The Expanding Duty to Defend and its Landmines
By: Phil Savrin
An insurance company’s duty to defend is broader than a duty to indemnify in at least three ways. First, a duty to defend is often based on the allegations of facts, even if the allegations are groundless, whereas a duty to indemnify is determined by the facts as confirmed by the evidence. Second, even if the facts are not in dispute, a duty to defend can exist if the claim is arguably covered by the terms of the policy, whereas the duty to indemnify may require legal construction of the policy’s provisions. Lastly, an insurer’s duty to defend can extend to the entire lawsuit – including non-covered claim — whereas the duty to indemnify would be limited to covered claims only.
Increasingly, courts sanction insurers for not defending claims against insureds, such as by allowing insureds to recover consequential damages beyond the costs of defense, and even finding waiver of coverage defenses for a wrongful refusal to defend. Even if the insurer defends, coverage defenses can be lost if they are not timely included in a reservation of rights. And in some locales, an insured can treat a reservation of rights as tantamount to a disclaimer of coverage, allowing it to settle claims on its own and pursue the insurer for reimbursement or even bad faith.
Given this landscape, insurers should carefully consider not only whether there is a duty to defend, but how far it extends, the terms under which a duty to defend should be provided, and in close cases the consequences of rejecting a tender of coverage by the insured.