Duty to Defend and Duty to Indemnify Go to: Basics of an Insurance Policy | The Insuring Clause | Duty Triggers | Burden of Proof | The Duty to Defend | The Definition of Suit | Importance of the Duty to Defend | Texas and Duty to Defend | The Duty to Indemnify | Settlement of Claim | The Reservation of Rights | Steps for the Policyholder Practitioner | Steps for the Insurer Practitioner | Related Content Current as of: 12/11/2019 by Daniel Cotter, Howard & Howard Attorneys PLLC This practice note addresses the two major duties that an insurer commits to providing under an insurance policy— the duty to defend and the duty to indemnify. 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. 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. For additional insight into these concepts, see Duty to Defend and Duty to Indemnify Checklist; Insurer Duty-to- Defend Standard State Law Survey. Basics of an Insurance Policy The duty to defend and the duty to indemnify are primarily found in liability policies—those with third-party coverage implications. The basic rule of insurance policies is that, in exchange for payment of premium, the insured is entitled to compensation for those losses covered by the insurance policy during the insurance policy period. 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 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 Duty to Defend and Duty to Indemnify 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. Law students attending their first day of my insurance law class often hear: : “You must pay very close attention to what the insuring agreement is and what it is not. What the front page giveth with a short insuring agreement, the next section, ‘Exclusions,’ taketh away.” Students quickly learn that for every policy they are analyzing they must closely read bodily injury and property damage definitions, because that is the starting point. 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 injury” or “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. Generally, liability policies provide insureds with coverage for tort types of actions. However, at least one jurisdiction had broadly read language in the insuring agreement that reads “legally obligated to pay damages” to apply to contract damages in addition to tort damages. Vandenberg v. Superior Court, 21 Cal. 4th 815, 838 (Cal. 1999). For additional insight on initiating coverage and triggering the duty to defend, see New Appleman on Insurance Law Library Edition §§ 16.03, 17.01. 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 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. An insurer ignores its duty to defend at great peril. Should an insurer wrongly deny an insured defense obligation, the consequences may be breach of the covenant of good faith and fair dealing. Furthermore, a general rule that has developed from case law in the various states is that if an insurer wrongfully refuses to defend its insured, it is liable on the judgment. See Gray v. Zurich Ins. Co., 65 Cal. 2d 263 (Cal. 1966). Insurers must carefully review the four corners of the complaint and determine if the allegations contained in the complaint bring potential coverage under the policy in question. Page 2 of 6 Duty to Defend and Duty to Indemnify Insurers should also keep in mind that courts in many jurisdictions review the unequal bargaining positions of the insured and insurers. Ambiguities from the unequal bargaining positions are held against the insurer, which drafted the policy. The courts often also try to determine the reasonable expectations of the insured. Practitioners should also be aware that, while the general rule is that the insurer must consider the four corners of the complaint to determine defense obligations (see below for Texas and its unique eight corners rule), some jurisdictions have addressed the question of whether an insurer might have a duty to defend in cases where the pleadings do not allege a covered occurrence but the insurer has actual knowledge of facts that would support a position that the lawsuit involves such an occurrence. For example, in Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61 (N.Y. 1991), the highest court of New York answered that question in the affirmative, finding that “the insurer cannot use a third party’s pleadings as a shield to avoid its contractual duty to defend its insured.” Because the insurer drafted the policy and because of its stronger bargaining power and leverage, all doubts about the duty to defend generally are found in favor of the duty. The practitioner must review the applicable jurisprudence on the use of extrinsic evidence beyond the complaint. At least 14 states permit extrinsic evidence to be used only to establish coverage, 7 states permit extrinsic evidence to be used to establish or negate coverage, and 17 jurisdictions prohibit extrinsic evidence. The other jurisdictions either have special rules for extrinsic evidence admissibility or the issue is unclear. The Definition of Suit One issue that courts in California and other jurisdictions have struggled with is what constitutes a suit. The issue has been especially difficult in environmental matters, where often the dispute is in the administrative realm instead of the traditional court system. Courts have not uniformly developed a consistent approach to whether such administrative actions fall within the definition of suit and thereby trigger the duty to defend. Practitioners faced with this question should review the applicable jurisdiction’s body of law to determine how that jurisdiction has addressed this question. Importance of the Duty to Defend In most CGL policies, the defense costs do not erode the policy limits. Thus, the duty to defend can be a very valuable source of support for an insured. Defense costs in a large suit, especially in product liability or environmental matters, can be extremely expensive and such lawsuits can also last for many years. This valuable benefit is one of the reasons that the duty to defend is so often litigated.