Duty to Defend and Duty to Indemnify Checklist by Daniel Cotter, Howard & Howard Attorneys PLLC

This Duty to Defend and Duty to Indemnify checklist addresses the major duties an insurer commits to under an insurance policy. The duty to defend describes an insurer’s obligation to provide an insured a defense to claims made under a policy. The duty to indemnify describes an insurer’s obligation to pay a claim for loss or damage against an insured.

For additional insight into these concepts, see Duty to Defend and Duty to Indemnify; Insurer Duty-to-Defend Standard State Law Survey.

The Starting Point

Counsel giving advice to clients, whether the policyholder or the insurer, must start by obtaining the insurance contract. Insurers draft special contracts, called insurance policies, providing certain coverages to insureds and certain duties by insurers in the event of a covered loss. Covered loss will be defined in each type of policy and will vary based on the type of policy sold to an insured. The two major duties that an insurer finds itself obligated to an insured for are the duty to defend and the duty to indemnify.

Finding the Two Duties

The duty to defend is a term that describes an insurer’s obligation to provide an insured with a defense to claims made under an insurance policy. The duty to indemnify describes an insurer’s obligation to pay a claim for loss or damage against an insured. Both are typically included in a policy’s insuring agreement.

Basics of an Insurance Policy and the Duties

The duty to defend and the duty to indemnify are primarily found in liability policies—those with third party coverage implications. The first step in making the determination of coverage is to review the insurance policy and determine if the occurrence falls within the scope of coverage. For guidance on what the Restatement of the Law of Liability Insurance provides with respect to the duty to defend and the duty to indemnify, see New Appleman on Insurance Law Library Edition § 16A.02.

The Insuring Clause

The analysis of potential coverage must begin with the insuring clause (also known as the insuring agreement). There may be some variances in the standard language that an insurer uses, but most policy language is common and is a large percentage of commercial liability policies and personal lines insurance policies are from the Insurance Services Office (ISO) or American Association of Insurance Services (AAIS). ISO and AAIS are services that provide standard forms and rules for the industry. Both ISO and AAIS are reputable, well-established organizations that provide various coverage forms to their subscribers.

Typical Commercial General Liability (CGL) language for the insuring agreement is along the following lines:

The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage.

Numerous terms in the above clause are defined elsewhere in the policy, including bodily injury and property damage and suit, as well as occurrence. Duty to Defend and Duty to Indemnify Checklist

Determining the Policy’s Duty Triggers

The insuring agreement spells out that the insurer’s two duties are a duty to indemnify and a duty to defend. These duties are triggered if an occurrence leads to an insured making a claim for bodily injuryor property damage that happens during the policy period. While both duties are related to each other, you must understand that each of the duties is separate and each is governed by different standards.

Burden of Proof

When it comes to establishing an insurer obligation for coverage, the insured must establish that the claim it has made falls within the scope of the policy’s coverage. Once the insured has established coverage, the burden is on the insurer to show that an exclusion applies or there otherwise is not coverage. If the insurer finds that an exclusion applies or there otherwise is not coverage, then the insured must show that there are applicable exceptions to the exclusion.

The Duty to Defend Determination

Of the two duties of an insurer, the duty to defend is a much broader duty. The duty to defend is also litigated more often. The language from the sample CGL provision above states that the duty to defend is where “the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage . . .”

The duty to defend is not only a duty, but a right of the insurer. The language imposes a duty to defend the insured against any suit that seeks damages that may be covered by the policy. An insurer’s obligation to defend is determined by comparing the allegations of the underlying complaint against the coverage afforded under the policy. If even a single claim potentially falls within coverage, the insurer generally must defend the entire action, even if the underlying lawsuit or claim is groundless, false, or fraudulent.

You must scrutinize the complaint allegations and compare against the terms of the insurance agreement.

The Duty to Indemnify

Often, the insurer will decide to defend the insured, perhaps under a reservation of rights. The duty to indemnify happens on the other end of the suit. The duty to indemnify comes at the end of the lawsuit when liability is established, unlike the duty to defend which is determined when the suit is filed and goes on during the pendency of the suit.

The duty to indemnify is much narrower than the duty to defend. A review of the facts developed during the suit must be examined to determine if they fall within the indemnification obligations of the insuring agreement. The typical CGL policy provides that the “Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence.”

Steps for the Policyholder Practitioner

The practitioner who has a client with a potential claim should take several steps when informed by the client that a suit or claim has been submitted against the client: • Ask the client to provide you with all policies that might be responsive to the claim. There may be clashes of coverage, other insurance provisions to review, and potential theories that you can explore with your client, the insured • Ask the client to provide you with relevant documentation of the claim, including pleadings and correspondence • Review the first two steps above to determine potential defense obligations. Discuss your assessment with the client

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• Assist your client with notification to the relevant insurers of the potential claim • Review any denials of coverage or reservation of rights letter provided by the insurer • Assess with your client next steps and approaches based on what happens after the denial or reservation of rights letter is received. Consider filing a declaratory judgment action against the insurer or pushing back on the reservation of rights • If a defense is provided, or if there is a denial of coverage or reservation of rights, consult with client about whether the defense counsel has any potential conflicts because of its unique triumvirate relationship—the defense counsel is retained by the insurer to defend the policyholder, and conflicts can arise because of this unique relationship. Some states have jurisprudence that dictates counsel may be retained by the insured in such conflict situations –and– • Consider settlement opportunities and consult with client to determine approach and strategy and whether to make a policy limits demand

Steps for the Insurer Practitioner

The practitioner who has an insurer client that has been notified of a potential claim from an insured should take several steps when informed by the client that notice has been provided to the insurer: • Ask the insurer for the applicable policy that is relevant to the noticed claim • Ask the insurer to provide the notice of claim and any relevant pleadings • Review the relevant pleadings to determine if any of the allegations are potentially covered by the applicable insurance policy • Review the insurance policy’s insuring agreement, conditions, and exclusions to determine what defenses to the duty to defend might exist • After consulting with the insurer client, draft an appropriate response to the notice—accept the defense, defend under a reservation of rights, deny or disclaim coverage • Based on the decision in the response to the notice, determine if appropriate to file a declaratory judgment action • Monitor the lawsuit and developments to determine if facts have changed to warrant a subsequent denial of coverage, and to determine what, if any, indemnification obligations might exist –and– • If an offer or demand to settle is submitted in the underlying lawsuit, consult with insurer about how to proceed, and advise the insurer of the potential risk it faces if it refuses the settlement and is later found to have not acted in the best interests of the insured

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