Insurance Litigation: Duty To Defend

Duty To Defend

An important value provided by a liability policy is the insurer’s promise to retain attorneys to handle the defense of a lawsuit on behalf of an insured.  An insurer’s failure to defend sometimes accompanies the insurer’s failure to take advantage of a reasonable opportunity to settle within policy limits, making the failure to defend relevant to bad faith.  A typical commercial general liability policy includes the following:

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages.  However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.  We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

An insurer’s duty to defend turns on the language of the insurance contract and the allegations of the complaint asserted against the insured. The duty to defend is broad, and “it is only where the complaint sets forth true factual allegations showing no coverage that the suit is one for which liability insurance coverage is not afforded and for which the insurer need not provide a defense.” The insurer is obligated to defend where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage. The duty to defend is triggered if the complaint shows only “potential” or “arguable” coverage.

The insurer must liberally construe coverage and defend even if there is only a possibility of coverage. Any doubt as to liability and the insurer’s duty to defend should be resolved in favor of the insured. A carrier is relieved of the duty to defend only if it is clear that the plaintiff can prove no set of facts entitling him to relief. When a plaintiff alleges alternative theories of liability, there is a duty to defend even if a single alternative implicates coverage. The Georgia Court of Appeals has restated these rules as follows:

[A]n insurer is obligated to defend even where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage.  To excuse the duty to defend, the petition must unambiguously exclude coverage under the policy, and thus, the duty to defend exists if the claim potentially comes within the policy.  Where the claim is one of potential coverage, doubt as to liability and insurer’s duty to defend should be resolved in favor of the insured.

Landmark Am. Ins. Co. v. Khan

A recent example of the application of these rules is Landmark Am. Ins. Co. v. Khan. In that case, a claimant was shot while leaving a nightclub.  The claimant filed a premises liability lawsuit against the insured nightclub, alleging, inter alia, assault and battery by employees of the club.  The insurer denied coverage and refused to defend, relying on an assault and battery exclusion in the policy.  The exclusion had an exception stating that it did not apply if the assault and battery was committed by an employee of the insured while reasonably protecting persons or property. A default judgment in the amount of $2.3 million was entered against the insured. The claimant took an assignment and sued the insurer.  The insurer argued that the claim was excluded because

1. the insurer’s investigation had revealed that the person firing the gun did not fall into the category described by the exception to the exclusion
2. the claimant had not alleged that the assault and battery was committed while protecting persons or property.  Nonetheless, the court ruled that the insurer had breached the duty to defend as a matter of law because the allegations in the complaint did not unambiguously exclude the possibility that the facts could fit within the exception to the exclusion.The duty to defend is separate and distinct from the insurer’s duty to pay a judgment rendered against the insured.

The General Rule

The general rule is that, in making a determination of whether to provide a defense, an insurer is entitled to base its decision on the complaint and the policy.  The insurer is under no obligation to independently investigate the claims against its insured. A different rule applies, however, when the complaint on its face shows no coverage, and the insured notifies the insurer of factual contentions that would place the claim within coverage. In such a situation, the insurer has an obligation to give due consideration to its insured’s factual contentions and to base its decision on “true facts.” In order to base its decision on “true facts,” the insurer must necessarily conduct a reasonable investigation into the insured’s contentions. Requiring such an investigation does not place an unreasonable burden on insurers, especially in light of the availability of the “procedurally safe course” of providing a defense under a reservation of rights and filing a declaratory judgment action to determine its obligations. An insurer who fails to investigate its insured’s contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.