Duty to Defend Trigger
Tenants brought an action against the landlord for negligence and wrongful death arising from a fire, and then sought a declaratory judgment against the landlord's insurer on the issue of coverage. This case is The Automobile Insurance Company of Hartford v. Lipscomb, 2011 WL 6091154 (Miss.).
Lipscomb owned and maintained his personal residence and rental property in Jackson, Mississippi . This property included a two-story building, set apart from the main house, that Lipscomb rented out as apartments. A fire started in the garage of the apartment building one day and spread to both floors. One tenant was injured and another died from injuries suffered in the fire.
A lawsuit was filed against Lipscomb and he turned it over to his insurer, The Automobile Insurance Company. The insurer denied coverage, citing two policy provisions: the first prevented coverage for injury or damage arising out of or in connection with a business engaged in by any insured; and the second one prevented coverage for injury or damage arising out of the rental of any premises by any insured. A declaratory judgment action was filed and the trial court ruled against the insurer. This appeal followed.
The Mississippi Supreme Court ruled that the threshold issue in the appeal was whether the insurer had a duty to defend, and that the answer to the question depended on the facts alleged in the complaint together with the policy. Based on this, the court found that an insurance company's duty to defend is not triggered until it has knowledge that a complaint has been filed that contains allegations of conduct covered by the policy. No such duty arises when the allegations fall outside the policy's coverage; however, where, through independent investigation, an insurer becomes aware that the true facts, if established, present a claim against the insured that would potentially be covered under the policy, the insurer must provide a defense until it appears that the facts upon which liability is predicated fall outside the policy's coverage.
After reviewing the unambiguous language of the policy, the complaint, and the relevant testimony, the court came to the conclusion that the conduct alleged in the complaint was outside the coverage of the policy. The complaint and the testimony revealed that Lipscomb was operating a business by renting out rooms inside his home, as well as the two rooms in the apartment building behind his house. And, the court went on, it was undisputed that Lipscomb's sole source of income at the time of the fire was his rental properties. The homeowners policy clearly excluded coverage when injury or damage occurs that arises out of or in connection with a business engaged in by the insured, or that arises out of the rental of any premises by the insured. Since the conduct alleged in the complaint falls outside the coverage of the policy, the insurer had no duty to defend the insured.
The ruling of the trial court was reversed and remanded.
Editor's Note: The Mississippi Supreme Court set down clear guidelines for when defense and coverage under an insurance policy applies. The facts of the incident that are alleged in the complaint against the insured have to be compared with the policy language to see if coverage exists. In this instance, the facts showed that the allegations were not covered due to exclusionary language in the policy. This was the ruling of the court despite the fact that the insured's agent told him before and after the fire that he was fully covered and that “this will be taken care of”, that the agent knew of the renting arrangement, and that the agent and the insured had discussed the renting situation on several occasions.
Agent E&O, anyone?