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When Does the Insurer Have a Duty to Defend?
Recent changes in the Commercial General Liability coverage form pertain to the insurer's duty to defend. Language has been added restricting the defense obligation to only those suits alleging injury or damage covered by the policy. The driving force for this change was a series of court decisions holding that the policy’s promise to "defend any suit seeking…damages" covered by the policy did not explicitly rule out a defense obligation with respect to other suits as well. In one case the court held that a professional liability exclusion in a general liability policy did not, in and of itself, eliminate the insurer's duty to defend the insured against charges of professional liability. The court ruled that while the applicability of the exclusion to coverage issues was clear, its applicability to the duty to defend was not. In its conclusion, the court warned the insurance companies that if they want to protect themselves in this type of a situation, it should be clearly stated that the exclusion clause applies to both the duty to pay and the duty to defend.
This is exactly what they did. In response to the court the following language was introduced: "However, we will have no duty to defend the insured against any 'suit' seeking damages for 'bodily injury' or 'property damage' to which this insurance does not apply."
The explanation of this change acknowledges the legal principle that a duty to defend exists when "there is any cause of action in a suit" that would produce covered damages if the suit were successful. The new language is meant only to clarify that no duty to defend is created by a suit against the insured when no cause of action in that suit would produce covered damages were the suit to be successful.
The second change rewords the insuring agreement's promise "to defend any suit" seeking damages payable under the policy, making it a promise instead "to defend the insured against any suit seeking those damages." While the revised wording is represented as more of an editorial than a substantive change, it is worth noting that the original reference to defending "any suit" seeking damages covered by the policy has been advanced by some as grounds for the insurer's duty to defend the insured's indemnitee. (Damages awarded against the insured's indemnitee may be damages payable under the policy's contractual liability coverage. A suit against the indemnitee would be a suit "seeking those damages.") It will be impossible to make this argument with the new language.
Questions also arise regarding when the duty to defend ends. Perhaps the best way to discuss this question is to examine the wording of the duty to defend clause as it appears in two coverage forms.
The "duty to defend" clause in the Personal Auto Policy states that the insurer"...will settle or defend as ... appropriate, any claim or suit asking for these damages ... Our duty to settle or defend ends when our limit of liability ... has been exhausted''. Now, some may see this as a clear-cut statement that, regardless of how the policy limits are exhausted, the duty to defend ends once those limits are gone. However, that clause needs to be looked at as a whole. The first part of the clause states that the insurer will settle or defend any claim or suit. Only after the insurer has made this promise does the issue of when the duty ends come into play. Many courts have used this point in coming to the decision that the duty to defend cannot end by an early tendering of the policy limits without obtaining a settlement or accepting a judgment against the insured. In other words, any ending of the duty to defend through the exhaustion of the policy limits must be by way of settlement or judgment and not simply by tendering the limits, that is, by paying into the court the policy limits even before a settlement or judgment is attained.
This reasoning is not an attempt to get around or ignore that part of the duty to defend clause that speaks of ending the duty when the limit of liability has been exhausted. It simply is an interpretation of the duty to defend clause in its entirety. It makes a clear distinction between exhausting the policy limits without a settlement or judgment and exhausting the limits through a settlement or judgment, thus disposing of the claim. The first is not seen as in keeping with the duty to defend clause as a whole and the second one is.
Compare the duty to defend clause in the Personal Auto Policy with that found in the Commercial General Liability coverage form. The Commercial General Liability form ties the ending of the duty to defend to using up the limits of the policy "in the payment of judgments or settlements."' In other words, the insurer, under the Commercial General Liability form, promises that the duty to defend ends only when the policy limits have been used up in the course of carrying out the obligation to settle a claim or lawsuit against the insured. Thus, in contrast to the Personal Auto Policy, the wording in the Commercial General Liability form clarifies just when the duty to defend ends and eases concerns that, by tendering the limits of the policy, the insurer could then avoid all burdens of defense, leaving the insured in the position of assuming the responsibility of defense when the insured may not be capable of handling such a task.
A word or two about limits of insurance is in order. Beware of situations where other claims may exhaust the aggregate in the middle of litigation or appeal. Increasing policy limits places a greater burden on insurers to mount a larger defense.
In any question about the duty to defend, look first to the wording of that clause on the particular coverage form. But, do so remembering that the sentence concerning the ending of that duty is just a part of the whole clause and has to be read in conjunction with the whole clause. Furthermore, the duty to defend is an independent contractual obligation on the part of the insurer and any payment of the policy limits that simply extracts the insurer from the claim process and does not release the insured from the claim, raises a question as to whether the insurer has performed its policy obligations in good faith.
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CREATIVE RISK MANAGEMENT, INC.
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