The Persistence of Indemnity
May 2009
In four-corners jurisdictions,1
although seemingly unlikely, an insurer's duty to indemnify can
persist even if the insurer has no duty to defend its insured.
by
R. Steven Rawls and
Rebecca C. Appelbaum
Butler Pappas Weihmuller Katz Craig, LLP
An insurer's duty to defend is purely contractual; if there
is no contract to defend, no such duty exists.
Rosati v. Vaillancourt, 848 So.
2d 467, 472 (Fla. Dist. Ct. App. 2003) (citing
14 Couch on Insurance 2d §
51.35 (1982); 7c Appleman,
Insurance Law & Practice § 4682 (1979)). The insuring
agreement in Insurance Services Office, Inc. (ISO), form CG 00
01 10 01 gives the insurer the right and duty to defend and
"suit" seeking damages covered by the policy.
The duty to defend is a separate contractual obligation and
is broader than the duty to indemnify.
See e.g.,
Allstate Ins. Co. v. RJT Ent., Inc.,
692 So. 2d 142, 144 (Fla. 1997). This is because an insurer's
duty to defend is triggered if the facts alleged in the
underlying complaint potentially
fall within the policy's coverage but the duty to indemnify
arises only if the facts alleged actually fall within the
coverage provided by the policy. Crum &
Forster Managers Corp. v. Resolution Trust Corp., 620
N.E.2d 1073, 1081 (Ill. 1993). Typically, there is no duty to
indemnify if there is no duty to defend.
Id. See also
Mut. Benefit Ins. Co. v. Haver,
725 A.2d 743, 746 n.1 (Pa. 1999); Fun
Spree Vacations, Inc. v. Orion Ins. Co., 659 So. 2d 419,
421 (Fla. Dist. Ct. App. 1995). Or is there?
Maybe Not
In Sokol & Co.v. Atlantic Mut. Ins.
Co., 430 F.3d 417 (7th Cir. 2005), the court explained
that "the absence of the duty to defend (because there was no
'suit')" does not "automatically preclud[e] indemnification
coverage." Sokol and Company supplied sealed packets of peanut
butter to Continental Mills for inclusion in boxes of
Continental's cookie mix. Continental discovered that the peanut
butter was bad, recalled the boxes, and replaced the peanut
butter packets with a product from another company. Continental
then sought reimbursement of the, approximately, $75,000 in
total replacement costs from Sokol.
Sokol tendered the claim to Atlantic Mutual which denied
coverage based on the business risk exclusions. After Sokol paid
Continental's claim, it sought coverage again from Atlantic
Mutual. Atlantic Mutual again denied coverage.
The district court granted summary judgment for Atlantic
Mutual, finding that because there was no duty to defend, there
could be no duty to indemnify. On appeal, the Seventh Circuit
Court of Appeals held that Atlantic Mutual did not have a duty
to indemnify Sokol because there was no "property damage" and
coverage was otherwise excluded pursuant to the business risk
exclusions for impaired property and recall of products
(Exclusions 2.(m) and 2.(n) in the standard CGL policy).
However, the Seventh Circuit also found that the district
court's reliance on the "general rule" that where there is no
duty to defend, there will be no duty to indemnify was
misplaced.
Interpreting language identical to that cited above, the
Sokol district court held that because Continental never brought
a "suit," the insurer had no duty to defend and, therefore, no
duty to indemnify. The Seventh Circuit explained that only the
duty to indemnify was at issue in the case and the insuring
agreement did not limit the application of the insurer's
indemnity obligation to "suits." Instead, the question of
indemnification turns on whether the payment made by the insured
qualifies as a sum the insured is "legally obligated to pay as
damages because of ‘property damage.'"
The Seventh Circuit found that there was no physical injury
to tangible property because the spoiled peanut butter did not
damage any of the other food products contained in the cookie
mix boxes. The loss of use prong of the property damage
definition also did not apply because the costs sought by
Continental Mills were not for loss of use of the cookie mix;
they were replacement costs. Even if Sokol's payment could be
characterized as one for "property damage," coverage would be
precluded pursuant to the impaired property exclusion (Sokol's
product was defective and incorporated into the cookie mix and
did not become spoiled suddenly within the meaning of the
exception to restore coverage) and the product recall exclusion
(Sokol's product was withdrawn from the market by Continental
because it was inadequate).
Thus, although the policy precluded coverage for Sokol, the
court explained that because the insurer's two duties—defense
and indemnification—are distinct and subject to different
insuring language, "the duty to indemnify may sometimes nest
inside the duty to defend, that will not always be the case."
In Farmer v. Liberty Mut. Fire Ins.
Co., 2007 WL 2028842 (S.D. Fla. 2007), the underlying
plaintiff sought to recover the amount of the consent judgment
from the defendant's insurer. The underlying state court
complaint alleged that the plaintiff and defendant were in their
vehicles and defendant became enraged when he couldn't see
around plaintiff's vehicle. The defendant then "approached
plaintiff's van, grabbed plaintiff's left arm through the open
driver's side window, and punched plaintiff in the face with his
right arm, breaking his jaw." Farmer
at 1. Defendant notified Liberty who responded that it would
neither defend nor indemnify Defendant.
Plaintiff sued Liberty directly alleging that the underlying
defendant was standing outside his vehicle while Plaintiff was
yelling at the defendant's passenger. When Defendant exited his
vehicle, the Plaintiff came toward him. "As [Defendant]
attempted to defend himself against the approaching Plaintiff,
Plaintiff was injured when he tripped and fell to the ground."
Id. at 2.
Apparently the state court complaint reflected facts
supported by Plaintiff's affidavit to the State Attorney in the
criminal action against Defendant while the Defendant's
statement to the insurance company supports the facts alleged in
the Plaintiff's action against Liberty. In the action against
Liberty, on competing motions for summary judgment, Plaintiff
argued that he was entitled to coverage because his injuries
resulted from an unintentional accident while Liberty argued
that the facts in the underlying state court complaint applied
barring any recovery by Plaintiff.
Liberty argued that it had no duty to indemnify because the
duty to defend is broader than the duty to indemnify, and the
duty to defend arises out of the facts alleged in the underlying
complaint. Plaintiff argued that Liberty was estopped from
raising coverage issues because it failed to defend in the
underlying lawsuit.
In denying both motions for summary judgment, the court
stated:
While Defendant is correct that typically the
duty to defend is broader than the duty to
indemnify, this logic is not applicable to this
case. Under most circumstances, Florida courts
hold that the duty to indemnify which arises out
of the specific facts of the case is narrower
than the duty to defend which is based on the
general facts alleged in the underlying
complaint ... However, the issue in this case,
is which specific set of facts applies. The mere
fact that the underlying complaint alleged an
intentional act does not absolve Defendant from
liability under the terms of the policy when the
actual injury may have been entirely accidental.
Farmer at 4.
In Farmer, there was clearly
no duty to defend based on the allegations of the complaint and
the language of the policy. However, the Southern District
court, applying Florida law, recognized that there can be no
duty to defend an underlying "suit" but the insurer's duty to
indemnify persists depending upon a determination of the actual
facts.
Will the Duty To Indemnify Persist?
Most recently, in Pine Oak Bldrs. v.
Great Am. Lloyd's Ins. Co., 2009 WL 353526 (Tex. 2009),
the Supreme Court of Texas addressed a declaratory judgment
action directed to the duty to defend. Great American insured
Pine Oak between April 1993 and April 2001. Mid-Continent
insured Pine Oak between April 2001 and April 2003. Between
February 2002 and March 2003, five separate homeowners sued Pine
Oak alleging that their homes suffered water damage due to
defective construction. Four suits alleged water intrusion due
to improper installation of exterior insulation and finish
systems (EIFS), and the fifth alleged water intrusion due to
improper design and construction of columns and a balcony.
The insurers denied Pine Oak's request for a defense in the
five homeowner suits and sought a declaratory judgment that they
had no duty to defend or indemnify Pine Oak. The trial court
granted summary judgment on all issues to the insurers. The
court of appeals held that Great American had a duty to defend
the four EIFS-based suits but not the column suit. The parties
appealed.
Under Texas law, "a claim of faulty workmanship against a
homebuilder was a claim for property damage caused by an
occurrence under a CGL policy." Lamar
Homes, Inc. v. Mid-Continent Cas. Co., 232 S.W.3d 1, 4-5,
16 (Tex. 2007). In this situation, pursuant to the effect of the
exception to exclusion (l), coverage "depends in part on whether
the alleged defective work was performed by Pine Oak or a
subcontractor." Pine Oak at 2.
The four EIFS-based underlying complaints expressly alleged
defective work by one or more subcontractors. In the column
case, the complaint contained no allegations that the defective
work was performed by a subcontractor. Instead, the complaint
alleged that Pine Oak failed to perform its work in a good and
workmanlike manner and a failure to make requested repairs.
Pine Oak presented evidence that the defective work in the
column case was performed by subcontractors and argued that,
based upon this extrinsic evidence, Great American had a duty to
defend the column case. The court refused to recognize an
extrinsic evidence exception explaining that "[i]n deciding the
duty to defend, the court should not consider extrinsic evidence
from either the insurer or the insured that contradicts the
allegations of the underlying petition."
Pine Oak at 4.
In holding that Great American had no duty to defend Pine Oak
in the column action, the court stated:
[a] defense of third-party claims provided by
the insurer is a valuable benefit granted to the
insured by the policy, separate from the duty to
indemnify. But the insurer's duty to defend is
limited to those claims actually asserted in an
underlying suit. ... The policy imposes no duty
to defend a claim that might have been alleged
but was not, or a claim that more closely tracks
the true factual circumstances surrounding the
third-party claimant's injuries but which, for
whatever reason, has not been asserted. To hold
otherwise would impose a duty on the insurer
that is not found in the language of the
policy....
Such a construction would also "conflate the
insurer's defense and indemnity duties," since
the duty to defend turns on the "factual
allegations that potentially support a covered
claim," while "the facts actually established in
the underlying suit control the duty to
indemnify." The duty to defend protects the
insured by requiring a legal defense to
allegations without regard to whether they are
true, but it does not extend to allegations,
true or false, that have not been made.
Id. (Internal citations
omitted.)
The Supreme Court of Texas affirmed the Texas Court of
Appeals on the duty to defend issue, reversed on others, and
remanded the case to the trial court. The Supreme Court of Texas
did not address Great American's duty to indemnify.
Conclusion
Great American clearly had no duty to defend Pine Oak, and
the Supreme Court of Texas is 100 percent correct with respect
to the scope of an insurer's duty to defend in a four/eight
corners state. Nonetheless, Great American may remain
susceptible to an indemnity claim based on
Farmer and
Sokol. The defenses available to
insurers in Great American's position in response to such claims
are not within the scope of this article.
Contributing author
Rebecca C.
Appelbaum is a senior associate practicing in the area
of third-party coverage at the firm of Butler Pappas Weihmuller
Katz Craig, LLP.
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