An insurance contract imposes two significant obligations on a carrier, the Duty To Defend (to defend the insured in a lawsuit brought by someone else), and the Duty To Indemnify (to pay damages or judgment—if any—that comes out of the lawsuit).
What California Law says about the Duty to Defend
The Duty to Defend is really broad and much more extensive than the Duty to Indemnify.
A carrier must defend covered claims (the kinds of claims the Policy says are covered by the insurance) and must also defend claims that are NOT covered—if the lawsuit contains both kinds of claims. A carrier can demand reimbursement for defense costs of uncovered claim, but only after the lawsuit is over. A carrier must provide a defense for the entire lawsuit, even if just one claim in a lawsuit is a covered claim.
(While everyone’s claims and results will vary, and we make no guaranties: we got one broker $1,000,000 from TOPA Insurance in settlement of a lawsuit for a claim where TOPA refused to defend claims against the broker.)
How an insurance carrier may try to get around its Duty to Defend
Sometimes a carrier agrees to defend, but issues a Reservations of Rights Letter at the same time. A Reservation of Rights is a letter used by the carrier to limit its exposure. In essence, the carrier is saying, “We’ll defend you! But we may not pay anything if we lose.”
In part, we can absolutely understand the carrier’s position. The Policy covers only certain things. But, one of the claims in the lawsuit can be for an uncovered thing (like fraud and punitive damages). So, while the carrier has to defend, it shouldn’t have to pay for a judgment on any uncovered part.
Ahhh, but here’s the rub.
The carrier typically assigns “Panel Counsel” to defend a lawsuit, even if the insured is entitled to independent E&O counsel (Cumis counsel). And, if the carrier refuses to assign Cumis Counsel, or pays tardily, that also gives rise to a claim of Bad Faith. (We tagged a carrier for this type claim too (TOPA, again), and got tens of thousands of dollars for the broker as a result.)
Insurance is supposed to be there when you need it.
At HLF, we do everything we can to make sure it is.
If you believe your insurance carrier may be in breach of its duty to defend, please call us immediately or send an email via the contact form on the right.