The Professional Liability Insurer's Duty to Defend-part Ii
| Publication year | 1986 |
| Pages | 1029 |
1986, June, Pg. 1029. The Professional Liability Insurer's Duty to Defend-Part II
This is the second part of a two-part article dealing with the rights and obligations of the professional liability insurer ("Insurer"). Part I, published in the May issue at 799, concentrated generally on the Insurer's "duty to defend." This Part II discusses specific coverage issues relating to the duty to defend.
An Insurer's obligations to defend may be complicated by the existence of "coverage issues." Coverage issues generally fall into two categories. One type of coverage issue arises when the insured ("Insured") breaches a policy obligation; for example, when the Insured fails to give prompt notice of a claim or refuses to cooperate with the Insurer. The Insured also breaches the policy if the Insured fails to disclose to the Insurer, at the time of applying for the policy, the likelihood of a claim. If the Insured "had a basis to believe that the Insured had breached a professional duty" and conceals this from the Insurer, coverage will be denied and the policy will be rescinded and voided ab initio.(fn1)
More commonly, a coverage issue arises when the claimant seeks to impose liability on the Insured as a result of conduct not covered by the policy. All professional liability policies reflect public policy in that they do not provide coverage for "dishonest, deliberately fraudulent, criminal, maliciously or deliberately wrongful acts or omissions committed by the Insured." Moreover, the Insurer will not indemnify for punitive or exemplary damages or fines (e.g., RICO's trebled damages).
One common coverage issue arises when a claimant alleges both negligent and fraudulent conduct. Another less common situation is when an attorney is sued in connection with transactions wherein the attorney had a personal business interest. The professional liability policy insures against negligence and certain other acts of an attorney when offering professional advice. It is not intended to protect the attorney from allegations of poor business judgment.
The Insurer does not have to defend every complaint which names an attorney as a defendant. One court stated:
The general rule is that the obligation to defend is measured by comparing the terms of the insurance policy with the pleadings of the claimants who sue the insured.(fn2)
If the complaint alleges both covered and noncovered conduct, the Insurer must defend all claims. In this respect, the duty to defend is broader than the duty to indemnify. The Insurer must defend if there is any "potential" for indemnity.(fn3)
If a coverage issue is present, the Insurer must undertake the defense and promptly reserve its rights to later deny or limit liability. Such reservation should specifically recite the basis for denial of coverage.(fn4) It may be better for the Insurer and the Insured to enter into a "non-waiver" agreement whereby the Insured recognizes that the Insurer's provision of a defense is not a waiver of the Insurer's right to deny coverage. If the Insurer fails to reserve its rights and the Insured is prejudiced thereby, the Insurer may be held to have waived its right to deny coverage.(fn5)
The existence of a coverage issue does not absolve the Insurer of its duty to defend. Furthermore, the Insurer is bound by its obligation of good faith not to take action prejudicial to the Insured. However, if a coverage issue does exist and if the facts developed at trial will resolve...
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