We purchase liability insurance in case we are sued. Our automobile policy is meant to protect us if we cause an accident involving injury or property damage. Doctors purchase malpractice insurance in case they botch a procedure. And businesses obtain general liability insurance to protect from almost every liability including sexual harassment and slip and falls.
Even if an insurance company may not be liable for any damages, they may still be obligated to provide a defense if their insured is sued.
As a general rule, an insured only needs to establish that there is potential for coverage under a policy. In many states, that triggers the carriers’ duty to defend. Implicit is the principle that the duty to defend is broader than its duty to indemnify. Courts in many states resolve doubts as to the duty to defend in favor of the insured.
If the carrier refuses its duty to defend, the insured may have a bad faith claim against the insurance company.
When insurance companies are sued after the fact for bad faith, they will typically go on a fishing expedition to find out what happened to the underlying claim (the claim they refused to defend.)
Why? Because they hope to find evidence that they did not owe a duty of coverage. The duty defend, however, is different from any coverage obligations the carrier may have. And it is not really fair for the insured that the carrier is allowed to bolster their decision not to defend after the fact.
The duty to defend must be based on whatever facts were known at the time the insured was sued or faced a claim. Even if there is ultimately no coverage, the insured may have been much better off if the carrier was providing a defense.
An old 1993 California case explains the law perfectly.
Duty to Defend – an Example
Until 1982, Montrose Chemical Company manufactured DDT, the now outlawed pesticide. In 1990, the State of California sued Montrose for failing to clean up its Torrance, California facility where the toxic pesticide was made.
Montrose, like most companies, had purchased a broad liability policy. According to the policies, the carriers promised to defend the company against “any suit … seeking damages on account of bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent.” The carriers also agreed to indemnify Montrose for “bodily injury or property damage … caused by an occurrence.” “Property damage” was defined as “injury to or destruction of tangible property which results during the policy period.” “Occurrence” was defined as “an accident, including continuous or repeated exposure to conditions which results in … property damage neither expected nor intended from the standpoint of the insured….”
When the state sued Montrose for pollution claims, the company notified its insurance carrier. The carrier both declined coverage and refuse to defend the company. [As we know from this post, those duties are different.]
The trial court sided with the insurance company. Montrose appealed.
Ultimately the case made it all the way to the California Supreme Court where they ruled the company had a duty to defend their insured.
In the words of the court, “The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. As one Court of Appeal has put it, [F]or an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. [Citation.] Hence, the duty `may exist even where coverage is in doubt and ultimately does not develop.’
“Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.
“The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.”
In simple terms, the California Supreme Court ruled that there is a difference between a duty to defend and whether or not the insurance company may ultimately have to pay a claim. Even if there is a possibility that an insurance company must pay a claim, it should defend its insured. It isn’t fair to refuse to defend and then after the case is complete elicit facts justifying their previous decision not to defend.
Duty to Defend and Insurance Bad Faith
If you are sued and your insurance company refuses to defend you in the lawsuit, you may have a claim for insurance bad faith. Generally, in most states, insureds can receive both economic and non-economic damages. In certain cases, you may also be eligible for punitive damages and attorney’s fees, although there are big variations state by state. (Attorneys fees you incurred in defending the original case are usually recoverable.)
For more information, visit our cornerstone insurance bad faith information page. Ready to see if you have a case? Contact attorney Brian Mahany online, by email or by phone at 202-800-9791. We accept insurance bad faith cases nationwide. [We limit our practice to claims with economic damages of $1 million or more.]