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

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

Typical Policy Language

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

Commercial General Liability (CGL) coverage form: The insuring agreement states that the insurer “will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured 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 the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.” The CGL form states that the insurer will pay, as a supplementary payment, all expenses incurred in investigating, settling, or defending a claim or suit.

Business Auto coverage form: Similarly to the CGL form, the business auto form states, “We have the right and duty to defend any 'insured' against a 'suit' asking for such damages or a 'covered pollution cost or expense.' However, we have no duty to defend any 'insured' against a 'suit' seeking damages for 'bodily injury' or 'property damage' or a 'covered pollution cost or expense' to which this insurance does not apply…Our duty to defend or settle ends when the Liability Coverage Limit of Insurance has been exhausted by payment of judgments or settlements.” Defense costs are an additional amount. In addition to 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 consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for 'bodily injury' or 'property damage not covered under this policy.”

Homeowners' form: The homeowners' form states that the insurer will “provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent…Our duty to settle or defend ends when our limit of liability for the 'occurrence' has been exhausted by payment of a judgment or settlement.” There is an interesting difference between this promise and the others previously mentioned: the insurer recognizes a suit may be false or groundless. This wording may lead to the belief that a groundless suit alleging an occurrence excluded by the policy (such as intentional bodily injury) will be defended; this is not always the case. The intent is to make clear that a suit may make allegations that are, in fact, groundless, but so long as the allegations fall within the scope of coverage the insurer will provide a defense. The expenses incurred by the insurer in defending a suit are in addition to the limit of liability.

Personal Umbrella Liability forms: Although ISO has developed a personal umbrella form, many insurers have long had their own. A review of various insurers' forms shows that all promise to provide a defense (based, of course, upon the allegations); this expense is in addition to the limit of liability. The umbrella insurer also has the right to coordinate a defense with the primary insurer if the primary insurance is first called upon.

Directors and Officers (D&O): A common feature of these forms is that defense costs are included within the limit of liability. In other words, the amount available to settle claims may be depleted by the amounts incurred to defend against a claim or suit. Sometimes these forms do not obligate the insurer to provide a defense but will reimburse defense costs. The duty to reimburse is not viewed as imposing a duty to defend upon the 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 to itself, that is not the case. Usually, a self insurer is under the same obligation to defend as other insurers if there is a contractual agreement equivalent to insurance, which was what the court 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, 847 N.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 duty to defend the insured is determined primarily by the pleadings in the underlying lawsuit, without regard to their veracity, what the parties know or believe the alleged facts to be, the outcome of an underlying case, or the merits of the claim.” But, what comprises the pleadings?

The majority view of the courts is that the factual allegations in the complaint, not the legal theories for recovery, determine the insurer's duty. For example, a plaintiff may allege that a defendant pushed him, causing him to fall and become injured, which would be an intentional act with no coverage. Therefore, the plaintiff adds that the defendant negligently (legal theory of recovery) pushed him, hoping to trigger coverage even though the facts clearly show intent. The courts will usually not accept this pleading.

Often, though, the court may look beyond the complaint itself to see if any other alleged facts could trigger coverage. If so, then the insurer owes a duty to defend. In the example, the defendant could intentionally push the plaintiff and at the same time proclaim loudly that he was such a wimp it was easy. The court could view this statement as slander and the insurer could owe a defense for that part of the claim. Or, perhaps, through investigation it becomes clear the plaintiff first punched the defendant, and the defendant was, in fact, defending himself. (Many liability policies cover intentional bodily injury carried out to protect persons or property.)

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

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

Can the Insurer Consider Other Information?

When a court considers only the complaint it is often referred to as the “four corners rule” (as in a piece of paper), or the “eight corners rule,” determined primarily by the pleadings where the four corners of the complaint are compared with the four corners of the insurance contract. In these jurisdictions, the insurer cannot consider evidence outside of the complaint. The complaint itself is all that may be considered. A Texas case gives an 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 permission by a friend to drive his car around the school parking lot. She lost control and injured another student and hit a parked car. Her parents' insurer declined to defend, saying the daughter could have had no reasonable belief she had permission to drive. But the court held that the eight corners rule applied because the allegations in the suit were that the daughter, with permission from the friend, got into his car and, with his permission, drove around the school parking lot.

Other jurisdictions not only permit but may even require the insurer to consider evidence apart from the complaint—extrinsic evidence—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 of an agreement, contract, and the like. Extrinsic evidence is also said to be evidence not legitimately before the tribunal in which the determination is made.”

Many courts follow the reasoning set forth by the court in Allstate 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 upon sound reasoning nor recognize the reality of today's litigation.” The court further reasoned that use of that rule “ignore[s] the reality of the situation. The insured's basis for defending may involve an affirmative defense…which can only be raised in the answer. To therefore suggest that the [insurer] only looks to the petition and ignores the fact that there is a justifiable, valid, and legal defense to the claim would be to entrust a third party with the determination of whether the insured should get that which the insured bargained for and which the insured is entitled to receive…a defense.”

Extrinsic evidence, however, may also be used in some jurisdictions to establish that there is no duty to defend. In Texaco, Inc. v. Hartford Acc.and Indem., 453 F.Supp. 1109 (E.D. Okla., 1978), the court said that despite the allegations of the suit—that the named insured (Crowl, Inc.) was acting as an agent of the oil company (Texaco)—no duty to defend arose because both Texaco and Crowl stipulated that there was no agency relationship.

Groundless, False, or Fraudulent Suits

As noted earlier, the homeowners policy promises to defend even if the suit is groundless, false, or fraudulent. (This promise is assumed in the other forms although not specifically stated; however, by stating the insurer will defend against “any suit”, the same effect is achieved. See the CGL form, for example.) The provision should not be read to mean that no matter what is alleged the insured will be entitled to a defense, however. Couch on Insurance states, “Since it is the nature of the claim rather than its merits which establishes a duty to defend, an insurer may not refuse to defend a suit on the ground that the claim asserted against the insured cannot possibly succeed because either in law or in fact there is no basis for the claimant's judgment.” Therefore, if the allegations of the complaint indicate a possibility of coverage, the insurer has the duty to defend. Conversely, Couch also says that “a liability policy provision requiring an insurer to provide a defense 'even if the suit is groundless, false or fraudulent' does not create duty to defend a suit that was otherwise not covered merely because the lawsuit was allegedly false and frivolous. Accordingly, a policy provision obligating an insurer to defend a suit brought against the insured even though groundless, false, or fraudulent, has been held not to impose upon the insurer the duty to defend claims outside 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 provision created an absolute duty to defend, but the intentional acts exclusion precluded coverage and thus there was no duty to indemnify. During an argument, Rachel Boker stabbed her boyfriend, Keith Tollett, and his mother sued Boker. Because the suit alleged Boker negligently struck Tollett with a knife, absolute duty was imposed; however, the intentional nature of the act precluded coverage.

Breach of the Duty to Defend

Consequences for breach of the duty to defend vary by jurisdiction. Generally, when an insurer breaches its duty to defend the insured, the insurer becomes liable and bound by any settlement or judgment rendered against the insured. Quoting Florida law, the court in Nationwide Mut. Fire Ins. Co. v. Beville, 825 So. 2d 999 (Fla. App. 2002) said that if an insurance company breaches its contractual duty to defend, the insured can take control of the case, settle it, and sue the insurer 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, as damages for its insurer's breach of the duty to defend, to reimbursement for the costs of the technical support it received from an engineering firm during trial of the insured's suit against its insurer to establish coverage for a claim arising out of percolation contamination to groundwater under and near its property.

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

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The Duty to Defend Is Broader Than the Duty to Indemnify

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