January 22, 2014

The Duck Test and an Insurer’s Duty to Defend

This is Still a Duck

The Duck Test, most commonly stated, is: “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”  Insurers put this logic to the test with one of the oldest concepts in insurance, the duty to defend.  Established duty to defend law strongly favors coverage, and insurers have fought for decades to change the established standards to no avail.  Then, someone came up with a diabolical idea – change the name from “duty to defend” to “duty to pay,” and argue to the courts that we now have a completely different animal – or at least, something other than a duck.  To most, it still looked like a duck, swam like a duck, and quacked like a duck.  Not surprisingly, it turns out, even with its new name, it is still a duck.

Given the importance of the duty to defend, and the fact that the duty is absolute, it is understandable why insurers might plot a revolt.  Every kind of liability policy, whether D&O, General Liability, or Errors and Omissions, contains a duty to defend.  When sued, if any of the factual allegations potentially trigger coverage, an insurer must provide coverage for the entire defense of a matter.  If a complaint alleges facts and causes of action, some potentially within coverage, and others not, the insurer is obligated to defend the entire lawsuit.

The law developed this way for good reason – to counteract the tendency of an insurance carrier to leverage an underlying claim against a policyholder.  Courts understood that an insurance company’s leverage is greatest when a policyholder needs them most, and nowhere does a policyholder need their insurer more than just after they are sued.  Some insurers tried to take advantage of this dynamic, using their leverage to work deals with policyholders, and, in some cases, forcing policyholders to waive bad faith claims against them.  The only thing getting in their way was the courts, which refused to follow their lead.

Eventually, carriers recognized that they could not change the law, so they tried a different approach; they coined a new concept.   What they came up with was the “duty to advance” or “duty to pay” defense costs, rather than the “duty to defend.”  They rapidly adopted minor policy language changes to support their new ideas.  Typical duty to pay policy language provides that the insurer “shall advance, excess of any applicable Retention, covered Defense Costs on a current basis . . .” Similarly, duty to advance language may state, “the Insurer shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim.”  Insurers now contend that policies containing this kind of language have been transformed from “duty to defend” policies to “indemnity” policies, so that the old rules no longer apply.

Although perverse, the idea was brilliant.  When selling insurance policies, carriers could tell policyholders that they were obligated to defend, as they still had a duty to pay defense costs.  Their arsenal of coverage lawyers could also simultaneously tell courts that this was something completely different from what had been decided before, and argue that insurance carriers no longer had the strict duty to defend obligations that they had before.  Policyholders were hit from all sides with the idea that carriers no longer had to pay for the entire defense.  Insurance company lawyers wrote articles on the concept, insurers rallied brokers around the idea, and the whole industry was faced with an onslaught of propaganda designed to make reasonable people believe that the old trusted rules for defense no longer applied.  The idea seemed to have traction.  Some insurance brokers sang the praises of the idea, and, at times, worked with insurers to convince policyholders to accept only a portion of the defense costs that they were owed.

Courts, however saw it another way.  The newfangled defense obligation was nothing more than an old duck dressed in new clothing.   Case law has been building over the past decade across multiple jurisdictions recognizing that there is no difference between an insurer’s duty to defend and an insurers duty to advance or pay defense costs.  See, e.g., Acacia Research Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. SACV 05-501 PSG (MLGx), 2008 WL 4179206, at *11 (C.D. Cal. Feb. 8, 2008) (“[T]he duty to advance defense costs is as broad as the duty to defend.  Given the broad scope of a[n insurer’s] duty to advance defense costs, [the insurer] was required to advance defense costs for potentially covered claims.”); see also Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161, 1170 (8th Cir. 2011) (“[S]tate courts generally have viewed an insurer’s duty to advance defense costs as an obligation congruent to the insurer’s duty to defend, concluding that the duty arises if the allegations in the complaint could, if proven, give rise to a duty to indemnify”); Great Am. Ins. Co. v. Geostar Corp., Nos. 09-12488-BC, 09-12608-BC, 09-14306-BC, 2010 WL 845953, at *17 (E.D. Mich. Mar. 5, 2010) (“[The insurer] has not articulated a persuasive reason to treat a duty to pay defense costs in a substantially different manner from a duty to defend . . . .”); Lowy v. Travelers Prop. & Cas. Co., No. 99 Civ. 2727(MBM), 2000 WL 526702, at *2 n. 1 (S.D.N.Y. May 2, 2000) (“[T]here is no relevant difference between the allegations that trigger an insurer’s duty to defend and the allegations that trigger an insurer’s obligation to pay defense expenses.”).  Thus, if a lawsuit alleges any facts or causes of action potentially covered under a policy, the insurer is obligated to advance or pay defense costs to defend the entire suit.  See, e.g., Brown v. American Int’l Grp., Inc., 339 F. Supp. 2d 336, 347 (D. Mass. 2004) (because “at least some of the wrongful acts alleged [in the underlying suit] present a ‘reasonable potential for coverage,’” the insurer had the duty to advance defense costs for the entire suit); see also Aspen Ins. UK, Ltd. v. Fiserv, Inc., No. 09-cv-02770-CMA-CBS, 2010 WL 5129529, *3-4 (D. Colo. Dec. 9, 2010) (applying “one claim-all claims” principle to “duty to advance defense costs”); Federal Ins. Co. v. Sammons Fin. Grp., Inc., 595 F. Supp. 2d 962, 977 (S.D. Iowa 2009) (“[T]he insurer will be required to advance costs to defend against all claims in the complaint unless it can show unequivocally that each allegation in the underlying complaint is not covered by the policy.”); Westpoint Int’l, Inc. v. American Int’l S. Ins. Co., 899 N.Y.S.2d 8, 9-10 (App. Div. 2010) (requiring insurer to advance defense costs in connection with entire suit, because insurer failed to show that all of the underlying allegations fell outside of coverage); HLTH Corp. v. Agricultural Excess & Surplus Ins. Co., No. 07C-09-102 RRC, 2008 WL 3413327, at *13-14 (Del. Super. Ct. July 31, 2008) (requiring insurer to advance defense costs in connection with entire suit when it could not show that all of the underlying allegations fell outside of coverage); American Chem. Soc’y v. Leadscope, Inc., No. 04AP-305, 2005 WL 1220746, at *8 (Ohio Ct. App. May 24, 2005) (concluding that “when a policy imposes a duty to advance defense costs but no duty to defend, the pleadings test and the one claim-all claims principle apply to determine the duty of the insurer to advance defense costs.”).

With so much case law recognizing this as a bait and switch, the insurer’s newest attack on the duty to defend should be dead.  There is no distinction between the duty to defend and the duty to pay defense costs, and there never was.  The new duty is exactly the same as the old duty.  It still looks like a duck, swims like a duck, and quacks like a duck, therefore, it is a duck.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage.  Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results.  Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please email or call Mark Miller (, 202-760-3161).

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