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Nov 1, 2010

The Insurance Company’s Duty to Defend

Category: Business

Part of an insurance company’s duty is to provide the insured persons or businesses with a legal defense if they are sued.  This is one of the most important reasons to have insurance.  The insurance company will hire and pays an experienced attorney to represent the insured party in court.  This is often called the insurance company’s “duty to defend.”  This duty typically exists under all of the following kinds of insurance:

  • a homeowner’s policy,
  • an automobile policy,
  • a commercial general liability policy,
  • a property insurance policy,
  • workers’ compensation insurance,
  • employer’s liability insurance,
  • errors and omissions insurance,
  • or any other insurance policy.

The Duty to Defend is Broad - In Maine this duty to defend is very broad.  It is much broader than the duty to ultimately pay on the claim, which is called the “duty to indemnify.”  Under Maine law, an insurer has a duty to defend its insured in a lawsuit if the allegations in the underlying action “are within the risk insured against and there is any potential basis for recovery . . .” Gibson v. Farm Family Mutual Ins. Co. (Maine 1996).  The court compares the provisions of the insurance contract with the allegations in the underlying complaint.  If this comparison shows even the possibility of coverage, the insurer is required to provide a defense, even if it has independent knowledge of facts demonstrating lack of coverage. In other words, the duty to defend arises solely because of what the other party claims happened. 

The broad scope of an insurer’s duty to defend has been described by Maine’s Law Court as follows: 

In order for the duty of defense to arise, the underlying complaint need only show, through general allegations, a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.  Moreover, where there is an ambiguity in the language of the policy, the doubt should be resolved in favor of finding that the insurer has a duty to defend the insured.

Union Mut. Fire Ins. Co. v. Inhabitants of Town of Topsham (Maine 1982) (emphasis added).   

The case of Maine Academy of Hair Design v. Commercial Union Ins., 699 A.2d 1153 (Me. 1997) illustrates the breadth of the duty to defend.  That was a case alleging discrimination and harassment of an employee by her employer.  The insurance policy excluded coverage for incidents “arising out of employment.”  In that case, although there was no mention in the lawsuit complaint of incidents occurring outside of work, the court found that it could not exclude insurance coverage for possible incidents that occurred outside of work.  Therefore, the court held that there was a duty to defend the employer against the employee’s claims because there was a possibility of coverage— even though a remote possibility.  

An insured person or business has the right to a legal defense provided by the insurance company for all claims for which the insured person could potentially incur liability (be subject to pay) if the claims were proven.  This even includes a defense against baseless, groundless and frivolous claims, provided the potential to have to pay exists.  Because the duty to defend is so broad, claimants sometimes write their claims with the language of typical insurance policies in mind.  By doing this, they may trigger the duty of an insurance company to defend the insured person or business against the claims being brought hoping for an ultimate settlement offer. 

Defending Under a Reservation of Rights - If the lawsuit brought involves some claims that may be covered and others that may not be covered, the insurance company still must provide a defense.  In these cases, the insurance company may send a “reservation of rights” letter. This confirms the insurance company will provide a defense, but only under certain conditions.  The insurance company is required to defend the person or business, even if there is only a possibility that any part of the claim could be covered.  This is so despite the fact that some or all of the other claims may not be covered under the policy.  But because the outcome of the case may not trigger the insurance company’s obligation to pay, it defends the case from the beginning under a “reservation of rights.”  For example, if a neighbor sues a person over a boundary dispute, asking for two things:  (1) a court declaration on where the boundary is, and (2) for money damages against the person trespassing on her land and cutting her trees, the person’s insurance company likely will have to defend the neighbor against the entire lawsuit.  Because it has a duty to defend against the claims for money damages due to the trespass and cutting of trees, even though there likely would be no duty to defend against the claim seeking a declaration of where the boundaries are.  In such a case, an insurer may defend under a reservation of rights.

Difference Between the Duty to Defend and the Duty to Indemnify - The “duty to defend” is distinct from the “duty to indemnify.”  The duty to indemnify means that the insurance company has an obligation to pay for any damages if the insured person or business is ordered to pay.  For example, if an insured driver were sued for damages arising out of a car collision that the insured driver allegedly caused, the insurance company likely would have a duty to defend.  If a court determined that the driver was negligent then the insurance company likely would have a duty to indemnify the driver and pay the claim.  However, most insurance policies do not provide coverage if the person intended to cause the harm or damages.  So, if a court held that the driver smashed into the other car on purpose, the insurance company likely would not have a duty to indemnify for the damage caused, even if it had a duty to defend because there was a possibility that the insured person did not intend to cause the damage.   

The court’s decision in Maine Bonding & Casualty Co. v. Douglas Dynamics, Inc., (Me. 1991) is also helpful in understanding the duty to defend versus the duty to indemnify under the intentional act exclusion described above.  The underlying suit in that case involved a former employee’s claim for wrongful discharge and emotional distress.  Even though the tort of wrongful discharge had not been adopted in Maine, and “would likely be characterized as an intentional tort,” the court found that the superior court committed legal error in not requiring the insurer to defend.   Although the underlying act of discharging the employee was clearly an intentional act, the harm alleged in the complaint by the plaintiff was not necessarily “subjectively wanted” by the employer.  The court stated:  “Comparing the complaint to the insurance policy, it is possible, albeit remotely so, that there would be coverage if the Plaintiff can establish that he suffered ‘bodily injury, sickness or disease’ as a result of emotional distress caused by his discharge.”  (Emphasis added)  This shows how the courts lean toward requiring insurance companies to defend claims against their insureds.

If you have any questions about your insurance coverage or if you are involved in an accident or other incident that may give rise to insurance questions, be careful to review all available insurance policies thoroughly.  We can help you.