Duty to Defend Under an Insurance Policy
| Publication year | 1983 |
| Pages | 68 |
1983, January, Pg. 68. Duty to Defend Under an Insurance Policy
A major reason that an insured purchases insurance is to secure his defense by the insurer in case of litigation.(fn1) The insurer's duty to defend under an insurance policy is separate, distinct and much broader than its duty to pay for legal liability imposed against its insured.(fn2) This article examines two aspects of an insurer's duty to defend. First, it discusses under what circumstances an insurer's duty to defend arises and the means by which an insurer may fulfill its duty. Second, it examines the consequences of an insurer's wrongful refusal to defend.
The standard insurance policy provides that the insurer shall have the right and duty to defend any action against its insured seeking damages for an event covered under the insurance policy even if the allegations of the action are groundless, false or fraudulent. The two documents that must be examined to determine whether the insurer has a duty to defend are the insurance policy and the complaint against the insured. The complaint by the plaintiff against the insured is referred to here as the primary action.
The general rule is that an insurer's duty to defend its insured is determined solely from the allegations in the complaint in the primary action. The insurer must defend if the allegations in the complaint, even if ambiguous, state a claim which is "arguably" or "potentially" within the policy's coverage. All ambiguities, including those contained in the allegations of the complaint, must be construed in favor of the insured.(fn3)
The insurer has a duty to defend if the complaint alleges several claims for relief, even if one or more of the claims clearly falls outside policy coverage.(fn4) This situation typically arises when the plaintiff pleads in the alternative. For example, in an automobile accident case, the plaintiff in the primary action may allege negligence and willful and wanton acts. Since automobile insurance policies commonly exclude from coverage intentional acts by the insured, the insurer might not be obligated to defend the intentional tort if that was the sole claim. However, because the plaintiff also alleges negligence that is covered by the policy, the insurer has a duty to defend both claims.
If the allegations in the complaint are ambiguous, the insurer must defend when facts are "known or reasonably ascertainable" by the insurer, which might bring the claim within policy coverage.(fn5) The converse is not true. Also, the insurer's duty to defend is not annulled by its knowledge that the allegations are not true.(fn6)
The Supreme Court of California, in the seminal case of Gray v. Zurich Insurance Co. was presented with a variation on this theme. The complaint clearly sought recovery against the insured for an intentional tort. The insurer refused to defend, contending that intentional torts were excluded. The court found the policy in question ambiguous and held that the policy must be interpreted to provide the protection that the insured would "reasonably expect" in light of the nature and kind of risk covered by the policy.(fn7)
The Gray court held that since modern procedural rules focus on facts rather than on theory, the duty to defend is fixed by the facts which the insurer learns from the complaint, the insured or other sources. An insurer has a duty to defend whenever it ascertains facts which give rise to potential liability under the policy and it, "cannot construct a formal fortress of the [plaintiffs complaint] and retreat behind its walls."(fn8) Thus, an insurer may have a duty to defend even though the plaintiff in the primary action alleges only an intentional tort if the facts alleged by the plaintiff could support a recovery of damages against the insured on grounds covered under the policy.
If the insurer can conclusively establish that the allegations against its insured fall outside the policy's coverage, it may refuse to defend or, having initially accepted the defense of its insured, may withdraw. However, the insurer may refuse to defend or withdraw only if the allegations in the complaint are unambiguously excluded from coverage or if the plaintiff's claims against the insured "clearly and unequivocally" no longer potentially fall within the policy's coverage.(fn9) Even if the insurer satisfies this test, if its withdrawal causes prejudice to its insured, the insurer subsequently will be estopped to deny liability under the policy.(fn10)
An insurer has three methods of fulfilling its duty to defend. First, an insurer may defend its insured without a reservation of rights. The general rule is that an insurer which accepts a defense without a reservation of rights is estopped from asserting a...
To continue reading
Request your trial