It is a long-held axiom that an insurer's duty to defend isbroader than the duty to indemnify. But what encompasses that duty?On what is the duty based: the factual allegations in thecomplaint, or legal theories of recovery such as negligence? Canother evidence or facts not in the complaint be considered? What ifthe complaint includes other allegations obviously not covered bythe policy?

Further, when does the duty to defend end? What happens when aninsurer determines it has no duty to defend only to later learnthere was such a duty? A recent ruling by the New York Court of Appeals seems tochallenge the rules generally applied in mostjurisdictions. At this point, it is debatable as to whetherthe decision will be a game-changer for insurers. For now, let'sreview the typical policy language detailing the insurer's duty todefend an insured.

Typical Policy Language

The CGL, business auto, personal auto, and homeowners' forms areall those of the Insurance Services Office (ISO).

Commercial General Liability (CGL) coverageform: The insuring agreement states that the insurer “willhave the right and duty to defend the insured against any 'suit'seeking those damages. However, we will have no duty to defend theinsured against any 'suit' seeking damages for 'bodily injury' or'property damage' to which this insurance does not apply.”

In regard to the end of the insurer's duty, the form states:“Our right and duty to defend ends when we have used up theapplicable limit of insurance in the payment of judgments orsettlements under Coverages A or B or medical expenses underCoverage C.” The CGL form states that the insurer will pay, as asupplementary payment, all expenses incurred in investigating,settling, or defending a claim or suit.

Business Auto coverage form: Similarly to theCGL form, the business auto form states, “We have the right andduty to defend any 'insured' against a 'suit' asking for suchdamages or a 'covered pollution cost or expense.' However, we haveno duty to defend any 'insured' against a 'suit' seeking damagesfor 'bodily injury' or 'property damage' or a 'covered pollutioncost or expense' to which this insurance does not apply…Our duty todefend or settle ends when the Liability Coverage Limit ofInsurance has been exhausted by payment of judgments orsettlements.” Defense costs are an additional amount. In additionto the Limit of Insurance, the insurer will pay for the insured:“(1) All expenses we incur.''

Personal Auto policy: The personal auto form(PAP) declares, “We will settle or defend, as we considerappropriate, any claim or suit asking for these damages. Inaddition to our limit of liability, we will pay all defense costswe incur. Our duty to settle or defend ends when our limit ofliability for this coverage has been exhausted by payment ofjudgments or settlements. We have no duty to defend any suit orsettle any claim for 'bodily injury' or 'property damage notcovered under this policy.”

Homeowners' form: The homeowners' form statesthat the insurer will “provide a defense at our expense by counselof our choice, even if the suit is groundless, false orfraudulent…Our duty to settle or defend ends when our limit ofliability for the 'occurrence' has been exhausted by payment of ajudgment or settlement.” There is an interesting difference betweenthis promise and the others previously mentioned: the insurerrecognizes a suit may be false or groundless. This wording may leadto the belief that a groundless suit alleging an occurrenceexcluded by the policy (such as intentional bodily injury) will bedefended; this is not always the case. The intent is to make clearthat a suit may make allegations that are, in fact, groundless, butso long as the allegations fall within the scope of coverage theinsurer will provide a defense. The expenses incurred by theinsurer in defending a suit are in addition to the limit ofliability.

Personal Umbrella Liability forms: Although ISOhas developed a personal umbrella form, many insurers have long hadtheir own. A review of various insurers' forms shows that allpromise to provide a defense (based, of course, upon theallegations); this expense is in addition to the limit ofliability. The umbrella insurer also has the right to coordinate adefense with the primary insurer if the primary insurance is firstcalled upon.

Directors and Officers (D&O): A commonfeature of these forms is that defense costs are included withinthe limit of liability. In other words, the amount available tosettle claims may be depleted by the amounts incurred to defendagainst a claim or suit. Sometimes these forms do not obligate theinsurer to provide a defense but will reimburse defense costs. Theduty to reimburse is not viewed as imposing a duty to defend uponthe insurer; see, for example, Valassis Communications, Inc. v.Aetna Cas. & Sur. Co., 97 F.3d 870 (6th Cir. 1996).

Although it might appear that a self insurer has no duty toitself, that is not the case. Usually, a self insurer is under thesame obligation to defend as other insurers if there is acontractual agreement equivalent to insurance, which was what thecourt held in Koenig v. City of Dayton, 502 N.E.2d 233(Oh. 1985). But, there is a minority viewpoint to the contrary;see Northern Indiana Public Service Co. v. Bloom, 847N.E.2d 175 (Ind. 2006).

What Determines the Duty to Defend?

Couch on Insurance (3^rd Edition) states,“Although there are exceptions, as a general rule an insurer's dutyto defend the insured is determined primarily by the pleadings inthe underlying lawsuit, without regard to their veracity, what theparties know or believe the alleged facts to be, the outcome of anunderlying case, or the merits of the claim.” But, what comprisesthe pleadings?

The majority view of the courts is that the factual allegationsin the complaint, not the legal theories for recovery, determinethe insurer's duty. For example, a plaintiff may allege that adefendant pushed him, causing him to fall and become injured, whichwould be an intentional act with no coverage. Therefore, theplaintiff adds that the defendant negligently (legal theory ofrecovery) pushed him, hoping to trigger coverage even though thefacts clearly show intent. The courts will usually not accept thispleading.

Often, though, the court may look beyond the complaint itself tosee if any other alleged facts could trigger coverage. If so, thenthe insurer owes a duty to defend. In the example, the defendantcould intentionally push the plaintiff and at the same timeproclaim loudly that he was such a wimp it was easy. The courtcould view this statement as slander and the insurer could owe adefense for that part of the claim. Or, perhaps, throughinvestigation it becomes clear the plaintiff first punched thedefendant, and the defendant was, in fact, defending himself. (Manyliability policies cover intentional bodily injury carried out toprotect persons or property.)

The minority view is that the duty to defend depends only on thelegal theories in the claim. Other facts may form part of the claimbut are not taken into account unless a theory of relief (such asnegligence) is included along with them.

Some courts cut to the heart of the claim: if covered, there isa duty to defend; if not, even if some facts alleged in the body ofthe claim are covered, there is no duty to defend. This is oftenthe case where sexual molestation is alleged. A claim against ahomeowners policy for damages may be couched in terms of failure tosupervise the abused child or an abusive caretaker, but if the cruxof the matter is still sexual abuse, there is no coverage and thusno duty to defend.

Can the Insurer Consider Other Information?

When a court considers only the complaint it is often referredto as the “four corners rule” (as in a piece of paper), or the“eight corners rule,” determined primarily by the pleadings wherethe four corners of the complaint are compared with the fourcorners of the insurance contract. In these jurisdictions, theinsurer cannot consider evidence outside of the complaint. Thecomplaint itself is all that may be considered. A Texas case givesan example: Calderon v. Mid-Century Ins. Co. of Texas,1998 WL 898471 (App. Tex. Austin; December 29, 1988).

Calderon's daughter, an unlicensed driver, was given permissionby a friend to drive his car around the school parking lot. Shelost control and injured another student and hit a parked car. Herparents' insurer declined to defend, saying the daughter could havehad no reasonable belief she had permission to drive. But the courtheld that the eight corners rule applied because the allegations inthe suit were that the daughter, with permission from the friend,got into his car and, with his permission, drove around the schoolparking lot.

Other jurisdictions not only permit but may even require theinsurer to consider evidence apart from the complaint—extrinsicevidence—to establish a duty to defend. Extrinsic evidence,according to Black's Law Dictionary (Fifth Edition), is“external evidence, or that which is not contained in the body ofan agreement, contract, and the like. Extrinsic evidence is alsosaid to be evidence not legitimately before the tribunal in whichthe determination is made.”

Many courts follow the reasoning set forth by the court inAllstate Insurance Co. v. Novak, 313 N.W.2d 636 (Neb.1981). The court dismissed the four (or eight) corners rule,stating that these cases holding to the rule “are not based uponsound reasoning nor recognize the reality of today's litigation.”The court further reasoned that use of that rule “ignore[s] thereality of the situation. The insured's basis for defending mayinvolve an affirmative defense…which can only be raised in theanswer. To therefore suggest that the [insurer] only looks to thepetition and ignores the fact that there is a justifiable, valid,and legal defense to the claim would be to entrust a third partywith the determination of whether the insured should get that whichthe insured bargained for and which the insured is entitled toreceive…a defense.”

Extrinsic evidence, however, may also be used in somejurisdictions to establish that there is no duty to defend. InTexaco, Inc. v. Hartford Acc.and Indem., 453 F.Supp. 1109(E.D. Okla., 1978), the court said that despite the allegations ofthe suit—that the named insured (Crowl, Inc.) was acting as anagent of the oil company (Texaco)—no duty to defend arose becauseboth Texaco and Crowl stipulated that there was no agencyrelationship.

Groundless, False, or Fraudulent Suits

As noted earlier, the homeowners policy promises to defend evenif the suit is groundless, false, or fraudulent. (This promise isassumed in the other forms although not specifically stated;however, by stating the insurer will defend against “any suit”, thesame effect is achieved. See the CGL form, for example.) Theprovision should not be read to mean that no matter what is allegedthe insured will be entitled to a defense, however. Couch onInsurance states, “Since it is the nature of the claim ratherthan its merits which establishes a duty to defend, an insurer maynot refuse to defend a suit on the ground that the claim assertedagainst the insured cannot possibly succeed because either in lawor in fact there is no basis for the claimant's judgment.”Therefore, if the allegations of the complaint indicate apossibility of coverage, the insurer has the duty to defend.Conversely, Couch also says that “a liability policyprovision requiring an insurer to provide a defense 'even if thesuit is groundless, false or fraudulent' does not create duty todefend a suit that was otherwise not covered merely because thelawsuit was allegedly false and frivolous. Accordingly, a policyprovision obligating an insurer to defend a suit brought againstthe insured even though groundless, false, or fraudulent, has beenheld not to impose upon the insurer the duty to defend claimsoutside the coverage of the liability policy.”

The court in Cambridge Mutual Fire Ins. Co. v. Tollett,677 N.E.2d 1232 (Oh. App. 1996) held that the policy provisioncreated an absolute duty to defend, but the intentional actsexclusion precluded coverage and thus there was no duty toindemnify. During an argument, Rachel Boker stabbed her boyfriend,Keith Tollett, and his mother sued Boker. Because the suit allegedBoker negligently struck Tollett with a knife, absolute duty wasimposed; however, the intentional nature of the act precludedcoverage.

Breach of the Duty to Defend

Consequences for breach of the duty to defend vary byjurisdiction. Generally, when an insurer breaches its duty todefend the insured, the insurer becomes liable and bound by anysettlement or judgment rendered against the insured. QuotingFlorida law, the court in Nationwide Mut. Fire Ins. Co. v.Beville, 825 So. 2d 999 (Fla. App. 2002) said that if aninsurance company breaches its contractual duty to defend, theinsured can take control of the case, settle it, and sue theinsurer for the damages he incurred. And in Westling Mfg. Co.,Inc. v. Western Nat. Mut. Ins. Co., 581 N.W.2d 39 (Minn. App.1998), the court determined that the insured was entitled, asdamages for its insurer's breach of the duty to defend, toreimbursement for the costs of the technical support it receivedfrom an engineering firm during trial of the insured's suit againstits insurer to establish coverage for a claim arising out ofpercolation contamination to groundwater under and near itsproperty.

But in Maryland Casualty Co. v. Imperial ContractingCo., 260 Cal. Rptr. 797 (1989), the insurer who defended theinsured under a reservation of rights letter, and whose policy wasdetermined not to provide coverage, was entitled to recover fromthe insured the amount of the good-faith settlement into which theinsurer entered.