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An Insurer’s Duty to Defend

It is well established that an insurer’s duty to defend an insured party is much broader than its duty to indemnify that party. This applies to homeowner’s policies, car insurance, property insurance and business policies, such as workers’ compensation coverage and comprehensive general liability (CGL) policies. This means that an insurance company may have to shoulder the court costs and attorney fees associated with defending an insured person, even if the insurance company may not have to pay for all the damages under the claims alleged or established during the course of an action. An insured party has a right to a defense provided by the insurance company for all claims under which the insured would incur liability if the claims were proven true. This even includes alleged claims that may be groundless, fanciful, or fraudulent. Claimants may even structure their allegations in order to recover under insurance policies of which they are aware or that they suspect may exist. In doing so, they will also trigger the duty of an insurance company to defend the insured party against whom claims are being brought.

This duty to defend is not without limits. Insurance policies are written for specific purposes, contain coverage limitations and exclusions, and typically even have specific provisions regarding the company’s defense obligations that have been included expressly to address issues about defense costs that may arise when the insured faces claims and possible litigation. Increasingly, insurance policies are written with aggregate limits, meaning that once the combined cost of a legal defense and payment of coverage exceeds the limits of a particular policy, the insurance company may no longer be obliged to continue providing a defense for its insured. Not infrequently, an issue will also arise as to whether the insurance policy in question was in force on the date of the incidents giving rise to the claims alleged.

Insurance companies commonly issue a reservation of rights to the people they insure. Such notice, or a nonwaiver agreement, will protect the company from having to pay for the legal defense once it is established that none of the remaining claims fall within the coverage of a policy. Some states allow such reservations of rights to be effected unilaterally by the insurer; others require the insurance company to enter into these agreements with the informed consent of the insured. If presented with a nonwaiver agreement, an insured may find it advisable to consult with an attorney to understand the terms of the agreement and, if necessary, to help negotiate the terms.

Another issue that can arise from claims potentially falling under coverage provided by an insurance policy is a conflict of interest between the interests of the insurance company and the interests of the insured party. Many insurance policies exclude damages resulting from intentional conduct. By implication, damages caused by negligence will also be included in most such claims. The insured will want to show, if necessary, that the damages resulted, at best, from negligent conduct, while the insurance company, to avoid paying a claim, will have a vested interest in establishing that the damages were intentionally caused and are, thereby, excluded from the coverage provided under the policy. While the insurance company may be able to appoint the legal counsel, some jurisdictions require that this counsel represent the insured with the utmost fidelity and under the strictures of the attorney-client privilege, even though the insurance company is paying the costs of the legal defense. In other jurisdictions and in certain situations, especially those involving parallel criminal charges, it may be advisable or required for an insured to obtain separate counsel, even if the insurance company remains liable for the costs of an independent defense. While counsel is bound by rules of professional conduct to report to the court and sometimes to others when a client’s conduct amounts to fraud, the attorney-client privilege may govern other revelations that evidence a divergence of interests between an insurance company and its insured. Additionally, the insured party, whether represented separately or by counsel chosen by the insurance company, has a duty to cooperate with the insurer in the defense of the claims.

If an insurance company refuses to defend an insured at the outset of the claim process, it may incur liability for all damages and costs of the defense if it is later shown that this duty was wrongly violated. Typically, an insurance company with serious reservations about its obligations to defend an insured party will institute a separate lawsuit involving the duty to defend the insured. An insured party can also file such a lawsuit. This type of action is called a declaratory judgment; it is a means for the insurance company or an insured party to seek an opinion from the court regarding the insurance company’s duty to shoulder the costs of the legal defense against the claims asserted. The insured may need to retain separate counsel for such proceedings, seeking reimbursement for defense costs if the court reaches a judgment adverse to the insurance company.

Finally, once an insurance company has paid to the limits of liability under a policy, sometimes reached on an aggregate basis calculating both legal defense costs and damages, its duty to defend may end. Thus, it may be important for an attorney handling a defense to advise the insured and the insurance company about the best settlement strategies and timing with respect to particular claims. Failure to do so may leave an insured party with a partially settled case and only partially paid-for defense. Particularly for individuals with large net worth and for companies, it may be advisable to consult an attorney regarding realistic coverage limits. This will help ensure that the types of policies an individual or company maintains and the coverage provided under them are adequate to meet any possible claims and the costs of defending against them.

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