Duty to Defend in the CGL Policy

Duty to Defend Applies Only to a "Suit"

As noted above, the duty to defend is triggered only if a "suit" is filed or made against an insured.

A "suit" is defined in the CGL policy and means a civil proceeding, such as the filing of a complaint, more commonly known as a lawsuit. The definition of "suit" also includes arbitration proceedings if the insured is required to submit to such proceedings. An arbitration proceeding is also considered a "suit" if the insured elects to submit to the arbitration proceedings if the insurer consents. Other types of alternative dispute resolution proceedings (e.g., mediation) to which the insured submits are included within the term "suit" if the insurer provides its consent.

A threatening letter received by the insured from an injured party's legal counsel, informing the insured why they are responsible for injuries, may be a claim ⁶ but is not a "suit." While the insured has an obligation to notify its insurer "as soon as practicable of an 'occurrence' or offense which may result in a claim," the insurer has no obligation to defend the insured upon receipt of the attorney's letter. Although this matter may ultimately result in a "suit," it is not a "suit" when in the form of a threatening letter—and the insurer is not obligated, by the terms of the policy, to engage counsel and answer the letter.

Another example of what is not a "suit" and would not trigger the duty to defend is an action filed against an insured for negligent homicide. A negligent homicide proceeding is typically a criminal rather than civil proceeding and, thus, does not meet the definition of a "suit."

Governmental Agency Proceedings

An issue that has received considerable legal attention is whether a governmental agency proceeding triggers an insurer's duty to defend under the CGL policy. More specifically, an environmental authority may demand that an insured remediate contamination for which the environmental authority is holding the insured responsible, usually by the issuance of a potentially responsible party letter. While cases are mixed, some courts have found that such a demand is within the meaning of or substantially equivalent to a "suit."

For example, Michigan courts also have found that demand letters from regulators, specifically in the context of environmental regulations, can be considered "the functional equivalent of a suit brought in the court of law." ⁷

Breadth of Duty to Defend

It is generally acknowledged that the duty of defense in the CGL policy is broader in scope than the duty to pay on behalf of an insured. The basis for the maxim is twofold.

• The insurer is required to defend covered claims even if the insured is ultimately found in a trial or other civil proceeding to have no legal obligation to pay damages; and
• The insurer's obligation to defend is determined by the allegations contained in the suit and not by facts that may later be established that ultimately show the claim is not covered by the CGL policy. In other words, an insurer is required to defend claims that may, once all of the facts are known, turn out to be uncovered.

No Legal Responsibility to Pay Damages

The insurance company's duty to defend in the CGL policy, and the resulting payment of legal expenses, is easily triggered. The nature of litigation is such that allegations may be freely made, in some instances, with little or no basis in law or fact. It is another matter entirely to show the insured is legally obligated to pay for the damages that were alleged. As the CGL policies only pay damages when the insured is legally responsible for those damages, circumstances in which the insurer is obligated to pay damages represents only a fraction of the claims requiring defense of the same insured.

Groundless, False, or Fraudulent

While prior CGL form editions required the insurer to defend an insured "even if the allegations of the suit are groundless, false or fraudulent," this wording was removed beginning in 1986. However, the obligation to defend an insured in the post-1986 edition CGL policy does apply to "any suit." The phrase "any suit" has been interpreted to include suits alleging false information, complaints filed without legal grounds, or complaints intended to deceive.

It is worth noting that the "groundless, false or fraudulent" wording does not expand the CGL insuring agreement. Put differently, simply because the complaint alleges facts that are fabricated or alleges unrecognized causes of action does not mean that otherwise excluded allegations must now be defended. For example, a complaint may falsely allege a restaurant served a patron alcohol—the falsity of the allegation does not nullify the CGL liquor liability exclusion and obligate the insurer to defend an otherwise excluded dram shop suit. For more on groundless, false, or fraudulent suits, see "The Duty to Defend—Groundless, False, or Fraudulent."

Duty to Defend Determined by Allegations in a Suit

Most jurisdictions determine the duty to defend, at least initially, by reviewing the allegations made against the insured. If even one allegation is potentially or even possibly covered by the policy, the insurer's duty to defend is activated.

To illustrate, here is what the Supreme Court of Connecticut holds.

An insurer's duty to defend is triggered if at least one allegation of the complaint falls even possibly within the coverage.

Source: Travelers Cas. & Surety Co. of Am. v. Netherlands Ins. Co., 312 Conn. 714, 739, 95 A.3d 1031 (2014).

The Supreme Court of California has directly addressed how it expects insurers to view what is meant by potentially covered as follows.

To prevail [on the duty to defend], the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.

Source: Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 290, 300 (1993).

Sometimes, it is difficult to decipher what, exactly, is being alleged. The resulting confusion or lack of clarity in the allegations does not necessarily mean the insurer can deny its insured a defense. To the contrary. For example, the Delaware Supreme Court found that any ambiguity or doubt in interpreting the allegations in the complaint should be resolved in favor of defending the insured.

Determining whether an insurer is bound to defend an action against its insured requires adherence to the following principles: (1) where there is some doubt as to whether the complaint against the insured alleges a risk insured against, that doubt should be resolved in favor of the insured; (2) any ambiguity in the pleadings should be resolved against the carrier; and (3) if even one count or theory alleged in the complaint lies within the policy coverage, the duty to defend arises.

Source: Pacific Ins. Co. v. Liberty Mut. Ins. Co., 956 A.2d 1246 (Del. 2008).

The question often arises as to what information the insurer must consider when determining whether the allegations in the complaint set in motion its duty to defend its insured. In other words, must the insurer consider only what is alleged in the complaint, or must the insurer consider both the allegations in the complaint and certain information that is outside of the complaint—what, in this context, is generally referred to as "extrinsic evidence." The following are the two common approaches to this question.

Defense of the Entire Claim

If just one of several allegations in a complaint is potentially covered by the CGL policy (but the other allegations are not potentially covered), the insurer generally has a duty to defend the entire claim, including the claims that are not potentially covered, at least until the potentially covered claim is resolved. The resolution may occur in several ways, including a judicial determination that the one potentially covered claim actually falls outside of the scope of the CGL coverage.

The duty to defend all allegations in a suit in which only one allegation is possibly covered is concisely articulated by the Maryland Special Court of Appeals (now the Appellate Court of Maryland).

If any claims potentially come within the policy coverage, the insurer is obligated to defend all claims, "notwithstanding alternative allegations outside the policy's coverage, until such times … that the claims have been limited to ones outside the policy coverage."

Source: Utica Mut. Ins. Co. v. Miller, 130 Md. App. 373, 746 A.2d 935, 940 (Md. Ct. Spec. App.2000).

The reasoning for this rather expansive obligation is that the insurance company must defend the entire case for it to provide a timely defense. Attempting to sort out potentially covered and potentially uncovered allegations, which may ultimately be a futile attempt, would delay the defense. Failure to provide an immediate defense is considered a failure to provide a meaningful defense. The seminal case that stands for this proposition is the Supreme Court of California case of Jerry Buss v. Superior Court of Los Angeles County, 939 P.2d 766 (Cal. 1997).

Reimbursement of Defense Costs

The above is sometimes called a "mixed action." A "mixed action" means the complaint includes an allegation or allegations that are potentially covered but also includes allegations that are plainly not potentially covered. As the insurer is required to defend all allegations, including those not potentially covered, has the insured gotten more than they have bargained for and is, thus, unjustly "enriched" when receiving the benefit of defense for uncovered allegations? If so, does the insurer have a right to its money back (restitution) for the additional defense costs?

An insurer will generally not be able to recover from an insured the cost of defending any claim that was potentially covered by the CGL policy but ultimately was determined not to be a covered claim. The cost of such defense is considered part of the insurer's duty to defend as afforded in the CGL form. In fact, some courts have referred to this independent duty to defend as "litigation insurance."

But what about the uncovered allegations? The results are decidedly mixed. For those allegations that were never potentially covered by the CGL policy, but which were defended as part of a complaint containing other potentially covered allegations, reimbursement from an insured may be allowed. (Jerry Buss v. Superior Ct. of Los Angeles Cty.) But even following Buss, reimbursement may not be easy to obtain, as the burden is on the insurance company to clearly demonstrate which defense costs specifically can be allocated to the uncovered allegations. Absent such a clear allocation, the insurance company will likely not have a right to reimbursement from an insured for defense costs.

Some courts have disallowed insurers from obtaining reimbursement from its insured for defending uncovered allegations in a "mixed." The Supreme Court of Pennsylvania prohibited reimbursement and found as follows.

By providing a defense to Insured, therefore, Royal acted as much in its own interest as it did in the Insured's. It would be unjust to require Insured to reimburse Royal for the cost of the defense where Royal invoked its right to defend in part to protect its own interest.

Source: American & Foreign Ins. Co. v. Jerry's Sport Center, Inc., 2 A.3d 526 (Pa. 2010).

Other courts have denied insurer's reimbursement of defense costs, as the purported right to such reimbursement does not appear in the CGL policy and would be no more than a "backdoor narrowing of the duty to defend." (Perdue Farms v. Travelers Cas. & Sur. Co., 448 F.3d 252 (4th Cir. 2006), applying Maryland law.)

Terminating the Duty to Defend

The CGL insuring agreements for both Coverage A—Bodily Injury and Property Damage Liability and Coverage B—Personal and Advertising Injury specifically state when an insurance company's duty (and right) to defend may be discontinued—that is when the applicable limit has been used up in the payment of judgments or settlements.

Popular belief to the contrary not withstanding, this limitation does not allow an insurance company to terminate their obligation to defend by simply offering to pay the applicable limit or paying the limit into a court or to the insured. Such a tactic would be counter to the widely accepted view that the duty to defend is an independent duty arising out of a separate promise of protection within the CGL policy. Defense of an insured must continue until the case reaches its conclusion, either by settlement with the claimant(s) or by court adjudication. In some jurisdictions, an insurer may have a further duty to appeal if reasonable grounds for an appeal are present.

The issue of how an insurer may discharge its duty to defend is particularly important when the policy limit is clearly inadequate to fully indemnify the claimants. For example, a CGL policyholder has purchased an each occurrence limit of $300,000 but is faced with what will almost certainly be a multimillion dollar settlement or judgment. While the CGL insurer may wish to tender its limits and withdraw from the case, the majority rule is that the CGL insurer is bound to continue to defend the claim until its resolution, regardless of the cost of defense.

When the Duty to Defend Is in Dispute

While it is generally settled that a CGL insurer must defend any suit that contains allegations that are potentially covered under the policy, there may be a legitimate disagreement as to what constitutes a potentially covered allegation. When a policyholder demands defense of a suit, asserting that at least one of the allegations is potentially covered by the CGL policy, but which the insurer does not believe they are obligated to defend, several options are available.