DUTY TO DEFEND

STEP BY STEP ANALYSIS

SIMPLICITY

Analyzing the duty to defend is much simpler and quicker than analyzing the duty to indemnify. Policyholders, plaintiffs, nor their counsel may avoid hiring a "coverage expert" to evaluate the correctness of an insurer's denial of the duty to defend. Understanding the duty to defend is simple because the duty to defend is triggered by "potential" indemnify coverage. A policyholder usually need only show that it is conceivable that the plaintiff's lawsuit could result in a covered judgment.1 The burden then shifts to the insurer to prove conclusively that it cannot.2

FIVE QUALIFIERS

A typical liability policy has five qualifiers which must be satisfied to trigger the obligation to defend: who, what, how, when and where. If truthful evidence establishes that all five qualifiers are true, then the insurer should agree to defend.

To analyze the presence of all five qualifiers, ask: Does the complaint:

1.	identify a defendant as an insured? (Who)

2.	seek the kind of damage covered for indemnity? (What)

3.	allege the kind of activity covered for indemnity? (How)

4.	allege loss during the period of time covered by the policy? (When)

5.	allege loss within the coverage territory? (Where)

STEP #1: UNDERSTAND THE DUTY TO DEFEND

Read Article: Duty to Defend,3 the plaintiff's complaint, the insurer's denial letter, and the insuring agreement and a few other policy provisions. The insurer's denial letter usually forms a guide to help a policyholder shape a response.4

STEP #2: WHO

The policyholder/defendant seeking coverage must qualify as an "insured" identified by the policy language. The declarations page usually identifies the "named insured." A provision typically entitled "Who Is An Insured" identifies others who are also protected by the policy as additional insureds. These often include officers, directors and employees of the named insured. Sometimes an endorsement will identify insureds.

STEP #3: WHAT

A phrase in the insuring agreement such as "damages because of 'bodily injury', 'property damage', 'personal injury', or 'advertising injury'" requires that the plaintiff's complaint must seek to recover loss for the limited type of damage identified in the policy. Terms in quotation marks are typically defined in the "definitions" portion of the policy. "Bodily injury" is typically defined in the policy to mean: "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." "Property damage" is typically defined in the policy to mean: "Physical injury to tangible property, including all resulting loss of use of that property." "Personal injury" and "advertising injury" are usually defined to include a discrete list of offenses, such as malicious prosecution, invasion of privacy, and wrongful eviction. Not all liability policies insure for all of these typical "what" qualifiers.

STEP #4: HOW

Liability policies include language identifying how loss happened. The word "occurrence" in a typical CGL insuring agreement requires that the plaintiff's complaint seek to recover loss caused by a qualifying activity. "Occurrence" is typically defined in the policy to mean: "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."5 A lawsuit may allege one or more "occurrences." If there are multiple occurrences, the policyholder may have to pay more than one deductible and/or the insurer may have to pay more than one per occurrence policy limit. Not all policies require an "occurrence" as a "how" qualifier. For example, the activity required to establish coverage under a typical professional liability policy requires that the insured commit an "act or omission [in] the performance of professional services for another."

STEP #5: WHEN

The phrase "during the policy period" in a typical CGL insuring agreement requires that the plaintiff's complaint must seek to recover loss that happened during an identified period of time. The "policy period" is typically a one year period specified on the declarations page. However, case law addresses whether the wrongful act of the policyholder, the resulting damage, or both must happen during the policy period. Also, case law addresses whether a policy covers an activity which happened during the policy period but results in damage after the policy period. Also some CGL policies include language seeking to limit coverage to damage that "first occurred" during the policy period. The intent of such language is to not cover damage which started prior to the policy inception but continues into the policy period. Some CGL policies also include language seeking to limit coverage if an policyholder knew of damage prior to the policy period. Not all policies require that damage "occur" during the policy period as a "when" qualifier. For example, a typical professional liability policy may be triggered by when a "claim" is made rather than when the damage happened.

STEP #6: WHERE

The phrase "coverage territory" in the insuring agreement requires that the plaintiff's complaint must seek to recover loss that happened in an identified geographical area. "Coverage territory" is typically defined in the policy to mean: "The United States of America" or "anywhere in the world." Thus, rarely does the "where" qualifier defeat coverage.

WHAT NEXT?

If the foregoing analysis yields a conclusion that the insurer is undeniably correct in denying coverage, the policyholder and/or plaintiff may decide to simply accept its decision to deny coverage. If analysis shows that the insurer is justified in denying coverage, but it has failed to consider certain allegations and/or additional facts, the policyholder and/or plaintiff may decide to urge the insurer to reconsider its denial.6 If the analysis demonstrates that the insurer is clearly wrong in denying coverage, the policyholder and/or plaintiff may consider the options to settle or adjudicate and sue the defaulting insurer.7

Since the duty to defend arises from a comparison of the language of the policy to the allegations of the complaint, the plaintiff has a great deal of influence over the "potential" for coverage. Therefore securing coverage may provide an incentive for the plaintiff and the policyholder to cooperate with one another to resist a wrongful denial of coverage by the insurer.8

ADEQUACY OF RESERVATION?

Nearly a half century ago, the Supreme Court held that "if the insurer adequately reserves its right to assert the noncoverage defense later, it will not be bound by the judgment. [After the liability suit is resolved,] the insurer can raise the noncoverage defense previously reserved."9 The Supreme Court has decreed that certain rights must be specifically reserved.10 However, since then no reported California published opinion assesses whether any particular reservation is "adequate." Thus, California law is not clear whether an insurer that reserves "all" rights to deny coverage has "adequately" reserved its rights.