Thursday, October 26, 2006

The Duty to Defend and Insurance Law Blogs

My latest column for the Legal Intelligencer is now online here.

I give a beginner's course in what the duty to defend is and how it works, and then turn to two insurance law bloggers to illustrate the principles in practice. They are Marc Mayerson of Insurance Scrawl, whose practice, like mine, stresses the policyholder's rights, and David Rossmiller of the Insurance Coverage Law Blog, who represents both insurance companies and policyholders.

Here's Mayerson's explanation of what the "duty to defend" means:

A liability insurer’s promise to defend its insured is at the core of the protection purchased by policyholders and, in most states, the insurer will be required to defend any suit alleging facts that possibly could result in a judgment against the insured that would be covered by the policy’s duty to indemnify. A duty to defend will be found where the undisputed facts surrounding a claim – typically the language of the policy and the allegations of the complaint – permit proof of a claim potentially covered by the duty to indemnify. The complaint-allegations test, or what some jurisdictions term the eight-corners rule, results in the duty to defend being found by courts easily, commensurate with the broad contract language and the policy’s intention to afford the insured “litigation insurance” protecting against the risk and burden of litigation.

In any given liability case, the insured defendant might win, in which event no indemnity would be required, or the insured defendant might lose the case on a ground that is outside the scope of coverage; nothwithstanding the possibility of results where the insurer will not have a duty to indemnify the policyholder, the insurer still has a duty to assume the defense, which matures at the outset of the liability case. Because the duty to defend arises based on the possibility of the duty to indemnify a complaint, rather than based on a prediction of the likely outcome or indeed the actual outcome, we typically say that the duty to defend is broader than is the duty to indemnify.

Although an insurer's duty to defend will be triggered if the allegations raise the possibility of a duty to indemnify, sometimes the complaint is unclear whether nestled within the allegations is a potentially covered claim.
Mayerson points to the Eleventh Circuit’s October 16 decision, Hartford Acc. & Indem. Co. v. Beaver, in which an insurance company was required to provide a defense to a putative class action prior to class certification, where there was only a possibility that there would be class members whose claims would be potentially covered. Because “the fight over class certification is often the whole ball game,” the purpose of litigation insurance would be defeated if the policyholder were left “without a defense until after a decision on class certification.”

Rossmiller's post looks at the case of a man named Cook who fatally shot a man named Barber in the stomach with a shotgun. New York's highest court ultimately decided that Cook's insurance company was required to defend him in a civil action brought by Barber's estate, even though Cook admitted that he intended to shoot Barber (just not fatally). As Rossmiller puts it: “Not surprisingly and probably solely to try to draw in insurance coverage, the Barber estate’s complaint alleged that Cook negligently killed Barber, as an alternative to a claim for intentional killing.”

Because accidents are generally covered by liability insurance, and the complaint standing alone did not rule out an accident, the policy’s intentional acts exclusion could not relieve the insurance company of its duty to defend.

These seemingly extreme cases help ensure that insurance companies honor their policyholders' expectations that when they buy litigation insurance, they get a defense when they are drawn into litigation.

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