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26 Journal of American Law // Spring 2015 seek reimbursement from the insured for uncovered defense costs 21 or settlement costs 22 under certain circumstances. Faced with a claim against the owner or general contractor in a wrap-up situation, the insurer may be inclined to reserve the right to recover uncovered amounts from the insured. Ordi- narily, such a reservation does not trigger the insured's right to independent counsel. 23 Te insurer's decision to reserve rights could have con- sequences. Te insured may sue enrolled subcontractors for indemnity. It would be difcult for defense counsel hired by the insurer to prevent prosecution of indemnity claims by their client, the insured. If the insurer prevented the indem- nity claim and refused to cover the loss, it might be subject to bad faith liability. 24 Many times, coverage limitations are legitimate but like- ly of minimal value in the long term. Te insurer alone must weigh the cost and the potential beneft in its decision-making. Failure to Settle Assume for the sake of argument that an allocated demand is made by an owner against the wrap-up participants that is within the stated policy limit as to any individual sub- contractor, but collectively, the demand is well in excess of the wrap-up policy limits. 25 The insurer must maximize the policy limits available for the benefit of each of the insureds. 26 A careful balancing act is required. These are not idle considerations, though they have not yet been the subject of a published opinion. Can an insurer that fails to settle in response to a demand that is reasonable on behalf of all its insureds be subject to extra contractual liability for the entire judgment if it refuses to settle on behalf of any of them? Specific fact problems, however, could create difficul- ties for an insurer. For example, assume that there is one larger defect issue that is not covered but the balance of the lawsuit seeks damages that are covered and within the policy limit. Can the insurer assert a noncoverage position as to the large claim while simultaneously attempting to settle the smaller claims against different specific insureds? The answer theoretically may be "yes," but practically "no." The attempt to segregate a large, uncovered claim that is part of a single lawsuit against one insured while settling others would create conflicts between the insureds (for either using the policy limits or denying coverage), com- peting claims on the policy, and demands for independent 21 Buss v. Superior Court, 16 Cal. 4th 35 (Cal. 1997) 22 Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 497 (Cal. 2001). 23 James 3 Corp. v. Truck Ins. Exch., supra. 24 Barney v. Aetna Casualty & Surety Co., 185 Cal. App. 3d 966, 979-980 (1986). 25 Howard v. American Nat'l. Fire Ins. Co., 187 Cal. App. 4th 498, 533 (Cal. App. 1st Dist. 2010). 26 Coe v. State Farm Mut. Auto. Ins. Co., 66 Cal. App. 3d 981 (Cal. App. 1st Dist. 1977). counsel. 27 Furthermore, at least one state bar has opined that counsel retained by the insurer could not engage in any activity to resolve the covered claim if the balance is uncovered. 28 Nevertheless, the temptation for a primary li- ability insurer paying defense costs in addition to the limit of liability will be to settle some combination of claims to cut off future defense cost liability. 29 Subrogation Against Enrolled Parties As an alternative to denying coverage for all or a portion of the loss, an insurer may try to settle the lawsuit, there- by eliminating claims against all the enrolled contractors and pursuing its rights of indemnity or subrogation against others. As a preliminary matter, the insurer likely may not pursue any claims against parties that are enrolled in the wrap-up program unless the claim is for uncovered damages pursuant to California law. 30 A Washington court has found that by participating in a wrap-up program, the wrap-up insurer implicitly waived its rights of subrogation, and the court reasoned that insurance is a contract to shif the risk of loss from the insured to the insurer. 31 In a wrap-up situation, therefore, the Washington court found that all of the parties to the wrap-up contemplated shifing the risk of loss to the insurer and, thus, the insurer should not be in a position to satisfy the loss and then pursue subrogation against an en- rolled party. Such limitations would not exist, however, between the insurer and nonwrap-up parties. Similar to the recommen- dation to "defend the project," the insurer must identify ex- posures that are nonwrap rather than covered versus uncov- ered. Tere is no prohibition on pursuing a loss and suing a nonenrolled party. Conclusion Te wrap-up seems simple as all the contractors are insureds under one policy. Te owner needs only to choose his bro- ker, the insurer, and the coverage. For the rest of the partic- ipants, however, it is a challenge to apply existing rules to the new environment. Brokers have new roles, and lawyers may fnd themselves in confict with the insurer or the cli- 27 See e.g., Novak v. Low, 77 Cal. App. 4th 278, 284 (Cal. App. 1st Dist. 1999), where the court disapproved of the insurer attempting to settle only the covered claims. 28 Oregon State Bar Comm. on Legal Ethics, Formal Op. 2005-121 concludes that a lawyer may not make a motion or settle the cov- ered claims and leave the client facing only uncovered claims. 29 See, e.g., Aetna Cas. & Sur. Co. v. Certain Underwriters, 56 Cal. App. 3d 791 (Cal. App. 2d Dist. 1976), holding that the primary insurer may settle individual claims involving the Santa Barbara oil spill, exhausting the policy limits and cutting of defense costs. Te distinction, however, is that with a wrap-up, the insurer would be settling certain claims for some but not all the insureds. 30 Truck Ins. Exch. v. County of L.A., 95 Cal. App. 4th 13, 23 (Cal. App. 2d Dist. 2002). 31 Afliated FM Ins. Co. v. Patriot Fire Protection, 2004 Wash. App. LEXIS 340.