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Liability Insurance

Duty To Defend in the CGL Policy

Craig Stanovich | August 1, 2002

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This article by Craig Stanovich explains in a clear, concise, and understandable way how the duty to defend provision works in the CGL policy.

The commercial general liability (CGL) policy obligates an insurer to defend an insured against any suit seeking damages because of bodily injury, property damage, or personal and advertising injury. The duty to defend is provided by an express grant of coverage contained in both the Coverage A—Bodily Injury and Property Damage Liability and Coverage B—Personal and Advertising Injury Liability insuring agreements. This promise to defend, which appears as a separate clause within the insuring agreements, is subject to policy limitations.

Duty To Defend—CGL Requirements

The duty to defend is triggered by a "suit" demanding damages against an insured for bodily injury, property damage, or personal and advertising injury covered by the CGL policy. If the damages being sought are clearly not covered by the CGL policy, the insurer will have no duty to defend. How a determination is made as to whether the damages being sought are covered by the policy is explained later in this article.

The Meaning of "Suit." A "suit," which is a term defined in the CGL policy beginning in 1986, 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 or if the insurer consents to the proceeding. Other alternative dispute resolution proceedings are considered to be included within the term "suit" if the insurer agrees to the proceeding. For example, a mediation hearing may be considered a "suit" if the insurer consents to the mediation.

An example of what is not a "suit," and therefore does not obligate the insurer to provide a defense, is an action filed against an insured for negligent homicide. A negligent homicide proceeding is typically a criminal complaint, and thus does not meet the definition of "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 (PRP) letter. While cases are mixed, some courts have found that such a demand is within the meaning of or substantially equivalent to a "suit."

In an Environmental Protection Agency (EPA) action against Bronson Plating, the Michigan Supreme Court noted in Michigan Millers Mut. Ins. Co. v. Bronson Plating, 519 NW2d 864 (Mich. 1994), that the term "suit" was ambiguous and capable of application to nontraditional legal actions that are the fundamental equivalent of a suit brought in a court of law. Under this definition, the court concluded, a PRP letter issued by the EPA constitutes initiation of a suit that the insurers are obligated to defend [Anderson Development Co. v. Travelers Indem. Co., 49 F3d 1128 (6th Cir. 1995)].

Duty To Defend—Scope of Duty

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:

  1. 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
  2. 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.

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 triggered when covered allegations are contained in a suit brought against an insured. The requirement in the CGL policy that the insurer pay actual damages on behalf of an insured is triggered when the claimant demonstrates an insured is legally liable for covered damages. In short, all suits asserting covered allegations must be defended while only a fraction of these suits actually result in the payment of damages.

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 or complaints filed without legal grounds.

Duty To Defend Determined by Allegations in a Suit

Most jurisdictions require that even if only one allegation in a suit of multiple allegations is potentially covered by the CGL policy, the insurance company has a duty to defend the entire suit. There are two common approaches to determining the obligation to defend; a jurisdiction may follow one or both of these approaches.

The "Four Corners" Complaint Test. In this traditional test, courts will look only at the allegations in the suit and compare them to the coverage provided in the CGL policy. If any of the allegations are potentially covered by the policy, the duty to defend is established. If none of the allegations in the complaint are potentially covered by the CGL policy, the insurer can generally refuse to defend. Many jurisdictions have ruled that any doubt regarding the obligation to defend is to be resolved in favor of the insured [Miller v. Elite Ins. Co., 100 Cal App. 3d 739 (1980)].

Extrinsic Evidence. Some jurisdictions look beyond how the allegations are stated to the basis of the allegations. This approach may result in a justifiable denial to defend an action that appears on its face to be a potentially covered claim. For example, a complaint that merely inserts the word "negligence" or the phrase "negligent performance" will not generally change a breach of contract complaint into a covered tort complaint and thus trigger the duty to defend.

A review of extrinsic evidence may also work in favor of an insured. A complaint that alleged breach of contract and resulting consequential damages was found to be analogous to damages arising out of defamation, a claim potentially covered by Coverage B of the CGL policy. This interpretation regarding the basis of the action required the insurer to defend the insured [Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass 7, 12–13 (1989)]. Some jurisdictions, such as California, require the insurance company to take into consideration the reasonable expectations of the policyholder in determining the duty to defend.

Defense of Entire Claim—Allegations Covered and Uncovered

If just one of several allegations in a complaint is potentially covered by the CGL policy, the insurer generally has a duty to defend the entire claim, 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 articulated in Aetna Cas. & Sur. Co. v. Continental Cas. Co., 413 Mass. 730 (1992):

Weight of authority imposes a duty to defend all counts of a complaint if the insurer has a duty to defend at least one count.

The reasoning for this rather expansive obligation is that the insurance company must defend the entire case in order 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.

Reimbursement of 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 independent duty to defend as contained in the CGL form. In fact, some courts have referred to this independent duty to defend as "litigation insurance."

However, for those allegations which 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 [Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal 4th 35 (1997)]. As a practical matter, 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.

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 multi-million 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 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, but which the insurer does not believe they are obligated to defend, several options are available.

Disclaim the Duty To Defend. An insurer may be able to clearly demonstrate that the suit has no possibility of being covered by the CGL policy. This may be evident for allegations that do not seek, even remotely, bodily injury, property damage, personal or advertising injury, or if the allegations are not made against an insured in the CGL policy.

However, considering that any doubt regarding the duty to defend may be resolved in favor of the insured, refusing to defend may not be the best course of action. As insurers are acutely aware, such a denial may result in a breach of contract or bad faith complaint from the policyholder. Therefore, other options are often considered.

Reservation of Rights. Where there is a possibility that CGL exclusions may apply to eliminate potential coverage or if some of the allegations are clearly not potentially covered by the CGL policy, the insurer may begin their defense but reserve their right to withdraw from defense as facts are established. Typically, the insured is advised that they may need to retain their own counsel.

Many states view the issuance of a reservation of rights letter as creating a possible conflict of interest. If a conflict of interest results, the insurer may be required to appoint separate independent counsel to represent the insured.

California, arguably one of the stronger advocates of appointment of independent counsel, stated in a 1984 California appellate court decision, San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984):

… where there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured.

Declaratory Judgment. Insurers do have the option, either in lieu of or in addition to reserving their rights, to request the court to decide a dispute as respects their duty to defend via a declaratory judgment action. In essence, the insurer files an action asking the court to rule and declare the rights of each party under the CGL policy regarding defense.

In a recent Massachusetts Supreme Judicial Court case, Hanover Ins. Co. v. Catherine Golden Docket, #99–P–38 (2001), it was ruled that if the insurer loses the declaratory judgment action on its merits (even if the insurer continues to provide defense after commencing the action for declaratory judgment), the insurer is liable not only for the costs to defend incurred by the insured, but also for the cost incurred by the insured for reasonable attorney fees and expenses in establishing the insurer's duty to defend. It did not matter, according to the court, if the declaratory judgment was done in good faith or whether the question was the subject of a legitimate dispute—the insured is to be reimbursed for "successfully establishing the insurer's duty to defend under the policy." [Rubenstein v. Royal Ins. Co. of Am., 429 Mass 355 (1999)].

This case appears to be in the minority, as usually an insurer will not be required to pay for the insured's cost of enforcing the right to defense, unless the insurer acted in bad faith.

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