May 16, 2016
A State-by-State Summary
Summary: We noted in another discussion (see Duty to Defend Requirement) that the duty to defend is held to be broader than the duty to indemnify. We looked at criteria used in triggering the duty to defend, such as the allegations of a complaint, the facts presented, or some combination thereof.
Following is a brief description of this insurance axiom in operation on a state-by-state basis. The cases cited are not necessarily those that first brought any given law into being; rather, many are more current cases that demonstrate the state case law as currently applied.
|Alabama
In Alabama, whether an insurance company owes a duty to defend its insured is determined primarily by the allegations contained in the underlying complaint. In making the determination, the court may look to facts which may be proved by admissible evidence. If there is any uncertainty as to whether the complaint alleges facts that would invoke the duty to defend, the insurer must investigate the incident that gave rise to the complaint to establish whether it has a duty to defend. See Tanner v. State Farm Fire & Casualty Co., 874 So. 2d 1058 (Ala. 2003).
If the facts are irreconcilable with the legal theory asserted in the compliant, the facts, not the assertion of a legal theory, determine the insurers' duty to defend. See Hartford Cas. Ins. Co. v. Merchants & Farmers Bank, 928 So. 2d 1006 (Ala. 2005).
If the insurer has doubts about coverage, a reservation of rights letter must be sent; otherwise the insurer cannot undertake a defense and later assert its right to deny coverage. See Home Insurance Co. v. Rice, 585 So. 2d 859 (Ala. 1991), in which the court found that there need not be actual prejudice to the insured before the insurer that failed to deny the duty to defend was estopped to deny that duty.
Alaska requires an insurer to defend when the true facts—those that are known or reasonably ascertainable by the insurer—are within, or potentially within, coverage, even if the suit alleges facts that are outside the scope of coverage. See National Indemnity Company v. Flesher v. Sterneman, 469 P.2d 360 (Alas. 1970). But if the true facts would place the complaint outside coverage, the insurer must still defend if the facts alleged in the suit are potentially covered. See Sauer v. Home Indemnity Company, 841 P.2d 176 (Alas. 1992).
The insurer can refuse to defend if a complaint alleges facts which are potentially not covered, and when the insurer, having conducted an investigation, confirms the facts provide no basis for coverage. The court in Sauer also found that the insurer is required to give the insured notice of its refusal to defend and its intention to deny coverage, setting forth the reasons for the denial based on its investigation of the facts or based on applicable law, and allowing reasonable time for the insured to defend himself.
A liability insurer can preserve its coverage defense and fulfill its duty to defend by defending under a reservation of rights to later disclaim coverage if liability is attributable to an excluded theory. See CHI of Alaska, Inc. v. Employers Reinsurance Corp,. 844 P.2d 1113 (Alaska, 1993). A duty to defend does not arise whenever an insurer and an insured have a dispute over coverage. Makarka ex. rel. Makarka v. Great American Insurance Co., 14 P.3d 964 (Alaska 2000).
The court in Western Casualty and Surety Co. v. Hays, 781 P.2d 38 (Ariz. Ct. App. 1989) stated that “[i]n reviewing a determination on whether an insurance company has a duty to defend a lawsuit brought against its insured, we first examine the facts alleged in the complaint. If the complaint on its face appears to impose a duty to defend, we may then look to other facts not alleged in the complaint to determine whether the case falls outside policy coverage.” Thus, if a complaint appears to allege covered facts, the court may look to the actual facts to make a coverage determination.
By the same token, if the complaint appears to allege facts that are not covered, but the insured provides other facts that might trigger coverage, the insurer must conduct its own investigation to determine if coverage is owed. See U.S. Fid. & Guar. Corp. v. Advance Roofing & Supply Co., Inc., 163 Ariz. 476, 788 P.2d 1227 (Ct. App. 1989). An insurer with knowledge of potential noncoverage, but that nonetheless assumes a defense, must notify the insured with a reservation of rights letter.
Payment of policy limits, without obtaining a release, does not end the duty to defend. California Casualty Insurance Co. v. State Farm Mutual Auto Insurance Co., 185 Ariz. 165 (Ariz. App. Div. 1, 1996).
Under Arkansas law, the general rule is that the complaint against the insured determines the insurer's duty to defend the insured. The duty to defend is broader than the duty to pay damages, and arises where there is a possibility that the injury or damages may fall within the policy coverage. The terms of an insurance policy and any ambiguity as to them are to be construed in favor of the insured. Accordingly, whenever there is any possibility that the injury or damage may fall within the policy coverage, the insurer must defend. See Anderson Gas & Propane, Inc. v. Westport Insurance Corp., 140 S.W.3d 504 (Ark. App. 2004).
When there is a duty to defend under an insurance policy and there is a conflict of interest between the insurer's interest and that of the insured (such as when the insured defends under a reservation of rights), the insurer must either provide an independent attorney to represent the insured or pay the costs incurred by the insured in hiring counsel of his own choice. But an insurance company is not required to do both. See Bituminous Casualty Corp. v. Zadeck Energy Group, Inc., 416 F. Supp. 2d 654 (W.D. Ark. 2005).
California holds that the duty to defend is a broad one, based both on a comparison of the allegations with the terms of the policy, and also on facts that are extrinsic to the complaint which reveal the possibility that the claim (or even a part of the claim) may be covered by the policy. A case outlining many of the California precepts is Gray v. Zurich Insurance Co., 419 P.2d 168 (Cal. 1966), which first stated the rule that an insurer was required to defend whenever facts giving rise to the potential of liability under the policy were ascertained. Two later cases, Horace Mann Insurance Co. v. Barbara B., 846 P. 2d 792 (Cal. 1993) and Montrose Chemical Corporation of California v. Canadian Universal Insurance Co. et al., 861 P.2d 1153 (Cal. 1993) relied on Gray and added that even though coverage might be in doubt, the duty continued until the insurer produced undisputed facts which eliminated the potential for liability.
Even if the insurer believes its insured to be lying, as in Amato v. Mercury Casualty Co., 23 Cal. Rptr. 2d 73 (Cal. App. 1994) without extensive investigation by the insurer to confirm its belief, it is obligated to defend.
An insurer which defends a mixed action must either obtain a non-waiver agreement from its insured or notify the insured that it reserves its right to dispute coverage with respect to known and unknown matters. If the insurer adequately reserves its right to assert its coverage defenses, and if it prevails, it will not be bound by the judgment against the insured. Val's Painting & Drywall, Inc. v. Allstate Insurance Co., 53 Cal. App. 3d 576 (Cal. App. 1975). An insurer which assumes a defense without asserting any reservation of rights can be found to have waived its right to later decline coverage if it knew the basis for the potential denial of coverage. Garamendi v. Golden Eagle Insurance Co., 116 Cal. App. 4th 694 (2004).
In Colorado, an insurer's duty to defend a suit against its insured arises solely from the underlying complaint. Cotter Corp. v. American Empire Surplus Lines Insurance Co., 90 P.3d 814 (Colo. 2004). This duty arises when the underlying complaint against the insured alleges any facts that might fall within coverage of the policy unless the insurer can establish that allegations in the complaint are solely and entirely within exclusions in the policy. If the insurer's duty to defend is not apparent from the complaint, but the allegations state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the coverage has been pleaded, the insurer must accept the defense of the claim. See Hecla Mining Co. v. New Hampshire Insurance Co., 811 P.2d 1083 (Colo. 1991).
When an insurer questions its obligation to defend, it should provide its insured a defense but reserve its rights to either seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or file a declaratory judgment action after the underlying case has been adjudicated. If the insurer provides a defense, it may rely on facts outside of the complaint to determine whether it can recover costs of defense from the insured. See Cotter, 90 P.3d 814.
An insurer does not forfeit its right to contest coverage when it breaches its duty to defend, even if the breach was in bad faith. Flannery v. Allstate Insurance Co., 49 F.Supp. 2d 1223 (D. Colo. 1999).
Generally, Connecticut subscribes to the “four corners rule” in construing the duty of an insurer to defend a suit against its insured. The obligation of the insurer to defend does not depend on whether the injured party will successfully maintain a cause of action against the insured but on whether he has, in his complaint, stated facts which bring the injury within the coverage. If the latter situation prevails, the policy requires the insurer to defend, irrespective of the insured's ultimate liability. It necessarily follows that the insurer's duty to defend is measured by the allegations of the complaint. Hence, if the complaint sets forth a cause of action within the coverage of the policy, the insurer must defend. See Board of Education of City of Bridgeport v. St. Paul Fire & Marine Insurance Co., 261 Conn. 37 (2002).
An insurer may “either refuse to defend or it may defend under a reservation of rights to contest coverage under the various avenues which would be subsequently open to it for that purpose.” Missionaries of Mary Inc. v. Aetna Casualty & Surety Co., 155 Conn. 104 (1967).
In Delaware, the claim as a whole must allege facts for which the insurer has assumed liability. Continental Casualty Co. v. Alexis I. duPont School District, 317 A.2d 101 (Del. 1974). Thus, the duty to defend is limited to such claims, but if any doubt exists the duty is resolved in favor of the insured. Under Delaware law, the insured must prove that a claim is covered by the policy, while the insurer has the burden of proving an exclusion applies. See Brosnahan Builders, Inc. v. Harleysville Mutual Insurance Co., 137 F. Supp. 2d 517 (D. Del. 2001).
In general, sending a timely reservation of rights preserves the insurer's coverage defenses. The doctrine of waiver is generally not available to bring within the coverage of an insurance policy risks expressly excluded from the policy. See Martin v. Colonial Insurance Co. of California, 644 F. Supp. 349 (D. Del. 1986).
As a general rule, a party cannot invoke estoppel to create an insurance contract where none exists and estoppel cannot operate to bring within a policy's coverage property risks or losses for which, by the policy's terms, there exists a specific exception or some other exclusion. An exception to the general rule exists where the insurer undertakes a defense of an insured without a reservation of rights. Container Corp. of America v. Bituminous Casualty Corp., 252 A.2d 117 (Del. Super. 1969).
District of Columbia
The District of Columbia applies the “eight corners rule”, examining both the complaint and the insurance contract to determine the duty to defend. All possible claims within the complaint are examined to see if any of them trigger the duty to defend. Continental Casualty Co. v. Cole et al., 809 F.2d 891 (D.C. Ca. 1987). The insurer's actual knowledge of extrinsic evidence is not allowed to influence the duty. Stevens v. United General Title Insurance Co., 801 A.2d 61 (D.C. App. 2002).
A liability insurer assuming and conducting the defense of an action brought against the insured, with knowledge of a ground of forfeiture and without disclaiming liability and giving notice of its reservations of rights, is thereafter precluded, in an action upon the policy, from setting up such ground of forfeiture. However, the doctrine of waiver cannot be invoked to create primary liability. Walker v. American Ice Co., 254 F. Supp. 736 (D. D.C. 1966).
The duty to defend is determined by the allegations in the complaint, even if the allegations later prove to be false or fraudulent. If the suit alleges facts that create potential coverage, the insurer must defend. See Kopelowitz v. Home Insurance Co., 977 F.Supp. 1179 (S. D. Fla. 1997).
However, extrinsic facts may sometimes be used to defeat the duty, as in Nateman v. Hartford Casualty Co., 544 So. 2d 1026 (Fla. App. 1989), where the insurer had no duty to defend an independent contractor, even though the suit alleged the plaintiff was an employee of the insured.
It is well-settled that an insurer may provide a defense to its insured while reserving the right to later challenge coverage if timely notice of such reservation is given to the insured. Giffen Roofing Co. v. DHS Developers, Inc., 442 So. 2d 396 (Fla. Dist. Ct. App. 1983). An insurer that delays informing its insureds of a dispute about coverage may find itself estopped from contesting coverage if the insureds show prejudice resulting from the delay. National Union Fire Insurance Co. of Pittsburgh, Pa. v. Sahlen, 999 F.2d 1532 (11th Cir. 1993).
In Georgia, if the facts as alleged in the underlying complaint even arguably bring the occurrence within the policy's coverage, the insurer has a duty to defend the action. Nationwide Mutual Fire Insurance Co. v. Somers, 264 Ga. App. 421 (2003). However, the court held in Great American Insurance Co. v. McKemie, 244 Ga. 84 (1979), that where the complaint filed against the insured does not assert any claims upon which there would be insurance coverage, the insurer is justified in refusing to defend the insured's lawsuit.
An insurer who assumes and conducts a defense of an action brought against the insured with knowledge of facts which would constitute non-coverage under the policy without disclaiming liability and giving notice of its reservation of rights is estopped from thereafter establishing such facts of non-coverage. An insurer may avoid such estoppel by giving a timely notice of its reservation of rights where such notice fairly informs the insured of the insurer's position. Richmond v. Georgia Farm Bureau Mutual Insurance Co., 140 Ga. App. 215 (1976). An insurer is not required to file a declaratory judgment action to avoid waiver and estoppel if the insured implied consent. Jacore Sys., Inc. v. Cent. Mut. Ins. Co., 194 Ga. App. 512, 514, (1990).
Hawaii's laws regarding the duty to defend are neatly summarized in CIM Insurance Corp. v. Masamitsu, 74 F.Supp. 2d 975 (D. Haw. 1999). The insurer has a duty to defend where a suit raises a potential for indemnification, even if parts of the complaint fall outside the policy coverage. The insurer has a duty to investigate to determine if the complaint raises potential coverage. This duty is also imposed if the allegations differ from facts the insurer knows or can readily determine, or if the allegations are ambiguous.
Under Hawaii law, the policy language may limit the duty to defend against threatened lawsuits. An insurer defending under a reservation of rights is subject to an enhanced standard of good faith, that is thoroughly investigating, retaining competent counsel, keeping the insured informed of all developments, and placing greater concern in the insured's financial risk than insurer's monetary interest. If an insurer is ultimately found to have had no duty to defend or indemnify, it may still be liable for improperly conducting the defense in bad faith.
An insurer may be estopped from denying coverage where it was plainly evident that grounds for non-coverage existed but the insurer assumed control of the insured's defense without securing a reservation of rights. AIG Hawaii Insurance Co. v. Smith, 891 P.2d 261 (Haw. 1995). Where an insurer defends an action with allegations of conduct both within and without the scope of insurance coverage, subject to a reservation of rights, a conflict of interest exists. Nevertheless, under Hawaii law, an attorney may be paid by the insurer if the insured is informed of that fact and consents, and the arrangement does not compromise the attorney's duty of loyalty to the insured. An insurer has the contractual right to select counsel for the insured in the tender of a defense under a reservation of rights. However, the insured has the right to reject this counsel. Finley v. Home Insurance Co., 975 P.2d 1145 (Haw. 1998).
In Idaho, the insurer's duty to defend arises on the filing of a complaint that contains allegations which, in whole or in part, when “read broadly,” reveal a potential for coverage. See Hoyle v. Utica Mutual Insurance Co., 48 P.3d 1256 (Idaho 2002). The duty continues as long as there is a genuine dispute over the facts bearing on coverage or over the application of the policy language to the facts. See Construction Management Systems, Inc. v. Assurance Company of America, 23 P.3d 142 (Idaho 2001]. Where a claim presents a fact pattern arguably within the policy, and the application of an exclusion presents a fairly debatable question of law or fact, the insurer has a duty to defend its insured until that question is resolved. See Black v. Fireman's Fund American Insurance Co., 767 P.2d 824 (Idaho Ct. App. 1989).
It is generally recognized in Idaho that coverage defenses may be properly preserved by a reservation of rights. Mutual of Enumclaw v. Harvey, 115 Idaho 1009 (1989).
An insurer's duty to defend its insured is much broader than its duty to indemnify. Crum and Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384 (1993). To determine whether an insurer has a duty to defend its insured a court will generally apply the “eight corners rule.” Under that rule, a court compares the four corners of the underlying complaint with the four corners of the insurance policy issued by the insurer to the insured and determines whether the facts alleged in the complaint fall within, or potentially within, the policy's coverage. Pekin Insurance Co. v. Dial, 355 Ill. App. 3d 516, 519 (2005). The duty to defend arises even if the allegations are groundless, false or fraudulent, or if only one of several theories advanced is potentially covered under the policy. See Lyons v. State Farm Fire & Casualty Co., 349 Ill. App. 3d 404 (2004).
If the complaint does not state facts that bring the case within or potentially within coverage, then there is no duty to defend. See Standard Mutual Insurance Co. v. Mudron, 358 Ill. App. 3d 535 (2005). However, an insurer's knowledge of true but unpleaded facts which indicate a claims potential coverage will give rise to a duty to defend. Shriver Insurance Agency v. Utica Mutual Insurance Co., 323 Ill. App. 3d 243 (2001). The underlying complaint and the insurance policy must be liberally construed in favor of the insured. See Westfield Nat'l Insurance Co. v. Long, 348 Ill. App. 3d 987 (2004).
Under Illinois law, if the insured tenders a defense to the insurer, the insurer cannot decline to participate and simply wait for the insured to sue it to determine the insurer's duty. Bedoya v. Illinois Founders Insurance, 688 N.E.2d 757 (Ill. App. Ct. 1997).
When an underlying complaint is potentially covered under a policy, and the insurer believes that the policy does not cover the claim, the insurer may not refuse to defend the insured, and must either defend the suit under a reservation of rights or seek a declaration of no coverage. Peerless Enterprise, Inc. v. Kruse, 317 Ill. App. 3d 133 (2000). When an insurer fails to either defend the suit under a reservation of rights or seek a declaration of no coverage and wrongfully denies coverage, it will be estopped from raising policy defenses to coverage. See American National Fire Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh PA, 343 Ill. App. 3d 93 (2003).
An insurer's duty to defend its insureds in suits against them is broader than its duty to indemnify. Indiana courts determine the insurer's duty to defend from the allegations contained within the complaint and from those facts known or ascertainable by the insurer after reasonable investigation. If the pleadings reveal that a claim is clearly excluded under the insurance policy issued by the insurer to the insured, then no defense is required. Jim Barna Log Systems Midwest, Inc. v. General Casualty Insurance Co. of Wisconsin, 791 N.E.2d 816, 823 (Ind. Ct. App. 2003). An insurer's duty to defend arise after it receives the foundational information designated in the notice requirement. Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267, 1273 (Ind. 2009).
When an insurer's independent investigation of the facts underlying a complaint against its insured reveals a claim patently outside of the risks covered by the policy, the insurer may properly refuse to defend. Walton v. First American Title Insurance Co., 844 N.E.2d 143, 146 (Ind. App. 2006).
An insurer may protect from waiver and estoppel by defending under a non-waiver agreement or reservation of rights letter. Ohio Casualty Insurance Co. v. Rynearson, 507 F.2d 573 (7th Cir. 1974).
The insurer is to look at allegations of fact in a third-party's claim against an insured rather than to legal theories on which the third party claims the insured is liable. The insurer's duty to defend continues after a covered cause of action is dismissed if the operative facts of remaining causes of action are arguably covered within the dismissed cause of action. Employers Mutual Casualty Co. v. Cedar Rapids Television Co., 552 N.W.2d 639 (Iowa 1996).
The duty to defend arises whenever there is potential or possible liability to indemnify the insured based on the facts appearing at the outset of the case. See First Newton National Bank v. General Casualty Co. of Wisconsin, 426 N.W.2d 618 (Iowa 1988). An insurer does not breach its contract with its insured by defending under a reservation of rights. In Iowa, an insured commits a breach when it settles its suit without the insurer's consent and the insurer has reserved its rights. Kelly v. Iowa Mutual Insurance Co., 620 N.W.2d 637 (Iowa 2000).
Kansas law holds that the insurer must look beyond the effect of the pleadings and consider any facts brought to its attention, or any facts which it could reasonably discover through a good faith analysis. If those facts are an indication of potential, even if remote, liability under the policy the insurer is obligated to defend. Aselco, Inc. v. Hartford Insurance Group, 21 P.3d 1011 (Kan. Ct. App. 2001).
Kansas courts recognize three possible consequences of the insurer's breach of its duty to defend and its failure to reserve its rights: 1) the possibility of an award in excess of the policy limits; 2) collateral estoppel, and 3) equitable estoppel. Aselco, 21 P.3d 1011.
In Kentucky, an insurer's duty to defend a suit against its insured is separate and distinct from the obligation to pay any claim. The insurance company must defend any suit in which the language of the complaint would bring within the policy coverage regardless of the action's merit. The determination of whether a defense is required must be made at the outset of the litigation. The duty to defend continues to the point of establishing that the liability upon which the plaintiff was relying was in fact not covered by the policy and not merely that it might not be. James Graham Brown Found., Inc. v. St. Paul Fire & Marine Insurance Co., 814 S.W.2d 273 (1991).
The insurer has a duty to defend if there is any allegation in the underlying complaint which potentially, possibly, or might come within the coverage of the insurance policy issued by the insurer to the insured. If an insurer believes that there is no coverage for a claim against an insured, it has several options including (1) not defending the claim, and (2) defending the claim while preserving the right to challenge the coverage at a later date by issuing a reservation of rights letter. Aetna Casualty & Surety Co. v. Commonwealth, 179 S.W.3d 830, 841 (2005).
However, an insured is not required to accept the insurer's offer to defend in the underlying tort action under a reservation of rights agreement. Instead, the insured may refuse such a qualified defense and then later litigate the coverage question after a tort judgment has been recovered against him. Cincinnati Insurance Co. v. Vance, 730 S.W.2d 521 (1987).
In Louisiana, the insurer's duty to defend is determined by the allegations in the lawsuit. If the suit alleges a covered set of facts, the insurer must defend even if the actual facts appear not to be covered. The insurer may refuse to defend only if the allegations of the suit unambiguously exclude coverage. James v. Hyatt Corp. of Delaware, 981 F.2d 810 (5th Cir. 1993).
Louisiana follows the “eight-corners rule.” Vaughn v. Franklin, 785 So. 2d 79, 84 (La. App. 2001). An insured claiming breach of duty to defend must only establish that one claim asserted is covered; the additional uncovered claims do not relieve the insurer of the duty. Complaint of Stone Petroleum Corp., 961 F.2d 90 (5th Cir. 1992).
A non-waiver agreement or reservation of rights letter is a document, indicating that the insurer retains its right to defend itself based on the alleged insured's lack of coverage under its policy. W.T.A. v. Yeager, 832 So. 2d 1217 (La. App. 2002). When an insurer, with knowledge of facts indicating noncoverage under the insurance policy, assumes or continues the insured's defense without obtaining a nonwaiver agreement to reserve its coverage defense, the insurer waives such policy defense. Arceneaux v. Amstar Corp., 921 So. 2d 189 (La. App. 2005).
Maine courts determine whether an insurer has a duty to defend a suit against its insured by comparing the allegations set forth in the underlying complaint with the provisions of the insurance policy issued by the insurer to the insured. If the allegations, when compared to the policy, put forth any potential basis for recovery, there is a duty to defend. State Farm Auto. Insurance Co. v. Montagna, 874 A.2d 406 (Me. 2005).
In defending its insured under a reservation of rights, an insurer does not breach its insurance agreement, but it must cede control over the defense to the insured. Therefore, where an insurer defends under a reservation of rights and the insured settles for a reasonable amount, the insurer is not denied a meaningful opportunity to defend its interests. See Patrons Oxford Insurance Co. v. Harris, 905 A.2d 819 (Me. 2006). A reservation of rights does not create a per se conflict of interest between an insurer and insured. State Farm Mut. Auto. Ins. Co. v. Hansen, 131 Nev. Adv. Op. 357 P.3d 338 (2015).
Under Maryland law, the insurer's duty to defend is established by the allegations made in the underlying action against the insured. The insurer has an obligation to defend when there is a potential that the claim could be covered. Thus, not only are the four corners of the complaint compared with the four corners of the policy, but also with any extrinsic evidence which would allow the insured to establish a potential for coverage. Warfield-Dorsey Co., Inc. v. Travelers Casualty & Surety Co. of Illinois, 66 F.Supp. 2d 681 (D. Md.1999). The extrinsic evidence must pertain to a claim actually asserted, not to one that possibly might be asserted. Reames v. State Farm Fire & Casualty Insurance, 683 A.2d 179 (Md. Ct. App. 1996).
Where a plaintiff sues an insured, who consequently demands a defense from the insurer, the insurer may (1) refuse to defend and disclaim liability; (2) defend the action against the insured under a nonwaiver agreement; or (3) institute a declaratory judgment action to resolve the issue of coverage. Glen Falls Insurance Co. v. American Oil Co., 254 Md. 120 (1969).
Massachusetts law holds that the insurer has a duty to defend a suit against its insured when the allegations of the underlying complaint are “reasonably susceptible” to an interpretation that they state a claim covered by the terms of the insurance policy issued by the insurer to the insured. Even if the complaint is not specific, a duty to defend exists. An insurer must defend until the time that it demonstrates with conclusive effect on the third party that as a matter of fact the third party cannot establish a claim within the insurance. The insurer may do this in a third-party action in which it has been brought in by the insured or by a declaratory judgment action. Metallized Products, Inc. v. Travelers Insurance Co., 2003 WL 22481398 (Mass. Super).
When an insurer defends under a reservation of rights, a potential conflict between the insured and insurer may arise. Even if no actual conflict ever materializes, the threat of conflict is so great that a reservation of rights defense is often treated as an actual conflict. In these situations of divergent interests, the insured is entitled to control the defense and to secure independent counsel, with reasonable costs paid by the insurer. Magoun v. Liberty Mutual Insurance Co., 346 Mass. 677 (1964).
The duty to defend in Michigan depends on the allegations in the complaint of the third party in the action against the insured, and extends to actions which are groundless, false, or fraudulent, so long as the allegations against the insured even arguably come within policy coverage. The duty to defend is not limited by the exact language of the pleadings—the insurer has a duty to look behind the allegation to analyze whether coverage is possible. Doubt is resolved in favor of the insured. See Detroit Edison Co. v. Michigan Mutual Insurance Co., 301 N.W. 2d 832 (Mich. Ct. App. 1980).
If the insurer contests its obligation to provide coverage, it optimally should provide notice to the insured, reserving its right to indemnify; at that point the interests of insurer and insured come into conflict, and so independent counsel must be appointed for the insured. Detroit Edison. The insured has no absolute right to select the attorney himself, as long as the insurer exercises good faith in its selection and the attorney selected is truly independent. An insurer can also refuse to defend and take its chances that there will be no coverage, but the former is the preferred option. Central Michigan Board of Trustees v. Employers Reinsurance Corp., 117 F.Supp. 2d 627 (E.D. Mich. 2000).
In Minnesota, an insurer must defend a suit brought against its insured if any part of a cause of action is arguably within the scope of the coverage. Jarvis & Sons, Inc. v. International Marine Underwriters, 768 N.W.2d 365 (Minn. App. 2009).
If a complaint alleges several claims, and any one of them would require a defense, the insurer must defend against all the claims. If an insurer knows all the facts of a claim and defends without reserving its rights to deny coverage, the insurer may be estopped to later deny coverage. See Mutual Serv. Cas. Insurance Co. v. Luetmer et al., 474 N.W. 2d 365 (Minn. Ct. App. 1991). But if there is no possible coverage, the insurer has no duty to defend. Thermex Corporation v. Fireman's Fund Insurance Co., 393 N.W.2d 15 (Minn. App. 1986).
Before an insured will be entitled to counsel of its own choice, an actual conflict of interest, rather than an appearance of a conflict of interest, must be established. A conflict of interest will not be established simply by showing that the insurer wished to remain fully informed of the progress of the litigation in the main action while also litigating a declaratory judgment action. Mut. Serv. Cas. Ins. Co. v. Luetmer, at 368-69.
Mississippi uses the “eight-corners” test to determine whether an insurer has a duty to defend a suit against its insured. Therefore, the obligation of a liability insurance company under a policy provision requiring it to defend an action brought against the insured by a third party is to be determined by the allegations of the complaint in such action. Watson Quality Ford, Inc. v. Greater River Insurance Co., 909 So. 2d 1196 (Miss. App. 2005). Under an exception to this rule, an insurer has a duty to defend when presented with extrinsic facts, of which the insurer has knowledge or could obtain knowledge by means of a reasonable investigation, that trigger coverage under the policy. Ingalls Shipbuilding v. Federal Insurance Co., 410 F.3d 214 (5th Cir. 2005).
The insurer may defend under a reservation of rights to deny coverage. If the policy covers only a portion of the claim against the insured or only one theory of liability, the insurer should allow the insured the opportunity to select independent counsel. Thus, the insurer does not have a responsibility to defend all claims alleged, but only those covered. See Moeller v. American Guarantee and Liability Insurance Co, 707 So. 2d 1062 (Miss. 1998).
In Missouri, the duty to defend arises when the insured is first sued. Normally, the duty to defend is determined by comparing the policy language with the allegations in the complaint. The insurer, however, cannot ignore facts which were known or should have been reasonably apparent at the commencement of the suit. This does not mean that the insurer must conduct a far-reaching investigation, though. Further, the duty to defend need not be based on facts emerging during discovery. But if the insured submits an amended pleading or additional facts that suggest there may be coverage, the insurer must reconsider its duty to defend. See Esicorp, Inc. v. Liberty Mutual Insurance Co., 193 F.3d 966 (8th Cir. 1999).
A liability insurer may litigate the coverage issue even if it has breached its duty to defend. Royal Insurance Co. of America v. Kirksville College of Osteopathic Medicine, Inc., 304 F.3d 804 (8th Cir. 2002).
An insurer may not reserve the right to disclaim coverage and simultaneously insist upon controlling the defense. Ballmer v. Ballmer, 923 S.W.2d 365 (Mo. App. W.D. 1996). The insured has the option of either accepting or refusing an insurer's defense under a reservation of rights. If the fully notified insured accepts, then the insurer's defense under a reservation of rights will not be considered a denial of coverage. Truck Insurance Exchange v. Prairie Framing, LLC, 162 S.W.3d 64 (Mo. App. W.D. 2005).
Missouri law treats an insurer's decision to defend under a reservation of rights as a refusal to defend. As a result, when an insurer defends under a reservation of rights, it surrenders its right to partake in the defense of the claim. See Ballmer.
Montana applies the “four corners” rule, so the policy's language determines an insurer's duty to defend its insured. See Skinner v. Allstate Insurance Co., 127 P.3d 359, 363 (Mont. 2005). Generally, the duty to defend arises when a complaint against an insured alleges facts which, if proven, would result in coverage under the insurance policy issued by the insurer to the insured. Farmers Union Mutual Insurance. Co. v. Staples, 90 P.3d 381 (Mont. 2004). Allegations are liberally construed in favor of finding an obligation to defend. Staples. Where a claim falls unequivocally outside the policy's coverage, however, there is nothing for the court to construe, and no reason to impose a duty to defend. Lloyd A. Twite Family P'ship v. Unitrin Multi Line Ins., 192 P.3d 1156, 1160 (Mont. 2008).
If an insurer wishes to dispute coverage, it must defend under a reservation of rights and later seek a judicial determination of coverage in a declaratory judgment action. See Staples.
In the case of Babcock & Wilcox Co. v. Parsons Corporation, 430 F.2d 531 (8th Cir. 1970) the court stated that under Nebraska law the insurer was required to undertake a defense only of the claims asserted against the insured which fell within policy coverage. The allegations of the complaint were the reference for deciding whether the claim was within coverage. If the complaint stated one covered claim, the insurer had a duty to accept defense of the entire lawsuit, even the uncovered claims.
In Allstate Insurance Co. v. Novak, 313 N.W.2d 636 (Neb. 1981), the court said an insurer had the duty to defend its insured whenever it ascertained facts which might lead to a potential of liability, and could not limit its investigation to the allegations. However, if, according to the facts alleged in a pleading and ascertained by an insurer, the insurer has no potential liability to its insured under the insurance agreement, then the insurer may properly refuse to defend its insured. Peterson v. Ohio Cas. Group, 724 N.W.2d 765, 774 (Neb. 2006).
Under Nebraska law, the insured must show an absence of a reasonable basis by the insurer for denying a defense, and must prove the insurer's knowledge or reckless disregard of a lack of reasonable basis for denial in order to make a bad faith claim. John Markel Ford, Inc. v. Auto-Owners Insurance Company, 543 N.W.2d 173 (Neb. 1996).
Under Nevada law, an insurer's duty to defend a suit against its insured is broader than its duty to indemnify. Nevada VTN v. General Insurance Co. of America, 834 F.2d 770 (9th Cir. 1987). An insurer is obligated to assume the defense of an action that alleges an injury which is potentially within the coverage provided by its insurance policy with the insured.
There is no duty to defend where there is no potential for coverage. If there is any doubt about whether the duty to defend arises, this doubt must be resolved in favor of the insured. United National Insurance Co. v. Frontier Insurance Co., Inc., 99 P.3d 1153 (Nev. 2004).
An insurer's duty to defend is determined by whether sufficient facts in the pleadings bring the cause of action within the policy coverage, even though the suit may eventually be found to be without merit. The court must also consider the reasonable expectations of the insured as to its rights under the policy. The duty to defend is not necessarily co-extensive with the duty to pay or indemnify. United States Fidelity & Guaranty Co., Inc. v. Johnson Shoes, Inc., 461 A.2d 85 (N.H. 1983).
While the duty to defend may be based on pleaded facts, the court may look at underlying facts to avoid permitting pleading strategies to control the rights of the parties to an insurance contract. In other words, if the court finds that an allegation of negligence is included in the suit simply to force a defense, the court can disallow the allegation. Winnacunnet Cooperative School District v. National Union Fire Insurance Co. of Pittsburgh, Pa., 84 F.3d 32 (1st Cir. 1996).
The duty to defend is triggered by the filing of a complaint alleging a covered claim. Abouzaid v. Mansard Gardens Associates, LLC, 207 N.J. 67, 79, (N. J. 2011). Under New Jersey law, the insurer's duty to defend is measured by the allegations in the complaint. If the pleadings state facts which bring the injury within policy coverage, the insurer must defend. Thus, it is the nature of the claim, rather than the ultimate liability of the insured, that determine the duty. Although the courts give effect to the insured's reasonable expectations, this doctrine does not apply where there is no ambiguity in the exclusionary language of the insurance policy. Hofing v. CNA Insurance Companies, 588 A.2d 864 (N.J. Super. Ct. App. Div. 1991).
If the pleadings do not clearly establish whether or not there is coverage, the insurer must consider extrinsic facts its insured makes known. SL Industries, Inc. v. American Motorist Insurance Co., 607 A.2d 1266 (N.J. 1992).
An insurer may not reserve its rights by unilateral action. If the insurer wishes to control the defense and simultaneously reserve a right to dispute coverage, it can do so only with the insured's consent. See Merchant Indemnity Corp. v. Eggleston, 37 N.J. 114 (1962).
In New Mexico, the duty to defend is determined by comparing factual allegations in the complaint with the policy. A determination of whether an exclusion relieves the insurer of the duty to defend must be made in a primary lawsuit, and not in an action for declaratory judgment. Lopez. v. New Mexico Public Schools Insurance Authority, 870 P.2d 745 (N.M. 1994). The insurer must also examine facts actually known to it at the time demand for defense is tendered; the insurer must still defend even if the complaint does not state facts with sufficient clarity so that it may be determined on its face whether the action is within policy coverage, provided the alleged facts tend to indicate coverage. Sena v. Travelers Insurance Co., 801 F.Supp. 471 (D. N.M. 1992). The duty to defend may arise at the beginning of litigation or at some later stage if the issues are changed so as to bring the dispute within the scope of policy coverage. Am. Gen. Fire & Cas. Co. v. Progressive Cas. Co., 799 P.2d 1113 (N.M. 1990). An insurance company is required to conduct an investigation into the facts and circumstances underlying the complaint against its insured as is reasonable given the factual information provided by the insured or provided by the circumstances surrounding the claim in order to determine whether it has a duty to defend. G & G Services, Inc. v. Agora Syndicate, Inc., 993 P.2d 751, 757 (1999).
Coverage defenses may be properly preserved by a reservation of rights agreement. American Employers Insurance Co. v. Crawford, 87 N.M. 375 (1975). Applying New Mexico law, the court ruled in Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190 (M.D. La. 1996), that a liability insurer may recover fees it has paid under a reservation of rights if it is subsequently found not to owe coverage unless, suggested the court, the insured had objected.
The duty to defend is “exceedingly broad” and more expansive than the duty to indemnify. Determining whether an insurer has a duty to defend requires an examination of the policy language and the allegations of the complaint to see if the underlying complaint alleges any facts or grounds which bring the action within the protection purchased. An insurer must defend whenever the four corners of the complaint suggest, or the insurer has actual knowledge of facts establishing, a reasonable possibility of coverage. Int'l Bus. Machines Corp. v. Liberty Mut. Fire Ins. Co., 303 F.3d 419, 424 (2d Cir. 2002). The duty to defend also extends to a defense of the entire action. Mendes & Mount v. American Home Assurance Co. et al., 97 A.D.2d 384 (N.Y. Sup. Ct. 1983). If the insurer believes an exclusion will apply to deny indemnification, the insurer must prove that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. Commercial Union Assurance Co. et al. v. Oak Park Marina, Inc., 198 F.3d 55 (2nd Cir. 1999).
The purpose of reserving rights is to prevent the insured's detrimental reliance on the defense provided by the insurer. A reservation of rights letter is sufficiently preventative to reliance even if the insurer later disclaims coverage on a basis different from the grounds originally asserted in the reservation of rights letter. A delay in giving notice of a reservation of rights will be excused where traceable to the insurer's lack of actual or constructive knowledge of available defenses, especially where, in addition to such lack of knowledge, the insurer was misled by representations into defending against the underlying lawsuit. The insurer, however, is not obligated to speculate about each and every conceivable defense. See Federated Department Stores, Inc. v. Twin City Fire Insurance Co., 807 N.Y.S.2d 62 (1st Dep't 2006).
In determining whether the insurer has the duty to defend, the court is to compare the insurance policy with the allegations of the complaint, and if the allegations bring the claim within the coverage, the insurer's duty to defend is absolute. However, matters outside the pleadings may be taken into account where the insurer knows or could reasonably ascertain facts that, if proven, would be covered by the policy (Lozado v. The Phoenix Insurance Co., 237 F. Supp. 2d 664 [M.D. N.C. 2003]).
An insurer who believes that a claim falls outside policy coverage can seek a declaratory judgment before trial of the underlying action, or defend under a reservation of rights. St. Paul Fire & Marine Insurance Co. v. Vigilant Insurance Co., 724 F.Supp. 1173 (4th Cir. 1990).
Generally, an insurer is not barred from later denying coverage when it defends the insured under a reservation of rights to deny coverage. Estoppel might apply, however, to bar such a denial if the insurer assumed the defense of the action without reserving its right to deny coverage and later disclaimed coverage after an adverse judgment was entered. See Fortune Insurance Co. v. Owens, 526 S.E.2d 463 (N.C. 2000).
In North Dakota, the obligation to defend is measured by the terms of the policy and the pleading. If the allegations in the complaint would be covered, the duty to defend is present. See Kyllo v. Northland Chemical Co., 209 N.W.2d 629 (N. D. 1973). The insurer need not investigate and ascertain facts independent of pleadings before it resolves whether or not to defend, but if the insurer acquires actual knowledge of additional facts that establish reasonable possibility of coverage, then the insurer must defend. Pennzoil Co. v. United States Fidelity and Guaranty Co., 50 F.3d 580 (8th Cir. 1995).
The insurer's duty to defend may not be readily apparent from the pleadings in the case against the insured, but if the allegations state a claim “potentially or arguably” within policy coverage, or if there is a doubt whether a theory of recovery within policy coverage has been pleaded, the insurer must defend. The insurer must also take into account facts known or readily discoverable through its investigation. The insurer may defend under a reservation of rights, utilizing discovery to clarify the nature of the claim against the insured. See City of Willoughby Hills v. Cincinnati Insurance Co., 459 N.E.2d 555 (Ohio 1984).
The test of whether the duty to defend has been breached is whether the reservation of rights has made it impossible for the insurer to defend both its own interests and those of the insured. Lusk v. Imperial Casualty and Indemnity Co., 603 N.E.2d 420 (Ohio Ct. App. 1992). Although Ohio courts hold as a general rule that waiver and estoppel cannot be used to expand coverage of a policy, the exception occurs when the insurer provides a defense without a reservation of rights. Turner Liquidating Co. v. St. Paul Surplus Lines Insurance Co., 638 N.E.2d 174 (Ohio Ct. App. 1994). Where the insurer defends its insured, either in whole or by a reservation of rights, the insured is not at liberty to make a reasonable settlement without prejudice to their rights under the contract. See Westfield Insurance Cos. v. D.C. Builders, 2004 Ohio 742 (Ohio App. 2004).
The actual facts, not just the pleadings, determine the duty to defend. The insurer must thus look to the pleadings, to facts known to the insured, and to facts the insurer may learn when the insured tenders its defense. During the litigation, if facts emerge that suggest coverage, the insured has the responsibility of notifying the insurer of these facts. See First Bank of Turley v. Fidelity & Deposit Co. of Maryland, 928 P.2d 298 (Okla. 1996).
Oregon applies the “eight corners rule,” examining two documents, the insurance policy and the complaint. Abrams v. Gen. Star Indem. Co., 67 P.3d 931 (Or. 2003). An insurer has a duty to defend if the factual allegations of the complaint, without amendment, state a claim for any offense covered by the policy. Marleau v. Truck Ins. Exch., 37 P.3d 148 (Or. 2001). The “without amendment” standard is to ensure that the insurer has sufficient notice of the insured's potential liability for conduct that is covered under the policy.
The insurer has a duty to defend if the complaint provides any basis for which the insurer provides coverage. Even if the complaint alleges some conduct outside the coverage of the policy, the insurer may still have a duty to defend if certain allegations of the complaint could impose liability for conduct covered by the policy. Ledford v. Gutoski, 877 P.2d 80, 83 (Or. 1994). So long as there are allegations of covered conduct, the insurer has a duty to defend, even if the complaint contains allegations of excluded conduct under the insurance policy. See Abrams.
The court in Ross Island Sand & Gravel Co. v. General Insurance Co. of America, 472 F.2d 750 (9th Cir. 1973) held that “any duty liability insurer might have had to defend suit against insured evaporated as soon as complaint against insured was supplemented by discovery of material facts; court was not required to avert its eyes from facts properly before it merely because complaint against insured was cast in broad enough language to have required insurer to defend in a state court, and court properly put an end to action against insurer by means of summary judgment.” However, they noted that Oregon's rule on the duty to defend does not lend itself to the pleading practices in the federal courts.
Under Oregon law, an insurer may be estopped from denying coverage when the party claiming coverage has acted in a reasonable reliance on an agent's representation of coverage that is not “patently absurd” Spring Vegetable Co v. Hartford Casualty Insurance Co., 801 F. Supp. 385 (D. Or. 1992). However, an insurer does not waive, nor is it estopped, from disputing coverage based on an exclusion by previously having refused to defend based on other grounds. Timberline Equipment Co., Inc. v. St. Paul Fire & Marine Insurance Co., 576 P.2d 1244 (Or. 1978).
If an insurer controls the defense of its insured, it does not preserve coverage defenses. In order to preserve coverage defenses, including the right to assert the defense of non-coverage, the insured must agree to the reservation of rights. If the insurer assumes the defense in the face of the insured's refusal to accede to the insurer's request for reservation of rights, it waives or is estopped from asserting the defense of non-coverage. See Ferguson v. Birmingham Fire Insurance Co., 460 P.2d 342 (Or. 1969).
The insurer has a duty to defend when the factual allegations of the complaint could potentially fall within policy coverage. Air Products and Chemicals, Inc. v. Hartford Accident and Indemnity, 25 F. 3d 177 (3rd Cir. 1994). The question of whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract to the four corners of the complaint. Am. & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 2 A.3d 526, 541 (Pa. 2010). The district court may not go beyond the face of the underlying complaint to determine the insurer's initial duty to defend for purposes of summary judgment. In order for extrinsic evidence to be admitted at the summary judgment state, the insured must introduce evidence to show that the exclusion upon which the insurer is relying to decline to defend does not apply after all. Air Products.
If a single allegation of the complaint is potentially covered, the insurer has an obligation to defend against all claims until the possibility of recovery is confined to claims outside the policy. CAT Internet Systems Inc. v. Providence Washington Insurance Co., 153 F.Supp. 2d 755 (E.D. Penn. 2001). It is the nature of the allegations contained in the complaint, rather than the actual details of any injuries suffered by the insured, that control whether an insurer must defend its policyholder. Scopel v. Donegal Mutual Insurance Co., 698 A.2d 602 (Pa. 1997).
The Pennsylvania Supreme Court has ruled that the duty to defend is based on the facts alleged, not the legal characterizations accorded to those facts in the plaintiff's pleadings. See Mutual Benefit Insurance Co. v. Haver, 725 A.2d 743 (Pa. 1999). Where an insurer has a contractual duty to defend, it may not recoup its defense costs later on, even if found not to owe coverage, under a theory of unjust enrichment or quantum meruit. American & Foreign Insurance Co. v. Jerry's Sport Center, Inc., 948 A.2d 834 (Pa. Super. 2008).
Generally, under Pennsylvania law, when a liability insurer voluntarily manages its insured's defense to a final judgment or settlement, the carrier cannot later disclaim liability under the policy. However, this general rule does not apply when coverage defenses are disclosed and specifically preserved. Pennsylvania's courts have approved the use of reservation of rights letters to preserve coverage defenses on disputed policy issues. In Pennsylvania, these letters do not require the consent of the insured and generally prevent the operation of an estoppel against the insurer. Titan Indemnity Co. v. Cameron, 2002 WL 242346 (E.D. Pa.).
There is no duty to defend if there is no potential of liability coverage under a policy. See Reyes Lopez v. Misner Marine Construction, Inc., 664 F. Supp. 652 (D. P.R. 1987).
Under Rhode Island law, an insurer's duty to defend its insured in an underlying action is triggered by applying the “pleadings test.” That test provides that where the complaint recites facts which bring the injuries complained of within the scope of the coverage in the insurance policy issued by the insurer to the insured, the insurer must defend irrespective of the insured's ultimate liability to the plaintiff. The facts alleged in the complaint, rather than the liability theories asserted, determine whether the duty is triggered. Quality Concrete Corp. v. Travelers Prop. Cas. Co. of Am., 43 A.3d 16, 20 (R.I. 2012).
The insurer cannot rely on facts not asserted in the complaint to avoid its duty to defend. If the insured fails to give timely notice of a claim, the insurer must show prejudice arising from the late notice to escape its duty to defend. Nortek, Inc. v. Liberty Mutual Insurance Co., 858 F.Supp. 1231 (D.R.I. 1994).
An insurer wishing to avoid bad faith liability may enter into a nonwaiver agreement to defend the insured and later question coverage or bring a declaratory judgment action. Rumford Property and Liability Insurance Co. v. Carbone, 590 A.2d 398 (R.I. 1991).
The obligation of the insurer to defend is determined by the allegations of the underlying third-party complaint. Reference to the policy itself is essential to determine whether the duty to defend exists. See Allstate Insurance Co. v. Best, 728 F.Supp. 1263 (D. S.C. 1990). Amended complaints which allege actions that may be covered are allowed. See South Carolina Medical Malpractice Liability Insurance Joint Underwriting Association v. Ferry, 354 S.E.2d 378 (S.C.1987); however, in USAA Property and Casualty Insurance Co. v. Rowland, 435 S.E.2d 879 (S.C. Ct. App. 1993), amending the complaint must modify the cause of action or changes will be disregarded.
An insurer has no duty to defend its insured where the cause of the damage is unambiguously excluded under the policy. Federated Mutual Insurance Co. v. Piedmont Petroleum Corp., 444 S.E.2d 532 (S.C. Ct. App. 1994).
The insurer's duty to defend extends to any claim asserted against an insured that arguably falls within the policy's coverages. If disputed, the issue of whether an insurer has a duty to defend is determined by the complaint and “other evidence of record.” The insurer bears the burden of showing it has no duty to defend the insured. Id. This burden is satisfied when the insurer shows the claim “clearly falls outside of policy coverage.” State Farm Fire & Cas. Co. v. Harbert, 741 N.W.2d 228 (S.D. 2007).
An insurer may defend an insured under a reservation of rights. St. Paul Fire and Marine Insurance Co. v. Engelmann, 639 N.W.2d 192 (S.D. 2002).
In Tennessee, the general rule is that the duty to defend depends upon the allegations in the underlying complaint. The allegations of the complaint are compared with the terms of the insurance policy. Once the duty is triggered, it continues until the facts and law establish that the claim is not covered. Standard Construction Co. Inc. v. Maryland Casualty Co., 2002 WL 1477886 (W.D. Tenn. 2002).
Extrinsic facts have no place in assessing an insurer's duty to defend; the duty is determined solely by the allegations contained in the complaint. Blake Industries, Inc. v. General Agents Insurance Co. of America, 2000 WL 1031054 (Tenn. Ct. App. 2000). The duty to defend extends to the entire complaint if there is a duty to defend any portion of it. York v. Vulcan Materials Co., 63 S.W.3d 384 (Tenn. Ct. App. 2001).
The scope of a reservation of rights is determined by its express terms. A reservation that reserves the right to investigate but not to deny coverage after payment of the claim results in a waiver of the coverage defenses. Richards Manufacturing Co. v. Great American Insurance Co., 773 S.W.2d 916 (Tenn. Ct. App. 1988).
Texas applies the “eight corners rule,” under which courts must first look to the factual allegations in the pleadings to ascertain whether the alleged conduct potentially requires coverage. Facts outside the pleadings cannot influence the duty to defend. If the complaint does not state sufficient facts to clearly determine if the case is within or falls outside of coverage, the insurer is obliged to defend if there is a potential case for coverage. See St. Paul Fire & Marine Insurance Co. v. Green Tree Financial Corp., 249 F.3d 389 (5th Cir. 2001).
A complaint which does not initially state a cause of action under the policy and thus create a duty to defend may be amended so as to trigger the duty. Rhodes v. Chicago Insurance Co., a Div. of Interstate Nat. Corp., 719 F.2d 116 (5th Cir. 1983). The duty is thus determined solely by allegations in the most recent petition in the underlying action. Mt. Hawley Insurance Co. v. Steve Roberts Custom Builders Inc., 215 F. Supp.2d 783 (E.D. Tex. 2002).
An insurer may undertake the defense of an insured and later deny coverage by reserving its rights so long as the insured is advised that the insurer may use a policy defense to later void its duty to defend. An insurer properly reserves its rights only when it believes in good-faith that the complaint alleges conduct that is not covered under the insurance policy. When a defense is conducted under a valid reservation of rights, the insurer can withdraw its defense once it is apparent there is no coverage under the policy. See Providence Washington Insurance Co. v. A & A Coating, Inc., 30 S.W.3d 554 (Tex. App. 2000).
Under Utah law, the insurer has a duty to defend on the allegations in a suit against an insured which, if proven, could result in liability covered under the policy. Where factual questions render coverage uncertain the insurer must defend until those uncertainties can be resolved against coverage. Equine Assisted Growth & Learning Ass'n v. Carolina Cas. Ins. Co., 266 P.3d 733 (Utah 2011).
As a general rule, the insured's duty to defend is based on a comparison of the language of the insurance policy with the allegations in the policy. Extrinsic evidence is admissible only if the insurance contract allows such evidence. If the duty to defend is dependent on the allegations, extrinsic evidence is irrelevant; but if the duty to defend is dependent on whether the language states the insurer will defend a covered claim or suit, extrinsic evidence is allowable to determine if a duty to defend exists. Fire Insurance Exchange v. Estate of Therkelsen, 27 P.3d 555 (Utah 2001).
An insurer has a duty to defend a suit against its insured when the facts alleged in the complaint might be of a type covered by the terms of the insurance policy issued by the insurer to the insured. In order to understand the application of policy provisions and exclusions, the insurer's duty is measured by comparing the language of the policy with the factual allegations underlying the complaint. R.L. Vallee, Inc. v. American International Specialty Lines Insurance Co., 431 F. Supp.2d 428 (D. Vt. 2006).
A bilateral reservation of rights agreement preserves the insurer's right to dispute coverage. Vermont Ins. Mgmt., Inc. v. Lumbermens' Mut. Cas. Co., 764 A.2d 1213 (Vt. 2000).
Under Virginia law, the duty to defend arises whenever the complaint alleges facts and circumstances, some of which would, if proved, fall within the policy coverage. If the insured has a duty to defend against part of the suit, the insurer must defend the entire suit, even though some of the costs of defense for noncovered allegations are later apportioned to the insured. The insurer has no duty to defend if it is clear that there would be no liability under the insurance contract. See Morrow Corporation v. Harleysville Mutual Insurance Co., 110 F.Supp.2d 441 (E.D. Va. 2000).
The insured must prove that a claim is covered by the policy while the insurer must prove that an exclusion applies. Only the legal claims or causes of action are determinant of the duty to defend. See Air Line Pilots Association v. Twin City Fire Insurance Co., 803 A.2d 1001 (D.C. App. 2002), applying Virginia law.
The duty to defend arises whenever a lawsuit is filed against the insured alleging facts and circumstances arguably covered by the insurance policy. To determine if the duty to defend exists, the court examines whether the allegations for coverage are conceivably within the terms of the policy. Then the court determines whether an exclusion clearly and unambiguously bars coverage. See DeWitt Construction, Inc. v. Charter Oak Fire Insurance Co., 307 F.3d 1127 (9th Cir. 2002). But if the allegations of the complaint are in conflict with facts known to or ascertainable by the insurer, the insurer cannot rely only on the pleadings to determine that coverage exists. See R. A. Hanson Co. Inc. v. Aetna Insurance Co., 612 P. 2d 456 (Wash. Ct. App. 1980). Similarly, the insurer cannot rely on extrinsic facts to deny its duty to defend where the complaint can be interpreted as triggering coverage; if in doubt, the insurer can file a declaratory action. See Truck Insurance Exchange v. Vanport Homes, Inc., 58 P.3d 276 (Wash. 2002).
If an insurer breaches its duty to defend, actual prejudice has to be proven to estop the insurer from asserting a coverage defense. See Underwriters at Lloyds v. Denali Seafoods, Inc. et al., 927 F.2d 459 (9th Cir. 1991). If an insurer wrongfully refuses to defend a suit and there is no reasonable means of prorating costs of defense between those items the insurer was required to defend and those it was not required to defend, the insurer is liable for the entire cost of defense. See National Steel Construction Co. v. National Union Fire Insurance Co. of Pittsburgh, 543 P.2d 642 (Wash. Ct. App. 1975).
Under West Virginia case law, an insurer has a duty to defend a suit against its insured only if the claim stated in the complaint could create liability for risks the agreement covers. West Virginia Fire & Casualty Co. v. Stanley, 602 S.E.2d 483 (W. Va. 2004). When the causes of action alleged by the plaintiff are completely unrelated to the risks covered by the insurance policy issued by the insurer to the insured, the insurance company is relieved of its duties under the policy.
In Wisconsin, the court uses a “four corners” approach and looks at the specific language of the complaint to decide whether the facts alleged therein raise the possibility of coverage under the policy. If there is a possibility of recovery on any covered claim in the complaint, the insurer must provide defense for the entire lawsuit, even if the other allegations in the suit are not covered. Bradley Corp. v. Zurich Insurance Co., 984 F.Supp.1193 (E.D. Wis. 1997). An insurer must defend all suits where there would be coverage if the allegations were proven, even if the allegations are “utterly specious.” If there is any doubt about the duty to defend, it must be resolved in favor of the insured. Olson v. Farrar, 809 N.W.2d 1(Wis. 2012). The insured has the burden of proving that coverage applies, and the insurer, if relying on an exclusion to deny coverage, has the burden of proving the exclusion applies. See Rhein Building Co. v. Gehrt, 21 F.Supp.2d 896 (E.D. Wis. 1998).
An insurer will not breach its duty to defend by denying coverage where the issue of coverage is fairly debatable as long as the insurer provides coverage and a defense once coverage is established. However, when coverage is not determined before a liability trial, the insurer must provide a defense with regard to liability and damages.
Under Wisconsin law, the procedure for an insurer to follow when coverage is disputed is: (1) to intervene in the underlying lawsuit and request a bifurcated trial on coverage and liability issues, and request that determination of the liability issue be stayed until the coverage question is resolved; or (2) to defend the insured while reserving its rights to contest coverage. When this procedure is followed, there is no risk that the insurer will have breached its duty to defend. See U.S. Fire Insurance Co. v. Green Bay Packaging, Inc., 66 F.Supp 2d.987 (E.D. Wis. 1999).
An insurer is obligated to defend as long as the alleged claim rationally falls within the policy coverage. Unless the policy states to the contrary, the insurer is liable for all of the costs of defending the action, including costs of defending both covered and uncovered claims. So, if a policy states the insurer will defend any suit but is silent on allocation of defense costs for covered and uncovered claims, it is to be construed in favor of the insured. See Shoshone First Bank, Inc. v. Pacific Employers Insurance Co., 2 P.3d 510 (Wyo. 2000).
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