#6 An Insurer’s Duty to Defend is Incredibly Broad

In today’s video, Managing Partner Brian Friel continues his series on the Ten Biggest Mistakes Made By Corporate Insurance Policyholders with number six, not understanding that an insurer’s duty to defend is incredibly broad.  In practice, it is highly unusual for an insurance carrier to acknowledge the broad and all-encompassing nature of this duty. The duty to defend requires an insurance companies to defend the entirety of a lawsuit for the duration of the lawsuit.  What is more, an insurance company is required to defend the entire lawsuit even if only some of the claims are potentially covered.  Just one count that may be potentially covered triggers defense of the entire lawsuit.  Allocation between so called covered and non-covered claims is not permitted.  Moreover, insurance carriers are not permitted to claw back defense costs paid if it is later determined that the claim was not in fact covered.  Insurance coverage for defense costs is often times the most important insurance asset in a corporation’s insurance program.

Duty To Defend Case Examples

Several examples of how insurance carriers try to improperly limit their duty to defend illustrates the problem and the solution.  Here, Brian addresses cases in which insurance companies, despite their initial denials of coverage, had a duty to defend, and, as a result, were responsible for paying one hundred percent of defense costs associated with the claim.  Unfortunately, insurance carriers seldom reach this conclusion on their own.  Knowing the law is a corporate policyholder’s best defense to improper claim denials. 

Watch the video to learn more about the duty to defend and why misunderstanding that duty is one of the Ten Biggest Mistakes Made by Corporate Insurance Policyholders.

For a transcript of the video, please see below

Another common mistake made by corporate policyholders is a failure to understand and appreciate an insurance company’s incredibly broad duty to defend its insured. Let’s step back for a second. Some policies for defense costs are duty to pay, basically they’re indemnity policies.

There are other policies, mostly in general liability context, that have a duty to defend. Not a duty to pay defense costs but an actual duty to step up and defend its insured. Here the insurance company is typically obligated to hire the law firm, pay the law firm directly so no money comes out of the pocket of the corporate policyholder, it’s all between the insurance company and the law firm hired by the insurance company. Sometimes you can negotiate with your insurance company to get your own law firm involved that’s not approved, but you can negotiate that, and then again those bills can go directly from that law firm to the insurance company.

Let’s take that same example, the complaint has five causes of action, arguably one is covered, the other four are not. In a duty to defend situation the insurance company is on the hook for paying for the entire litigation, the entire defense. It’s not allowed to allocate and only pay you 20% of those legal fees. It’s basically what we call “in for one, in for all.” The duty to pay is one of the most important policy features for corporate policyholders. Let’s see how that works in some real life examples.

We had a client a couple of years ago who had a duty to defend policy. The complaint made a number of allegations about certain transactions that occurred with respect to certain insureds and some allegations involved other individuals who are not insureds under the policy. There was some dispute about whether the claim and the allegations that involved the policy at all. With a duty to defend policy you don’t just look at the allegations in the complaint and woodenly or strictly interpret them and apply them to your policy. You are allowed, and in fact you are entitled to, the broadest reading of the policy or the allegations against you as possible to fit within that duty to defend.

For example, even a complaint doesn’t allege facts or claims that on their face fit within the four corners of your policy, if there is an argument or a basis to say that there’s a possibility that the plaintiff could even modify his or her complaint to add an allegation or a cause of action that could fit within the policy and the insuring grant, you can make the argument that the insurance company still has a duty to defend. The duty to defend is so broad that it not only covers the allegations on the complaint itself, but you can make the argument that because plaintiffs are allowed to amend complaints and expand their allegations and bring in other causes of action, an insurance company is still obligated to defend you.

Not only are they obligated to defend you, they are obligated to defend you for the entire claim from the moment it’s filed in notice to the carrier all the way to the end of the lawsuit until it’s either settled or there’s some finding from a judge or an arbitrator which could relieve the insurance company of its obligations to defend. That often times doesn’t occur for two or three years after the initial complaint is filed and millions of dollars of attorneys’ fees have come in.

What we have found on our own experience are companies, even sophisticated companies, that don’t appreciate how broad this duty is to defend that their insurance companies owe them. You have to look at this and realize that this is an absolute critical piece of the coverage that you bought, you probably paid a little higher of a premium for a duty to defend policy versus a duty to pay policy, and you are entitled to this coverage. Trust me, insurance companies are going to take a very limited and narrow view of their duty and sometimes they’ll try to confuse or conflate that duty with a duty to pay situation. You have to understand the critical difference between those two.

The takeaway on this is truly understanding how broad the duty to defend is for insurance companies and not accepting either a denial of coverage for a defense based on a strict reading of the complaint or agreeing to some sort of discount that they’re only going to pay 20% or 50% of your defense. That’s not how it works with duty to defend. In for one, in for all and just about any complaint filed against a company we can make an argument. In fact, we will make an argument that there is a reasonable or even just a possibility of coverage either based on the face of the complaint or due to some amendment that a plaintiff can make later on that triggers the insurance company’s duty to defend the company for the entire lawsuit for the duration of the lawsuit. That type of coverage is invaluable to all companies.

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