The Professional Liability Insurer's Duty to Defend-part I

• Publication year: 1986
• Pages: 799
• Citation: Vol. 15 No. 5 Pg. 799

15 Colo.Law. 799 Colorado Lawyer 1986.

1986, May, Pg. 799. The Professional Liability Insurer's Duty to Defend-Part I

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799

Vol. 15, No. 5, Pg. 799

The Professional Liability Insurer's Duty to Defend---Part I

by Pat McCune

Most attorneys are aware of the dramatic increase in the number and severity of legal malpractice claims. Therefore, attorneys should be knowledgeable about their obligations and rights as insureds ("Insureds"), as well as the obligations and rights of the professional liability insurers ("Insurers"). This article is presented in two parts. Part I concentrates generally on the Insurer's "duty to defend." Other obligations may be identified broadly as the Insurer's "duty to settle" and "duty to indemnify," areas not discussed here. Part II of this article, to be published in the June 1986 column, will discuss specific coverage issues relating to the duty to defend.

Any treatment of a professional liability Insurer's obligations and rights should start with the recognition of two axioms. Initially, the insurance contract will control and be construed to establish the Insurer's and the Insured's obligations and rights; ambiguities will be construed against the Insurer and in favor of the Insured so as to establish coverage and impose obligations upon the Insurer. Furthermore, professional liability insurance contracts are subject to most of the rules applicable to other types of "third party" liability insurance contracts.

The second axiom is that courts impose upon both parties, and especially upon the Insurer, the obligation to act toward the other party in "good faith."

It is well established that the law imposes upon the insurer the duty to exercise diligence, intelligence, good faith, and honest and conscientious fidelity to the common interest of the insured as well as itself. . . .(fn1)

A breach of the obligation of good faith may create a tortious cause of action against the Insurer for "bad faith."(fn2)

Bad Faith in Colorado

The subject of Insurer "bad faith" in Colorado recently has received much attention(fn3) and, therefore, will be only briefly mentioned here. Most notably, the tort of "bad faith breach of an insurance contract" in Colorado recently was explained by the Colorado Supreme Court in Farmers Group, Inc. v. Trimble.(fn4)

In Trimble, the Insured injured the claimant when an automobile was driven onto a residential lot. The automobile liability Insurer (Farmers Insurance Exchange) undertook the Insured's defense, but reserved coverage on the basis of the policy exclusion for "intentional acts." Thereafter, it was discovered that the Insured's homeowner's policy with Mid-Century Insurance Co. ("Mid-Century") might provide coverage as well under certain theories of liability. Partly because of the possibility of coverage by Mid-Century, Farmer's refused to settle for its policy limits. The Insurers then initiated a declaratory action seeking a determination of which policies covered which claims.

The Insured counterclaimed in the declaratory action, alleging misconduct on the part of Farmers in handling the claim. The Insured alleged negligence, willful breach of contract, bad faith breach of insurance contract, breach of the implied covenant of fair dealing, outrageous conduct and intentional infliction of emotional distress. The underlying claimant's action then settled. The Insured's counterclaims in the declaratory action were dismissed and the Insured appealed to the Colorado Court of Appeals.

The Colorado Court of Appeals(fn5) reversed the dismissal of certain of the Insured's counterclaims. The court held that in Colorado the tort of bad faith is characterized by intentional or willful conduct.(fn6) The Insurers appealed and the Colorado Supreme Court granted certiorari "to consider whether evidence of intentional conduct is necessary to establish the tort of bad faith breach of an insurance contract."

The Supreme Court set forth the standard of conduct for an Insurer in Colorado, as follows:

The basis for liability in tort for the breach of an insurer's implied duty of good faith and fair dealing is grounded upon the special nature of the insurance contract and the relationship which exists between the insurer and the insured. The motivation of the insured...