CHAPTER 6 Duty to Defend and Insured Litigation

JurisdictionUnited States
Publication year2019


Duty to Defend and Insured Litigation

§ 6.01 Overview

Liability insurance is also known as litigation insurance because it provides for defense and indemnity obligations.1 This chapter discusses the issues surrounding the defense obligations. First, it looks at the central policy language issue—whether a “suit” exists requiring commencement of an insurance company paid or reimbursed defense.2 It then looks at the general rules concerning the duty to defend,3 issues concerning independent counsel,4 settlement after breach,5 tender,6 umbrella insurance,7 and reimbursement of defense costs.8 Finally, it addresses the topic of insured litigation.9

§ 6.02 Duty to Defend

The second sentence of the standard-form insuring agreement states that “we will have the right and duty to defend the insured against any ‘suit’ seeking those [‘bodily injury’ or ‘property damage’] damages.”10 This is the duty-to-defend language, which is the promise by the insurance company to defend the policyholder in a “suit” potentially covered by the indemnity provisions of the policy. The coverage issues include the existence of a “suit” and allegations potentially within the policy’s coverage grant.


Nowhere in CGL insurance policies is the term “suit” defined. In most cases, a legal action needs to be filed to constitute a “suit.” In the environmental context, there is a dispute as to whether a “potentially responsible party” (“PRP”) letter constitutes a “suit” triggering the defense obligation.11 The insurance companies argue that “suit” is limited to actions filed in a court of law,12 while policyholders maintain that the term includes out-of-court legal proceedings, such as administrative enforcement actions initiated by the Environmental Protection Agency (“EPA”).13

It is undisputed that the term “suit” includes a court proceeding. Similarly, the term “suit” has also been defined in terms of legal process outside a court of law. For example, Webster’s Dictionary, on which courts have relied for definitions of undefined insurance policy terms,14 “suit” is “the attempt to gain an end by legal process: prosecution of right before any tribunal.”15 The existence of such alternative dictionary definitions establishes that the term “suit” is ambiguous at minimum.16

In addition, the majority of courts that have addressed this issue have determined that a PRP letter17 constitutes a “suit.”18 Indeed, the majority of state courts (including the majority of courts of last resort) that have addressed the “suit” issue have held government enforcement actions are “suits” that insurance companies must defend.19 Likewise, the majority of federal courts applying state law have also determined that a PRP letter constitutes a “suit.”20 There is only a small minority of decisions holding that PRP letters are not “suits.”21 Conflicting judicial viewpoints reinforce this ambiguity:

“The determination that ‘sudden and accidental’ [as used in the “qualified” pollution exclusion] is an ambiguous phrase is supported by a large amount of conflicting authority. Although the mere existence of conflicting authority does not establish the ambiguity of a contract term, ‘this type of comprehensive debate dispels the insurer’s contention that the exclusionary language is clear.’ ”22

Under most states’ laws, insurance policy ambiguities are resolved in favor of coverage.23 Thus, the term “suit” should be construed broadly and in favor of coverage, including as applying to legal proceedings other than court actions initiated by complaints, such as EPA enforcement actions initiated by PRP letters.

The majority view is in fact supported by sound reasoning or namely, that an EPA enforcement action initiated by a PRP letter is akin to a lawsuit initiated by complaint:

“The EPA processes for the enforcement of obligations to aid in the cleaning up of environmental pollution have moved away from the use of lawsuits toward the use of agency demands for participation in remedial action. Those requests are dangerous for the alleged polluter to ignore because they often result in dispositive, extrajudicial solutions. The consequences of the receipt of [an] EPA [demand] letter [are] so substantially equivalent to the commencement of a lawsuit that a duty to defend [arises] immediately.

“The EPA demand letter is not the same as a conventional demand letter based on a personal injury claim. The identification of an insured as a ‘potentially responsible party’ (PRP) has more serious consequences than a demand letter in a personal injury case. For example, the insured can be fined for failure to cooperate in the EPA’s process of cleanup. In addition, if the EPA ultimately recovers the costs of cleanup, the insured’s failure to settle before any legal action by the EPA could increase the amount of recovery against the insured.

“The insured’s obligation to respond positively to the [EPA’s demand] letter [is] strong. The prospects of avoiding financial responsibility [are] minimal because liability is not based on fault. Moreover, the risk to which [the insured is] exposed [is] substantial because, as a practical matter, its liability is joint and several. Early involvement in the settlement discussions is thus often crucial to protect one’s interests. Any court action by EPA is limited to the administrative record, and judicial review considers only whether the EPA ‘decision was arbitrary and capricious or otherwise not in accordance with law.’ Thus participation in the development of that record can be crucial. Settlement of EPA claims against potentially responsible parties, with protection against claims for contribution, is a desired goal. The situation [is] such that opportunity to protect [the insured’s] interests could well [be] lost, long before any lawsuit would be brought. It would be naive to characterize [an] EPA [demand] letter as a request for voluntary action. [The insured has] no practical choice other than to respond actively to the letter.”24

Such reasoning is supported by important public policy interests. Any distinction between “claim” and “suit” would place perverse incentives on non-cooperation with the EPA, because non-cooperation would be the only mechanism through which a policyholder could ensure insurance coverage.25 Non-cooperation would force the EPA to initiate a lawsuit and thereby trigger a policyholder’s right to a defense. Such a position would obviously impede environmental cleanup efforts, and it would effectively amount to a waste of precious judicial resources. Further, permitting policyholders to do indirectly that which they could not do directly flies in the face of all logic and reason. As stated by the Michigan Supreme Court:

“[F]rom a policy perspective, . . . the position urged by [the insurance companies] would only increase the litigiousness of this already extensively litigated area of the law. Limiting an insurer’s duty to defend to an actual court proceeding preceded by a complaint would merely encourage PRPs to decline voluntary involvement in site cleanups, waiting instead for an actual lawsuit to be brought in order to receive insurance coverage. This would have the effect of substantially protracting the cleanup of contaminated sites.”26

[2]—General Rules Regarding the Duty to Defend

Once a suit is found to exist, there are a number of rules to aid in ascertaining whether the duty has been implicated by such “suit.” An insurance company’s duty to defend is interpreted expansively. Indeed, the duty to defend is independent of, and broader than, the duty to indemnify, meaning the duty to defend might be owed even in circumstances where the duty to indemnify is not owed.27

Initially, the duty to defend is determined exclusively from the insurance policy and the allegations made against the policyholder in the underlying action.28 However, even when the underlying complaint’s allegations do not trigger an insurance company’s duty to defend, the insurance company must nonetheless defend its policyholder if it later discovers facts establishing a possibility of coverage.29 On the other hand, in some jurisdictions, when the underlying complaint establishes a duty to defend, an insurance company may not deny that defense based on actual facts that it later discovers in the underlying action.30

An insurance company is also under a duty to defend its policyholder whenever the allegations or the actual facts in the underlying action potentially or even arguably come within the scope of the policy coverage.31 Significantly, it is the facts alleged, not the theories asserted, that determine the existence of a duty to defend.32 For example, if a complaint “contains ambiguous or incomplete allegations and does not state facts sufficient to bring a case clearly within or without the coverage,” the insurance company is obligated to defend its policyholder.33

When the duty to defend attaches, the insurance company cannot pick and choose which claims to defend, but is required to defend all claims—whether excluded or potentially covered—that arise from the same occurrence in which the potentially covered claim arises.34

Any doubts regarding the allegations of the underlying action or the scope of coverage are construed in favor of finding a duty to defend.35 This rule follows the more general rule of insurance policy construction that any ambiguities in the interpretation of insurance policy terms are resolved in favor of the policyholder.36

The duty to defend may also include a duty to settle within policy limits if it is reasonable to do so. The insurance company has an affirmative duty to seek to protect its policyholder against any excess liability by making reasonable effort to settle within the policy limits, and the insurance company’s failures in this regard, to the extent it has acted unreasonably, may expose it to liability in excess of the indemnity limits set forth in the policy.37

[3]Independent Counsel

[a]—Right to...

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