Duty To Defend: We Sue Insurance Companies That Wrongfully Refuse To Defend Policyholders
The Duty to Indemnify vs. the Duty to Defend
Insurance policies that protect against liability from lawsuits filed by other people or businesses typically include two types of protection. The first is indemnity coverage, which is the insurance company’s promise to pay a judgment against the policyholder after a lawsuit. The second is the insurance company’s promise to defend the policyholder against a lawsuit before a judgment is even entered. The insurance company’s duty to defend requires it to do everything necessary to defend the lawsuit, including hiring legal counsel, conducting an investigation, paying court costs, and hiring experts.
Common policies that include both a duty to indemnify and a duty to defend include homeowner, auto, professional liability, and commercial general liability (CGL) policies. In the case of a homeowner’s policy, for example, if you are sued for negligence by someone who slips and falls on your property, the insurance company must both provide a defense to the lawsuit (its duty to defend) and pay any judgment or settlement that results (its duty to indemnify).
When Is the Insurance Company Required to Defend?
The duty to defend is triggered when the insurance company receives notice that the policyholder has been or might be sued in a lawsuit potentially resulting in covered liability (i.e., a judgment that the insurance company would be required to pay). Because the duty to defend is triggered before a judgment is entered against the policyholder, the insurance company is required to defend against any lawsuit that might potentially result in a judgment that would be covered. In other words, if there is any potential the suit could result in a judgment the insurance company would be required to pay, the insurance company must provide a defense.
Whether a defense is owed typically involves a comparison of the allegations in the complaint against the policyholder and the coverage provided by the policy. When a complaint includes a claim that could result in liability covered by the policy, the insurer must defend. The duty to defend is also triggered when facts outside the complaint suggest that the complaint could be amended to allege a covered claim.
The Duty to Defend Is Broad – it Includes Any Claim that Could Potentially Require Indemnity and Applies to the Entire Lawsuit, Not Just Potentially Covered Claims
Under California law, the duty to defend is very broad – it is often said that “the duty to defend is broader than the duty to indemnify.” This saying refers to the fact that indemnity coverage requires that there be actual coverage for a judgment, whereas the duty to defend only requires a potential for coverage.
The duty to defend is also broader than the duty to indemnify because insurance companies have a legal duty to defend the entire lawsuit, so long as any one claim has the potential to result in indemnity coverage – even if there are other claims that are not covered. For example, if a lawsuit against a policyholder contains 3 claims, only one of which could result in a judgment that would be covered under the policy, the insurance company must still defend the entire suit – including the 2 non-covered claims.
When Can an Insurance Company Refuse to Defend?
An insurance company can only refuse to defend a lawsuit if there is no possibility that a judgment covered by the policy could be entered against the policyholder. If there is any possibility of a covered judgment, the duty to defend is triggered. Failure to defend a potentially covered lawsuit is a breach of the insurance policy and is often grounds for a bad faith lawsuit against the insurance company.
Insurance companies will often defend under a “reservation of rights.” In this circumstance, the insurance company agrees to provide a defense, but reserves its right to later challenge coverage and the obligation to continue providing a defense. When an insurer defends under a “reservation of rights,” the company may file a lawsuit against the policyholder asking the court to determine that there is no potential for indemnity and therefore no duty to defend. This type of lawsuit is called a suit for “declaratory relief.” If successful, the insurance company may seek reimbursement of money it has paid to defend the lawsuit under the reservation of rights.
If Your Insurance Company Has Refused to Defend You or Your Business in a Lawsuit, or You Have Been Sued for Declaratory Relief, We Can Help
An insurance company’s refusal to defend often has devastating consequences for the insured. You or your firm could be facing hundreds of thousands or even millions of dollars in legal frees and damages. If an insurance company has refused to defend a lawsuit, or if you are facing a declaratory relief action, you need an experienced insurance lawyer.
The Law Offices of Corbett H. Williams has substantial experience pursuing coverage for policyholders. Mr. Williams has been instrumental in securing millions of dollars in coverage for clients, including in cases involving a failure to defend. If you are your business are facing an insurance coverage issue, contact our Orange County offices today at 949-679-9909.