Insurance policies may have numerous obligations, but one of the most important responsibilities an insurer has toward its policyholder is the duty to defend. The duty to defend obliges an insurance company to offer legal defense to the insured when he or she is being sued for claims that have the potential of being covered under the policy.
In this article, you will discover what the duty to defend is, how it is different from the duty to indemnify, when the insurers have to defend, and what will occur if they decline.
What Is the Duty to Defend?
The duty to defend means that an insurance company must provide legal representation to a policyholder if they are sued for something that might be covered by their insurance policy. This duty is broader than the duty to indemnify (the obligation to pay a judgment or settlement) because it is based on the allegations in the lawsuit, not the actual outcome.
Even if the lawsuit is groundless, false, or fraudulent, if there is a potential for coverage under the policy, the insurer typically must step in and defend the insured.
Duty to Defend vs. Duty to Indemnify
It’s important to distinguish the duty to defend from the duty to indemnify:
- Duty to defend arises when a lawsuit is filed and is based on the allegations made in the complaint.
- Duty to indemnify arises if there is an actual obligation to pay damages after a judgment or settlement.
An insurer may have a duty to defend even if, ultimately, it turns out there is no duty to indemnify. In other words, an insurer must often defend a case even if it does not have to pay damages in the end.
When Does the Duty to Defend Arise?
The duty to defend is triggered when:
- A lawsuit is filed against the insured
- The allegations made in the lawsuit potentially fall within the coverage of the policy
Courts typically apply the “eight corners rule,” which compares the four corners of the lawsuit (the allegations) to the four corners of the insurance policy (the coverage terms). If there is any possibility that the policy covers the claim, the insurer must defend.
Even if only some claims are potentially covered, the insurer often must defend the entire lawsuit.
Scope of the Duty to Defend
The duty to defend is generally considered very broad. Once triggered, the insurer must:
- Hire an attorney to represent the insured
- Pay all defense costs, including attorney’s fees, court fees, and expert witness fees
- Defend against all claims, even those not covered, until it becomes clear that no covered claims exist
Importantly, the defense must be provided at no cost to the policyholder, except for any deductible or self-insured retention that may apply.
What Happens if an Insurer Wrongfully Refuses to Defend?
When an insurer wrongfully refuses to defend a policyholder, it can face serious consequences, including:
- Being held liable for the full amount of any judgment against the insured, even if it exceeds policy limits
- Paying for the insured’s defense costs out of pocket
- Being sued for bad faith, which could result in punitive damages
Courts take an insurer’s duty to defend very seriously because it protects policyholders from the high costs and risks of litigation.
Common Issues Involving Duty to Defend
Several complications can arise concerning the duty to defend, including:
Reservation of Rights
Sometimes, an insurer will agree to defend the insured under a reservation of rights. This means the insurer provides a defense while reserving the right to later deny coverage. Essentially, the insurer protects itself by stating that just because it’s defending doesn’t mean it will necessarily pay any damages.
Conflicts of Interest
If there is a conflict of interest between the insurer and the insured — for example, if some claims are covered and others are not — the insured may have the right to choose their own attorney, with the insurer paying for it.
This is often referred to as the right to independent counsel or Cumis counsel (named after a landmark court case).
Partial Coverage Situations
When only part of the lawsuit is potentially covered, the insurer typically must defend the whole lawsuit but can seek to recover costs associated with uncovered claims later, depending on state law and policy language.
Real-World Examples of Duty to Defend
Understanding how the duty to defend plays out in real life helps illustrate its importance:
- Commercial General Liability Policy: A small business owner is sued after a customer slips and falls. The complaint alleges injuries that could be covered under the business’s general liability policy. The insurer must defend the business owner even if the customer’s claims seem exaggerated or unlikely.
- Homeowner’s Insurance: A neighbor sues a homeowner claiming that a tree from their property damaged the neighbor’s house. The homeowner’s insurer must defend the homeowner if the allegations fit within the homeowner’s policy coverage.
- Auto Insurance: A driver is sued after an accident involving injuries. Their auto insurance carrier must defend them if the lawsuit alleges covered injuries, even if the driver disputes the facts.
In each case, the insured benefits from having a professional legal defense funded by the insurance company.
Why the Duty to Defend Matters
The duty to defend is crucial because lawsuits are expensive, stressful, and complex. Without this protection, individuals and businesses would have to pay significant legal costs themselves, even when they are innocent.
A robust duty to defend:
- Levels the playing field in court
- Helps prevent financial ruin from legal fees
- Ensures timely and professional representation
- Holds insurance companies accountable for protecting their policyholders
It is one of the most valuable aspects of having liability insurance.
About the Author
Neil Bhartia
Neil Bhartia isn’t your typical, stuffy attorney that you see on TV. While some have their sights exclusively on money and treat their clients like a number, Neil takes a personal interest in every single client he has. As an empath, Neil understands that people that seek legal help are typically in an involuntary, and stressful situation, and he goes out of his way to diffuse the stress and educate clients on each every detail of the legal process.
