duty to defend

Subscribe to duty to defend via RSS

The “Four Corners rule” (a.k.a. the “Eight Corners rule”) is the foundation for many states’ common law regarding the Duty to Defend under liability policies. Under that regime, the court treats “the underlying complaint and the insurance policy” as “the only documents relevant” to deciding whether an insurer owes the policyholder a duty to defend.  Badger Mining Corp. v. First Am. Title Ins. Co., 534 F. Supp. 3d 1011, 1020 (W.D. Wis. 2021); 1 General Liability Insurance Coverage § 5.02 (5th ed.) (providing a “50-State Survey: Duty to Defend Standard: ‘Four Corners’ or Extrinsic Evidence?”).

The rule presents a problem for policyholders when the complaint’s allegations do not raise a duty to defend on their face, however, during the course of the litigation, it becomes apparent that claims that do give rise to a duty to defend are, in fact, at issue.  If the case is pending in federal court, policyholders can assert the “constructive amendment doctrine”; that is, that the complaint has been effectively amended to include the unpleaded claims and, therefore, the insurance company should provide a defense.Continue Reading Expanding the “Four Corners” rule through constructive amendment

On December 29, 2023, an Arkansas court in the case of Walmart, Inc. v. ACE Am. Ins. Co., 04CV-22-2835-4, 2023 WL 9067386, (Ark. Cir. Ct. Dec. 29, 2023) found that defendant insurers owe Walmart a duty to pay or reimburse defense costs that Walmart incurred while defending prescription opioid liability lawsuits. 

Like many in the pharmaceutical supply chain, Walmart is a defendant in thousands of lawsuits filed by state and local government entities acting in their parens patriae capacity. These lawsuits allege that Walmart knowingly, recklessly, or negligently caused bodily injuries, like addiction, death, and property damage, by failing to monitor, detect and report suspicious orders of prescription opioids. In 2022, Walmart entered into a “National Settlement” that resolved many of those governmental suits. The settlement reimbursed costs the government plaintiffs alleged they incurred for treating its citizens’ bodily injury and property damage.  Walmart sought defense and indemnity coverage from AIG and other insurance companies providing excess coverage under its general liability policies. The insurers denied coverage.Continue Reading A win for Walmart! An Arkansas court finds insurers have a duty to defend certain prescription opioid liability lawsuits

At least since the California Supreme Court’s ruling in Buss v. Superior Court, 939 P.2d 766 (Cal. 1997), insurance companies have urged courts to let them sue their own policyholders to recoup the costs that the insurance companies paid to defend their policyholders if, at the end of the day, some or all of the claims are excluded from coverage. The Hawaii Supreme Court is the latest state supreme court to reject the Buss approach, instead requiring the insurance company to bear the full cost of its duty to defend.Continue Reading Hawaii Supreme Court rejects insurance company claims for defense expense reimbursement

In addition to insurance companies’ broad duty to defend all claims arising from complaints seeking damages potentially covered by their policies, Pennsylvania law provides an opportunity for policyholders to have their insurance companies pay for litigation costs associated with claims and/or suits that overlap or are intertwined with a suit the insurance company is already defending.  

The magic words are “inextricably intertwined”

Policyholders may seek defense costs for related litigation if those claims are made as: (1) counterclaims in suits the insurance company is already defending, or (2) separate, independent lawsuits with facts or defense work that overlap with a suit the insurance company is defending. The insurance company’s duty to defend such related claims is not automatic, however. Pennsylvania courts make it clear that in both instances, the cases or claims must be “inextricably intertwined” in order to trigger the insurance company’s obligation to pay litigation costs.Continue Reading Insurers must foot the bill for “inextricably intertwined” counterclaims in Pennsylvania 

In a world of uncertainty, few things in life are more guaranteed than liability insurers reflexively rejecting claims for pre-notice defense costs, even where there is no legitimate or principled basis to do so. In a perfect world, insureds would immediately notify their insurers as soon as a claim or suit arises to avoid insurers refusing to pay or credit pre-notice defense costs. But companies operating in the real world for various reasons sometimes investigate and defend claims or suits before formally notifying their insurers.  In that circumstance, insurers should not be permitted to avoid their coverage obligations for so-called “pre-tender” defense costs for each of the following reasons.

Many courts only require notice to the insurer – not “magic words” or a formal “tender” – to trigger an insurer’s defense obligations

Insurers often argue their defense obligations only arise after the insured formally “tenders” or specifically requests a defense of a claim or suit, even though many courts have flatly rejected this premise. E.g., White Mountain Cable Constr. Corp. v. Transamerica Ins. Co., 631 A.2d 907, 910 (N.H. 1993) (“in order for an insured to tender the defense to the insurer, it need only put the insurer on notice of the claim”). Indeed, many courts correctly have held that the insurer’s defense obligations are triggered upon receipt of “actual notice” from any source – even if not directly from the insured seeking coverage. E.g., Cincinnati Cos. v. West Am. Ins. Co., 701 N.E.2d 499, 505 (Ill. 1998) (“the insurer’s duty to defend is triggered by actual notice of the underlying suit”).  Absent specific policy language or legal precedent to the contrary, insureds should not be required to formally “tender” or request a defense to obtain the benefit of its coverage once the insurer is on notice of the claim or suit – particularly where the insurance policy delegates the duty to defend to the policyholder rather than the insurer.Continue Reading Maximizing recovery of pre-notice defense costs: Considerations for policyholders

If an insurance company owes a duty to defend, the dispute should be decided promptly, on the pleadings. Any delay undermines the duty to defend. The scope of the duty to defend should be adjudicated on the pleadings as quickly as possible to give policyholders the true value of their policies and the benefit of their contracts.

The value and purpose of the duty to defend

The duty to defend is one of the most valuable components of an insurance policy. Like it or not, American society is litigious. Companies cannot prevent lawsuits through good conduct, laudable intentions, or strong compliance programs.  Refuting liability and damages is expensive even if the core facts are undisputed or the case is frivolous.

For a single company or individual, the frequency and size of litigation generally is unpredictable, making budgeting for defense costs a difficult task.  In any single year, the risk of litigation is low, but when a claim does come in, defense costs can be significant.  This litigation landscape is a problem for legal departments trying to budget or reserve for litigation costs.

The duty to defend addresses this problem using the principles of risk transfer and risk pooling.

  • Risk transfer: the risk and costs of defending litigation is transferred to the insurance company in exchange for a premium payment.
  • Risk pooling: the insurance company takes the collective risks of litigation against all policyholders in a pool large enough that aggregate defense costs can be statistically analyzed and predicted on an annual basis.

This way no one has to assess the risk that any individual company is sued or anticipate those defense costs. Policyholders can include insurance premium costs in their legal budgets, and shift covered defense costs onto the insurer. The insurance company underwriters can evaluate the aggregate defense spend at a gross systemic level and charge premiums to cover those costs (with a healthy profit margin).Continue Reading The duty to defend requires an early judgment

The Supreme Court of Appeals of West Virginia has made it harder for policyholders to prevail on claims of common law bad faith against insurers in that state. In State of West Virginia ex rel. State Auto Property Insurance Companies v. Stucky, No. 17-0257, 2017 WL 4582607 (W. Va. Oct. 10, 2017), West Virginia’s highest court held that an insurance company cannot be held liable for bad faith regardless of its dilatory conduct, so long as it ultimately defends and indemnifies its policyholder.  As the dissent in Stucky observed, however, “[t]his over-simplified approach is myopic.”

In Stucky, the policyholder was a construction company that allegedly damaged a couple’s home.  The construction company, though, believed it “was insured for the damage to the … property under a commercial general liability policy ….”

Although the company’s insurer initially agreed “that it would handle the claim,” the insurer nevertheless allegedly “conducted a series of inspections and investigations, thereby delaying a potential settlement of the plaintiffs’ lawsuit, increasing the amount of the plaintiffs’ property damage, and resulting in the lawsuit filed against [the construction company] by the plaintiffs.”Continue Reading “Myopic” ruling limits policyholders’ ability to recover for common law bad faith in West Virginia

On October 6, 2015, the United States District Court, Northern District of California held that an insurer breached its duty to defend by interpleading remaining policy limits and ceasing its defense of its insured.  Doublevision Entertainment, LLC v. Navigators Specialty Insurance Company, N.D. Cal., No. C 14-02848 WHA. Despite language in the policy stating that the insurer was not obligated to defend after it had deposited remaining policy limits with a court, the district court held that Navigators could not simply interplead the funds and abandon its insured “at the moment of her greatest peril.”

Navigators issued an errors and omissions policy to Commercial Escrow Services (“CES”) and its principal, Antoinette Hardstone. Beginning in 2010, CES and Hardstone were sued by a number of customers alleging improper escrow handling. After CES and Hardstone tendered to Navigators, Navigators assumed the defense of the claims.  While the claims were pending, the California Department of Corporations conducted an investigation into CES and determined that it had a shortage of $195,750. The Department of Corporations appointed a receiver, who had authority to collect any insurance proceeds needed to cover the shortage.Continue Reading Beware of Good Intentions: Insurer Cannot Escape Duty to Defend by Interpleading Policy Limits That Were Not Subject to Competing Claims

The tables may be turning. Insurers often seek to avoid their coverage obligations by invoking time limitations in their policies for providing claim notifications. On the other hand, these same insurers routinely take their sweet time in responding to claims, contending that they need time to “investigate” even before making a decision whether or not to provide a defense to a lawsuit, which in most cases simply requires the insurer to review the allegations in the complaint to determine whether there is a potential for coverage under their policies. Once they decide to provide a defense (which in some cases can be weeks if not months after the insured has had to retain its own defense counsel to respond to a suit), insurers claim they have the right to control the insured’s defense, including the selection of defense counsel, and will force the insured to accept new defense counsel that are not up to speed on the case. Not so fast, according to a recent decision from the United States District Court for the Northern District of California.
Continue Reading Insurers Beware: Respond Promptly or Lose the Right to Control the Defense