News
Insurance
Feb. 21, 2002
Broad Duty to Defend Is Very Valuable to Insured
Focus Column - By Kirk A. Pasich - One of the most valuable provisions in a liability insurance policy is the provision obligating an insurance carrier to defend its insured, or pay its insured's defense costs, in a lawsuit or claim that is potentially covered. The carrier's duty typically will be triggered upon its receipt of notice from its insured.
Focus Column
By Kirk A. Pasich
One of the most valuable provisions in a liability insurance policy is the provision obligating an insurance carrier to defend its insured, or pay its insured's defense costs, in a lawsuit or claim that is potentially covered. The carrier's duty typically will be triggered upon its receipt of notice from its insured.
When the carrier receives notice, it must respond in one of three ways - by acknowledging coverage, with an unqualified assumption of its duty to defend; by acknowledging notice, with an assumption of its duty to defend under a reservation of rights to deny coverage; or by denying coverage, with a refusal to defend. See Truck Ins. Exch. v. Superior Court, 51 Cal.App.4th 985 (1996); Campbell v. Superior Court, 44 Cal.App.4th 1308 (1996).
In many situations, an insured will have a strong argument that it is entitled to at least a defense, even if the carrier ultimately is not obligated to pay for any judgment or settlement. The leading decision is Gray v. Zurich Insurance Co., 65 Cal.2d 263 (1966).
In Gray, the court held that a carrier "must defend a suit which potentially seeks damages within the coverage of the policy." As the court subsequently explained, the duty arises when the carrier "is informed of [an] accident and learns of even the potential for liability under its policy." Samson v. Transamerica Ins. Co., 50 Cal.3d 220 (1981).
This duty is triggered by allegations in a complaint or by facts extrinsic to the complaint "that reveal a possibility that the claim may be covered by the policy." Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076 (1993). The duty arises even when a complaint alleges covered and noncovered acts and even when those noncovered acts predominate. As the Horace Mann court explained, the question is not whether noncovered acts predominate but "whether there is any potential for liability under the policy."
Indeed, the defense duty continues even after a lawsuit results in a judgment against an insured solely on a noncovered ground. An insurance carrier remains obligated to pay for the insured's defense through the resolution of the lawsuit on appeal. See Prichard v. Liberty Mut. Ins. Co., 84 Cal.App.4th 890 (2000).
As Prichard explained: "Just because evidence has closed in the underlying case does not mean the facts against the policy holder have necessarily calcified. Here, a new trial might have been granted. Witnesses might have changed their stories or their memories might have improved. The judgment against [the insured] could have been overturned, yet another takes its place on remand. In short, the potential for indemnification liability continued into the appeal period."
Furthermore, a carrier cannot sit back and conduct an investigation to determine whether there might be coverage while it leaves its insured to fend for itself. As the California Supreme Court has held: "The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage. Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf." Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287 (1993).
There has been some dispute as to whether a duty to defend exists when a complaint is neutral, or silent on its face, about the possibility of covered events. The California Supreme Court has held that a carrier must defend in such situations.
For example, in Montrose, the court addressed insurers' duties to defend their insured in a lawsuit alleging environmental contamination. The carriers argued that they owed no duty because the insured had engaged in regular business practices and must have expected or intended the property damage involved.
The court disagreed, stating: "Although the [underlying] complaint was, as the trial court observed, 'neutral' on the question of coverage[,] its allegations sufficed to raise the possibility that [the insured] would be liable for property damage covered by the policies."
California courts also have rejected arguments that there is no duty to defend when it is unclear from the face of the complaint whether a covered event occurred within the policy period. As one court explained, a carrier cannot "properly avoid its duty to defend by relying upon a coverage defense related to a critical issue in the underlying lawsuits, to wit, that there was no 'occurrence' during the policy period." County of San Bernardino v. Pacific Indem. Co., 56 Cal.App.4th 666 (1997).
Furthermore, a carrier cannot ignore its duty to defend by arguing that the underlying plaintiff will not recover against the insured or that the allegations are meritless.
As another court has explained: "[A]n insurer cannot avoid the duty to defend merely by concluding, based on its own investigation, that the insured has done no wrong. Indeed, the duty of defense covers third party claims that are 'groundless, false or fraudulent.' In short, an insurer's determination that an insured is not liable on a third party claim does not provide a basis for escaping the duty to defend." A&H Plating Inc. v. Am. Nat'l Fire Ins. Co., 57 Cal.App.4th 427 (1997).
When a carrier's duty to defend is triggered, it cannot refuse to defend in anticipation that another carrier might defend and cannot agree only to pay a pro-rata share of the defense. In fact, a carrier's offer to pay only a share of the defense is "the equivalent of a defense denial. Such a unilateral limitation of [a carrier's] responsibility is not justified. If it owes any defense burden it must be fully borne with allocation of that burden among other responsible parties to be determined later." Haskel Inc. v. Superior Court, 33 Cal.App.4th 963 (1995); see also Aerojet-Gen. Corp. v. Transport Indem. Co., 17 Cal.4th 38 (1997) ("[T]he insurers each had a duty to defend all the actions in their entirety - to be precise, each had such a duty separate and independent from the others.").
Finally, many insurers who have sold various forms of liability policies, such as errors-and-omissions policies or directors-and-officers policies, contend that their policies are "indemnity" policies that obligate them to reimburse their insureds for defense costs, rather than to actually assume the defense of their insureds. This, carriers often argue, means that they only have to pay for defense costs as to claims that are actually, rather than potentially, covered.
This is a contention that courts have rejected. For example, in Cheek v. Williams-McWilliams Co., 697 F.2d 649 (5th Cir. 1983), the policy obligated the insurer to pay "all such loss and/or damage and/or expense as the Assured ha[s] become liable to pay." The court applied the "potentiality" standard derived from duty-to-defend cases to determine whether the insured was entitled to reimbursement of defense costs for a claim that it successfully defended.
The court explained: "The parties agree that the protection and indemnity policy does not require Lloyd's to undertake [the insured's] defense; instead, [the insured's] claim against Lloyd's prays for reimbursement of the costs, expenses, and attorneys' fees expended in its successful defense of [the claimant's] claim. Lloyd's ultimate exposure for these defense costs is contingent upon a finding that the liability defended against by [the insured] was one that would have been covered by the policy had the court held for [the claimant]."
The court then ruled that "Lloyd's duty to reimburse [the insured] for the costs of its defense arises if [the insured's] potential liability to [the claimant] would have been covered by the policy." See also Sherwin-Williams Co. v. Certain Underwriters at Lloyd's London, 813 F. Supp. 576 (N.D. Ohio 1993) (holding that insurers "incorrectly assert that the existence of a duty to reimburse defense costs, instead of a duty to defend, somehow alters" the "potentiality" standard).
As the above shows, an insurer's duty to defend is extremely broad. It is triggered by a mere potential for coverage, arises immediately when the insurer learns of a potentially covered claim and continues through the ultimate conclusion of the lawsuit. Thus, insureds should not overlook the substantial value of an insurance carrier's duty to defend.
Kirk Pasich is a litigation partner in the Century City (Los Angeles) office of Howrey Simon Arnold & White. He represents insureds in complex coverage matters and is the author of "Casualty and Liability Insurance" (Matthew Bender 2000).
By Kirk A. Pasich
One of the most valuable provisions in a liability insurance policy is the provision obligating an insurance carrier to defend its insured, or pay its insured's defense costs, in a lawsuit or claim that is potentially covered. The carrier's duty typically will be triggered upon its receipt of notice from its insured.
When the carrier receives notice, it must respond in one of three ways - by acknowledging coverage, with an unqualified assumption of its duty to defend; by acknowledging notice, with an assumption of its duty to defend under a reservation of rights to deny coverage; or by denying coverage, with a refusal to defend. See Truck Ins. Exch. v. Superior Court, 51 Cal.App.4th 985 (1996); Campbell v. Superior Court, 44 Cal.App.4th 1308 (1996).
In many situations, an insured will have a strong argument that it is entitled to at least a defense, even if the carrier ultimately is not obligated to pay for any judgment or settlement. The leading decision is Gray v. Zurich Insurance Co., 65 Cal.2d 263 (1966).
In Gray, the court held that a carrier "must defend a suit which potentially seeks damages within the coverage of the policy." As the court subsequently explained, the duty arises when the carrier "is informed of [an] accident and learns of even the potential for liability under its policy." Samson v. Transamerica Ins. Co., 50 Cal.3d 220 (1981).
This duty is triggered by allegations in a complaint or by facts extrinsic to the complaint "that reveal a possibility that the claim may be covered by the policy." Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076 (1993). The duty arises even when a complaint alleges covered and noncovered acts and even when those noncovered acts predominate. As the Horace Mann court explained, the question is not whether noncovered acts predominate but "whether there is any potential for liability under the policy."
Indeed, the defense duty continues even after a lawsuit results in a judgment against an insured solely on a noncovered ground. An insurance carrier remains obligated to pay for the insured's defense through the resolution of the lawsuit on appeal. See Prichard v. Liberty Mut. Ins. Co., 84 Cal.App.4th 890 (2000).
As Prichard explained: "Just because evidence has closed in the underlying case does not mean the facts against the policy holder have necessarily calcified. Here, a new trial might have been granted. Witnesses might have changed their stories or their memories might have improved. The judgment against [the insured] could have been overturned, yet another takes its place on remand. In short, the potential for indemnification liability continued into the appeal period."
Furthermore, a carrier cannot sit back and conduct an investigation to determine whether there might be coverage while it leaves its insured to fend for itself. As the California Supreme Court has held: "The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage. Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf." Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287 (1993).
There has been some dispute as to whether a duty to defend exists when a complaint is neutral, or silent on its face, about the possibility of covered events. The California Supreme Court has held that a carrier must defend in such situations.
For example, in Montrose, the court addressed insurers' duties to defend their insured in a lawsuit alleging environmental contamination. The carriers argued that they owed no duty because the insured had engaged in regular business practices and must have expected or intended the property damage involved.
The court disagreed, stating: "Although the [underlying] complaint was, as the trial court observed, 'neutral' on the question of coverage[,] its allegations sufficed to raise the possibility that [the insured] would be liable for property damage covered by the policies."
California courts also have rejected arguments that there is no duty to defend when it is unclear from the face of the complaint whether a covered event occurred within the policy period. As one court explained, a carrier cannot "properly avoid its duty to defend by relying upon a coverage defense related to a critical issue in the underlying lawsuits, to wit, that there was no 'occurrence' during the policy period." County of San Bernardino v. Pacific Indem. Co., 56 Cal.App.4th 666 (1997).
Furthermore, a carrier cannot ignore its duty to defend by arguing that the underlying plaintiff will not recover against the insured or that the allegations are meritless.
As another court has explained: "[A]n insurer cannot avoid the duty to defend merely by concluding, based on its own investigation, that the insured has done no wrong. Indeed, the duty of defense covers third party claims that are 'groundless, false or fraudulent.' In short, an insurer's determination that an insured is not liable on a third party claim does not provide a basis for escaping the duty to defend." A&H Plating Inc. v. Am. Nat'l Fire Ins. Co., 57 Cal.App.4th 427 (1997).
When a carrier's duty to defend is triggered, it cannot refuse to defend in anticipation that another carrier might defend and cannot agree only to pay a pro-rata share of the defense. In fact, a carrier's offer to pay only a share of the defense is "the equivalent of a defense denial. Such a unilateral limitation of [a carrier's] responsibility is not justified. If it owes any defense burden it must be fully borne with allocation of that burden among other responsible parties to be determined later." Haskel Inc. v. Superior Court, 33 Cal.App.4th 963 (1995); see also Aerojet-Gen. Corp. v. Transport Indem. Co., 17 Cal.4th 38 (1997) ("[T]he insurers each had a duty to defend all the actions in their entirety - to be precise, each had such a duty separate and independent from the others.").
Finally, many insurers who have sold various forms of liability policies, such as errors-and-omissions policies or directors-and-officers policies, contend that their policies are "indemnity" policies that obligate them to reimburse their insureds for defense costs, rather than to actually assume the defense of their insureds. This, carriers often argue, means that they only have to pay for defense costs as to claims that are actually, rather than potentially, covered.
This is a contention that courts have rejected. For example, in Cheek v. Williams-McWilliams Co., 697 F.2d 649 (5th Cir. 1983), the policy obligated the insurer to pay "all such loss and/or damage and/or expense as the Assured ha[s] become liable to pay." The court applied the "potentiality" standard derived from duty-to-defend cases to determine whether the insured was entitled to reimbursement of defense costs for a claim that it successfully defended.
The court explained: "The parties agree that the protection and indemnity policy does not require Lloyd's to undertake [the insured's] defense; instead, [the insured's] claim against Lloyd's prays for reimbursement of the costs, expenses, and attorneys' fees expended in its successful defense of [the claimant's] claim. Lloyd's ultimate exposure for these defense costs is contingent upon a finding that the liability defended against by [the insured] was one that would have been covered by the policy had the court held for [the claimant]."
The court then ruled that "Lloyd's duty to reimburse [the insured] for the costs of its defense arises if [the insured's] potential liability to [the claimant] would have been covered by the policy." See also Sherwin-Williams Co. v. Certain Underwriters at Lloyd's London, 813 F. Supp. 576 (N.D. Ohio 1993) (holding that insurers "incorrectly assert that the existence of a duty to reimburse defense costs, instead of a duty to defend, somehow alters" the "potentiality" standard).
As the above shows, an insurer's duty to defend is extremely broad. It is triggered by a mere potential for coverage, arises immediately when the insurer learns of a potentially covered claim and continues through the ultimate conclusion of the lawsuit. Thus, insureds should not overlook the substantial value of an insurance carrier's duty to defend.
Kirk Pasich is a litigation partner in the Century City (Los Angeles) office of Howrey Simon Arnold & White. He represents insureds in complex coverage matters and is the author of "Casualty and Liability Insurance" (Matthew Bender 2000).
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