In tort litigation — asbestos bodily injury tort litigation in particular — corporations occasionally are served with (and become parties to) lawsuits in which the plaintiffs named the wrong entity as a defendant to the action. In those instances, does the wrongly named corporation's insurance company have a duty to defend the action? In a word, yes.
Let's consider the hypothetical company of "Smith Insulation, Inc." Surely a risk manager or claim handler can imagine instances in which Smith Insulation, Inc. is served with a complaint that names some variation of the company's name as a defendant, such as "Smith." That is not uncommon in asbestos litigation. Even if Smith Insulation, Inc. was wrongly named as a defendant — perhaps there was another company with a similar name, like Smith Insulators Corporation, that allegedly caused the injury or damage — Smith Insulation, Inc. should be defended by its insurer(s) nonetheless.
Standard form general liability insurance policies have a duty to defend policyholders, even if the claims against the policyholders are groundless, false, or fraudulent. When a complaint, if liberally construed, could be covered under a policy with a duty to defend, the insurance company "must come forward to defend the insured no matter how groundless, false or baseless the suit may be."
Generally, an insurance company's duty to defend arises whenever there is a potential for coverage, even if the underlying complaint is vague or poorly drafted.
This includes situations when, in light of the facts alleged, the complaint can easily be amended to include a potentially covered liability, or when the carrier knows of extrinsic facts that establish a reasonable possibility of coverage.
More specific to the issue of the wrongly named insured, when an underlying claimant has named the wrong party, an insurance company should not use that error against its own policyholder. Instead, it must defend its policyholder and use the underlying claimant's error to assist in the policyholder's defense. The Minnesota Supreme Court has held that an insurance company had a duty to defend its current policyholder when it was unclear whether the former or current corporation was the intended defendant in the underlying complaint. Under many state laws, an insurance company also has the duty to defend the successor corporation against alleged activities and injuries allegedly caused by a policyholder during the policy period.
Thus, if a complaint named "Smith" as a defendant, but Smith Insulation, Inc. was served with the complaint, the amorphous term "Smith" could refer to Smith Insulation, Inc. or to Smith Insulators Corporation Corp. On that basis alone, the insurer should be obligated to defend. As a practical point, if the policyholder can find evidence that it has been referred to either formally or informally as the name used in the complaint (for instance, "Smith Insulation, Inc." described as "Smith"), such evidence should further support a claim that the insurance company has a duty to defend. This is especially true in the context of asbestos litigation, where courts have specialized dockets with relaxed pleading rules, and a complaint that named just "Smith" might not be dismissed immediately on procedural grounds.
When insurance companies refuse to defend on the basis that the defendant is not a named insured, the policyholder is stuck between the proverbial rock and a hard place. To obtain coverage under such a scenario, the insurer would have the policyholder suffer a default judgment on the basis that the wrong entity was named in the lawsuit, or instead have the named insured (Smith Insulation, Inc.) officially named in the lawsuit to obtain potential insurance coverage. Neither result would be correct or appropriate.
Insurance companies also have a duty to refrain from conduct that might prejudice its policyholder's defense of any underlying action. An insurance company's duty of good faith arises even before the policyholder is named a party to the underlying action. An insurer has a duty to its policyholder analogous to that of a fiduciary. That obligation imposes a duty on the insurer to act in good faith with its insured, including in the context of third-party claims against the policyholder.
Moreover, a policyholder never has an obligation to prove liability against itself to obtain coverage.
Following that rule, a policyholder should not be obligated to either be dismissed from the action as a wrongly named party or have a complaint amended to accurately name the policyholder so that the policyholder may obtain a defense.
Rather, the proper inquiry in an insurance coverage case is whether the claim as alleged in the underlying action falls within the insurance policy's coverage provisions. When a complaint names a party that could be construed as a named insured under the policy, the named insured has been served with the complaint, and must defend itself, the claims, as alleged, fall within the policy's coverage provisions.
In short, the law is on the side of a policyholder that seeks a defense for a lawsuit that wrongly named the policyholder. Insurance companies will, on occasion, argue that there is no duty to defend because the complaint does not list a policyholder or other insured. In such circumstances, claim handlers should think about the case law and tenets set forth above, and that denying a duty to defend on the basis of a wrongly named entity runs afoul of well-established law.
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