It's a long-held axiom that an insurer's dutyto defend is broader than its duty to indemnify. But what does theduty to defend encompass? On what is that duty based: the factualallegations in the complaint, or legal theories of recovery such asnegligence? Can other evidence not in the complaint be considered?What if the complaint includes other allegations obviously notcovered?

Further, when does the duty to defend end? What happens when aninsurer determines it has no duty to defend only to later learn newinformation that shows an obligation?

Lines of Coverage

Typical policy language, and the findings and legal implicationsthat result, help better define the insurer's duty to defend theinsured. The commercial general liability, business auto, personalauto, and homeowners' forms are much of what the Insurance ServicesOffice (ISO) has to determine its level of responsibility. So,first, let's look at just what those forms say.

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: Similar to the CGLform, the business auto form states, “We have the right and duty todefend any 'insured' against a 'suit' asking for such damages or a'covered pollution cost or expense.' However, we have no duty todefend any 'insured' against a 'suit' seeking damages for 'bodilyinjury' or 'property damage' or a 'covered pollution cost orexpense' 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:here, the form states the insurer will pay “all expenses weincur.''

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 lead to the belief that a groundless suitalleging an occurrence excluded by the policy (such as intentionalbodily injury) will be defended; this is not always the case. Theintent is to make clear that a suit may make allegations that are,in fact, groundless, but so long as the allegations fall within thescope of coverage the insurer will provide a defense. The expensesincurred by the insurer in defending a suit are in addition to thelimit of liability.

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 D&O 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 (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 (seeNorthern Indiana Public Service Co. v. Bloom, 847 N.E.2d175 [Ind. 2006]).

Key Determinations

So drawing on the stipulations set forth in the formsthemselves, how can insurers properly draw the lines of theirobligation to the insured? Couch on Insurance(3^rd Edition) states, “Although there are exceptions, asa general rule an insurer's duty to defend the insured isdetermined primarily by the pleadings in the underlying lawsuit,without regard to their veracity, what the parties know or believethe alleged facts to be, the outcome of an underlying case, or themerits of the claim.” But what comprises the 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 thedefendant pushed him, causing him to fall and become injured, whichwould be an intentional act with no coverage. Therefore, theplaintiff adds the defendant negligently pushed him (legal theoryof recovery), hoping to trigger coverage even though the factsclearly 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 the plaintiff was such a wimp it was easy. Thecourt could view this statement as slander, and the insurer couldowe a defense 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 rationalefor denying obligation is often used in allegations of sexualmolestation. For example, a claim against a homeowners' policy fordamages may be couched in terms of failure to supervise the abusedchild or an abusive caretaker; however, if the crux of the matteris sexual abuse, then there is no coverage—and thus no duty todefend.

Can the Insurer Consider Other Information?

It's vital an insurer evaluate only viable information—and allof it—when determining its responsibility to defend. When a courtconsiders only the complaint it is often referred to as the “fourcorners rule” (as in a piece of paper); it's also called the “eightcorners rule,” because the court compares the four corners of thecomplaint with the four corners of the insurance contract. In thesejurisdictions, the insurer cannot consider evidence outside of thecomplaint. The complaint itself is all that may be considered. ATexascase gives an example: Calderon v. Mid-Century Ins. Co. ofTexas, 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 or Fraudulent Suits

How do these elements affect claims with questionable veracity?As noted earlier, the homeowners' policy promises to defend even ifthe suit is groundless, false, or fraudulent. (This is assumed inother forms, though not specifically stated; however, by statingthe insurer will defend against “any suit” the same effect isachieved. The provision should not be read to mean that no matterwhat is alleged the insured will be entitled to a defense, however.Couch on Insurance states, “Since it is the nature of theclaim rather than its merits which establishes a duty to defend, aninsurer may not refuse to defend a suit on the ground that theclaim asserted against the insured cannot possibly succeed becauseeither in law or in fact there is no basis for the claimant'sjudgment.” Therefore, if the allegations of the complaint indicatea possibility 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.”

Cambridge Mutual Fire Ins. Co. v. Tollett, 677 N.E.2d1232 (Oh. App. 1996) offers an example. During an argument, RachelBoker stabbed her boyfriend, Keith Tollett, and his mother suedBoker. The policy provision created an absolute duty to defend, butthe intentional acts exclusion precluded coverage. Thus, there wasno duty to indemnify.Because the suit alleged Boker negligentlystruck Tollett with a knife, absolute duty was imposed; however,the intentional nature of the act precluded coverage.

Breaches of Duty

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. QuotingFloridalaw, the court in Nationwide Mut. Fire Ins. Co. v.Beville, 825 So. 2d 999 (Fla. App. 2002) said that if aninsurer breaches its contractual duty to defend, the insured cantake control of the case, settle it, and sue the insurer for thedamages he incurred. In Westling Mfg. Co., Inc. v. Western Nat.Mut. Ins. Co., 581 N.W.2d 39 (Minn. App. 1998), the courtfound that the insured was entitled, as damages for its insurer'sbreach of the duty to defend, to reimbursement for the costs of thetechnical support it received from an engineering firm during theinsured's suit alleging coverage for a claim involving percolationcontamination to groundwater under and near its property.

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