Determining an Insurer's Duty to Defend, 0713 ALBJ, 74 The Alabama Lawyer 239 (2013)

AuthorWilliam E. Shreve, Jr.

Determining an Insurer's Duty to Defend

Vol. 74 No. 4 Pg. 239

Alabama Bar Lawyer

July 2013

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 William E. Shreve, Jr.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Under most policies of liability insurance, insurers have a duty to defend their insureds.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0This means that when a claimant sues an insured, and the lawsuit includes a claim that is covered by the insurers policy, the insurer must hire defense counsel for the insured and pay the cost of defending. This duty is separate from the insurers duty to indemnify the insured against covered damages.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Insurers who wrongfully refuse to defend expose themselves to liability for breach of contract and, in some cases, for bad faith. Also, when an insurer denies a defense, it loses control of the litigation against the insured, who may not adequately defend the suit. In fact, insureds have been known to consent to adverse judgments in exchange for the claimants agreeing to attempt collection only from the insurer. As a result, the insurer maybe faced with a demand to pay a judgment without having had any say-so in the defense. Thus, when a claimant sues an insured, it is important that the insurer make the right decision whether to defend.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The general rule controlling the duty to defend seems simple enough: "An insurance company's duty to defend its insured is governed by the language of the insurance policy and by the allegations of the complaint.... If the allegations accuse the insured of actions for which the insurance company has provided protection, the insurance company is obligated to defend the insured." Ajdarodini v. State Auto Mut. Ins. Co., 628 So.2d 312, 313 (Ala. 1993). But determining whether a complaint "accuse [s] the insured of actions for which the insurance company has provided protection" is not always easy. The policy may be unclear as worded, or as applied to the claimants allegations. The complaint may assert a mixture of covered and non-covered claims, or it maybe vague, ambiguous or contradictory. Facts outside the complaint may tend to show that coverage does or does not exist.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0This article discusses the process of determining an insurer's defense obligation, including policy interpretation and construction, what to look for in the complaint and use of extrinsic facts to establish or negate a duty to defend. Since complaints often assert both covered and non-covered claims, or leave it uncertain whether the insurer owes a defense, the article also discusses defending under reservation of rights.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Reading the Policy

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Insurance policies, like other contracts, are agreements expressing the parties' intent. See Alabama Farm Bureau Mut. Cas. Ins. Co. v. Goodman, 279 Ala. 538, 188 So.2d 268, 270 (1966). They typically include a broad grant of coverage followed by exclusions that narrow coverage. When an insured tenders a complaint for defense, the insurer must review the coverage grant and exclusions to determine whether they (a) unambiguously express an intent that the insurer would defend the claims asserted, (b) unambiguously express an intent that the insurer would not defend the claims or (c) are ambiguous as to what the parties intended.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Certain principles guide the determination of intent. The law presumes the parties intended to adopt prior judicial constructions of words and phrases used. See Alabama Plating Co. v. United States Fidelity & Guar. Co., 690 So.2d 331, 336 (Ala. 1996) (quoting Couch on Insurance § 15:20 (2d ed. 1984)). Otherwise, the policy language should generally be given its "common interpretation, " that is, the meaning that "persons with usual and ordinary understanding would [ascribe to the words] when used to express the purpose for which they were employed." Alabama Farm Bureau, 188 So.2d at 270. However, words that have "acquired a peculiar sense distinct from [their] popular sense, " as "by the known usage of trade, " are to be "understood in [that] special and peculiar sense." Mobile Marine Dock & Mut. Ins. Co. v. McMillan & Son, 27 Ala. 77, 98-99 (1855) (construing marine policy). See also 2 Allan D. Windt, Insurance Claims & Disputes § 6:2 (5th ed. Westlaw 2012) ("For example, the words used in an aviation policy may have the technical meaning used in the aviation industry, such that the common everyday meaning of those words should not control"). Also, policy definitions are controlling, even if they are different from the defined terms' ordinary meanings. See Twin City Fire Ins. Co. v. Alfa Mut. Ins. Co., 817 So.2d 687, 692 (Ala. 2001); Fate v. Allstate Ins. Co., 692 So.2d 822, 824 (Ala. 1997). Dictionaries maybe consulted to ascertain the ordinary meanings of terms that the policy does not define. See Safeway Ins. Co. v. Herrera, 912 So.2d 1140, 1143-44 (Ala. 2005); Carpet Installation & Supplies v. Alfa Mut. Ins. Co., 628 So.2d 560, 562 (Ala. 1993).

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Particular wording should be viewed in the context of the whole policy rather than in isolation. See State Farm Fire & Cas. Co. v. Slade, 747 So.2d 293, 309 (Ala. 1999). Each term should be given effect if possible. See Sentry Ins. Co. v. Miller, 914 F.Supp. 496, 500 (M.D. Ala. 1996), aff'd in part, rev'd in part, 114 F.3d 1202 (11th Cir. 1997). The interpretation should be "rational and practical." American Resources Ins. Co. v. H&HStephens Constr, Inc., 939 So.2d 868, 873 (Ala. 2006). Use of "strained or twisted reasoning" to try to create or avoid coverage is inappropriate. Twin City, 817 So.2d at 692.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Policy language that is reasonably certain in its meaning, both as written and as applied to a particular claim, is unambiguous. See State Farm Mut. Auto. Ins. Co. v. Brown, 26 So.3d 1167, 1169 (Ala. 2009); 2 David L. Leitner, Reagan W Simpson & John M. Borkman, Law & Practice of Insurance Coverage Litigation § 23:16 n.9 (Westlaw 2012). In such cases, there is no need to resort to rules of construction, and the policy should be enforced as written (i.e., as either providing or not providing a defense). See Alabama Farm Bureau, 188 So.2d at 270; Safeway, 912 So.2d at 1143. While courts sometimes state without qualification that policies are to be construed in favor of the insured and exclusions should be construed as narrowly as possible, those rules have no application if the policy is unambiguous. See Jones v. Liberty Nat'l Life Ins. Co., 357 So.2d 976, 977 (Ala. 1978); St. Paul Mercury Ins. Co. v. Chilton-Shelby Mental Health Ctr., 595 So.2d 1375, 1377 (Ala. 1992).

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Policy language that is "reasonably susceptible to two or more constructions, " or whose meaning is subject to "reasonable doubt or confusion, " is ambiguous. State Farm, 747 So.2d at 308-09. Ambiguity can be "patent, i.e., existing on the face of the policy, or latent, i.e., arising only when one attempts to apply the language to actual facts." Leitner, et al., supra § 23:16 n.9. Since the latter depends on the factual context, a provision that is ambiguous as to one claim maybe unambiguous as to another. See Porterfield v. Audubon Indem. Co., 856 So.2d 789, 805-06 (Ala. 2002) (pollution exclusion ambiguous as to lead paint flaking inside apartment); Federated Mut. Ins. Co. v. Abston Petroleum, Inc., 967 So.2d 705, 708-13 (Ala. 2007) (pollution exclusion unambiguous as to gasoline leaking from underground lines).

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0When a policy is ambiguous, the "construction will be adopted which is favorable to the insured." State Farm Mut. Auto. Ins. Co. v. Hanna, 277 Ala. 32, 166 So.2d 872, 876 (1964). This is based on the doctrine oi contra proferentum, that ambiguities in a contract are construed against the drafter. See First Mercury Syndicate, Inc. v. Franklin County, 623 So.2d 1075, 1077 (Ala. 1993); Jehle-Slauson Constr. Co. v. Hood-Rich Architects & Consulting Eng'rs, 435 So.2d 716, 720 (Ala. 1983). This doctrine is applied in ordinary contract cases as a "last resort, " after other rules of construction have failed to resolve ambiguity. See Lackey v. Central Bank, 710 So.2d 419, 422 (Ala. 1998). In insurance cases, though, it has come to be applied automatically upon finding ambiguity. See 1 Leitner, et al., supra § 1:11.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0There are several justifications for this automatic application of contra proferentem: One, insurance policies are contracts of adhesion; two, there is usually no evidence of intent other than the policy itself; and three, the insurer could have better drafted the policy. See id.; Arriaga v. Florida Vac. Farms, LLC, 305 F.3d 1228, 1247-48 (11th Cir. 2002); Castleberry v. Goldome Credit Corp., 418 F.3d 1267, 1271-72 (11th Cir. 2005). Automatic contra proferentum has been criticized, however, because it may result in coverage that the parties did not intend and for which the insured did not pay. See Leitner, et al, supra § 1:11. In any event, some Alabama insurance cases indicate that where extrinsic evidence of intent does exist, a court or jury may consider such evidence before resorting to contra proferentum. See Molton, Allen & Williams, Inc. v. St. Paul Fire & Marine Ins. Co., 347 So.2d 95, 99 (Ala. 1977) (ambiguities construed against insurer if "circumstances surrounding the [policy] do not make the terms clear"); Alfa Ins. Corp. v. Johnson, 822 So.2d 400, 404-05 (Ala. 2001); United States Fidelity & Guar. Corp. v. Elba Wood Prods., Inc., 337 So.2d 1305, 1308 (Ala. 1976); see also Windt, supra § 6:2.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The fact that the parties differ, or that courts have differed, in their interpretation of particular language does not alone make it ambiguous and subject to contra...

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