16.4 The Insurer’s Duties

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

16.4 THE INSURER'S DUTIES

16.401 The Duty to Defend.

A. In General. Most CGL policies impose a duty on the insurer to defend suits against the insured. This duty is set out in the coverage grant for coverage A and coverage B: "We will have the right and duty to defend any 'suit' seeking" damages for the risks insured against. This language not only obligates the insurer to provide a defense but also gives the insurer the right to control that defense. ⁹⁰

Under Virginia law, the duty to defend arises whenever the complaint or motion for judgment against the insured "'alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy.'" ⁹¹ Therefore, an insurer has no duty to defend the insured when,

[Page 717]

"under the allegations of the complaint, it would not be liable under its contract for any recovery therein had." ⁹² Nevertheless, if the allegations might support a judgment for which the insurer would be liable to indemnify the insured, the insurer has a duty to defend the insured. The Virginia Supreme Court has stated, "Only when 'it appears clearly [that the insurer] would not be liable under its contract for any judgment based upon the allegations,' does the company have no duty to defend." ⁹³ The rule that the duty to defend should be determined by looking solely to the policy language and the underlying complaint is often referred to as the "eight corners" rule because it requires courts to consider only the words within the four corners of the policy and the four corners of the complaint. ⁹⁴

An insurance carrier's refusal to defend on the basis of ambiguous allegations is at its own risk, and it will be liable to its insured if, upon development of the facts, the allegations turn out to state a compensable claim. ⁹⁵

If any claim falls within the policy period, the duty to defend against the entire suit includes providing a defense against claims that fall outside the policy period. In Morrow Corp. v. Harleysville Mutual Insurance Co., ⁹⁶ the court noted that

[a]n insurer has a duty to defend the insured against the entire suit, including claims for damages attributable to the non-covered period, regardless of whether the defense costs may be reasonably apportioned between the covered and non-covered periods. Put differently, where the insurer has a duty to defend an insured against part of an underlying suit, the insurer may not mount a defense that is limited to the claims that implicate the periods of coverage and thereby require the insured to provide its own defense for the periods of

[Page 718]

non-coverage. Rather, because of the insurer's absolute duty to protect the insured's interests, the insurer must provide a defense for the entire claim against the insured. ⁹⁷

As a practical matter, to determine whether an insurer has a duty to defend an insured against a suit, a court must decide whether any of the claims asserted in the suit fall within the policy's scope of coverage. ⁹⁸ This analysis is accomplished by comparing the policy terms and the defined scope of coverage with the allegations in the complaint or motion for judgment. ⁹⁹

B. Reservation of Rights. An insurer may choose to defend a suit but reserve the right to deny coverage if it communicates this reservation to the insured in a timely fashion. "A liability insurer is not deemed to have waived, nor be estopped to set up, the defense of lack of coverage if, in its participation in defense of an action against its insured, it fairly informs him of its position and gives timely notice." ¹⁰⁰

However, failure to reserve rights as to a breach of a condition precludes an insurer from later denying coverage. As the Virginia Supreme Court has stated, "when a liability insurer has...