this ...
When Abalone Died As a Result of Multiple Causes The Efficient Proximate Cause Requires Payment
Post number 5345
Read the full article at https://www.linkedin.com/pulse/efficient-proximate-cause-doctrine-saves-claim-barry-zalma-esq-cfe-yndlc, see the video at and at and at https://zalma.com/blog plus more than 5300 posts.
In American Abalone Farms, LLC v. Star Insurance Company et al., H052643, California Court of Appeals, Sixth District (April 27, 2026) the Court of Appeals dealt with an insurance coverage issue that required application of the efficient proximate cause doctrine.
FACTS
American Abalone Farms, LLC ("American Abalone" ) operates an aquaculture farm in Santa Cruz County, California, raising abalone in tanks. In August 2020, the CZU Lightning Complex Fires led to a prolonged power outage and road closures near the farm. As a result, the farm’s water pumps failed, causing the death of most of the ...
Breach of a Specific Condition Precedent Is a Complete Defense
See the video at and at and at https://zalma.com/blog plus more than 5300 posts.
In United Services Automobile Association and State Farm Mutual Automobile Insurance Company v. Anthony Wenzell, 2026 CO 25 (Colo. Apr. 27, 2026) Anthony Wenzell was rear-ended in a car accident. He had a significant prior 2014 accident that required back surgery.
Wenzell claimed underinsured-motorist (UIM) benefits under three policies: (1) the tortfeasor’s liability policy, (2) his own primary UIM policy with State Farm, and (3) an excess UIM policy issued by USAA (under his brother’s policy, which contained an “other insurance” clause making USAA’s coverage excess over any collectible insurance).
After receiving the claims, both USAA and State Farm repeatedly requested that Wenzell execute comprehensive medical-release authorizations so they could obtain his full medical records and ...
It is Fraud to Make the Same Claim Twice
Read the full article at https://www.linkedin.com/pulse/fraud-make-same-claim-twice-barry-zalma-esq-cfe-c4g8c and at https://zalma.com/blog.
Chutzpah: After Being Paid for a New Roof Insured Makes Second Claim For Same Damages
Post number 5347
No One is Entitled to be Paid for the Same Loss Twice
In Mohammed Ali Khalili v. State Farm Lloyds, No. 14-25-00611-CV, Court of Appeals of Texas (April 30, 2026) Khalili maintained a State Farm Lloyds homeowners insurance policy for decades. In 2008 he filed a roof-damage claim; State Farm paid him to replace the entire roof (shingles and gutters). Khalili never replaced the roof and repeated his claim.
BACKGROUND
In 2021 he filed a second roof claim. State Farm’s inspectors found the roof “very old” with extensive non-storm-related damage. The claim was denied because (1) the damage did not exceed the deductible and (2) State Farm had already paid for a full roof replacement.
PROCEDURAL HISTORY
State Farm filed motion for summary...
It is Fraud to Make the Same Claim Twice
Read the full article at https://www.linkedin.com/pulse/fraud-make-same-claim-twice-barry-zalma-esq-cfe-c4g8c and at https://zalma.com/blog.
Chutzpah: After Being Paid for a New Roof Insured Makes Second Claim For Same Damages
Post number 5347
No One is Entitled to be Paid for the Same Loss Twice
In Mohammed Ali Khalili v. State Farm Lloyds, No. 14-25-00611-CV, Court of Appeals of Texas (April 30, 2026) Khalili maintained a State Farm Lloyds homeowners insurance policy for decades. In 2008 he filed a roof-damage claim; State Farm paid him to replace the entire roof (shingles and gutters). Khalili never replaced the roof and repeated his claim.
BACKGROUND
In 2021 he filed a second roof claim. State Farm’s inspectors found the roof “very old” with extensive non-storm-related damage. The claim was denied because (1) the damage did not exceed the deductible and (2) State Farm had already paid for a full roof replacement.
PROCEDURAL HISTORY
State Farm filed motion for summary...
What Must be Done after Notice of a Claim is Received by the Insurer
Read the full article at https://lnkd.in/gzvvdkMZ and at https://zalma.com/blog.
Below you will read from this post until you reach the the end of this blog post as the free part of an Excellence in Claims Handling post. To read the full article and receive all articles for members of Excellence in Claims Handling you should consider joining as a paid member to get full access to articles for members only, to our news, analysis, insurance coverage, claims, insurance fraud and insurance webinars, by clicking at the subscription link below.
A first party property policy does not insure property: it insures a person, partnership, corporation or other entity against the risk of loss of the property. Before an insured can make a claim for indemnity under a policy of first party property insurance the insured must prove that there was damage to property the risk of loss of which was insured by the policy. The obligation imposed on the insured ...
