What is the "duty to defend?"
Most commercial liability insurance policies – such as a typical
General Liability policy, Directors and Officers policy, Professional
Liability policy – insure the policyholder against the financial
cost of defending lawsuits filed by third parties. An insurer has a "duty
to defend" any lawsuit that includes any claim against its policyholder
that is even "potentially" or "possibly" covered by
the terms of its policy.
When served with any lawsuit, therefore, a policyholder should immediately
tender the lawsuit to all of its liability insurers. If even a single
potentially covered claim has been alleged in the lawsuit, the insurer
may have a duty to pay the cost of defending the entire lawsuit and may
also have to cover any settlement or adverse judgment obtained against
the insured.
Should an insurance company's denial of the duty to defend be viewed
with suspicion?
Yes, always.
All too frequently, even the most sophisticated commercial policyholders
accept an insurer's denial of the duty to defend without question.
However, insurance companies make mistakes. In our experience, this is
especially true with regard to the duty to defend. The legal standards
applicable to an insurer's duty to defend are favorable to policyholders,
requiring that they show only a "potential" or "possibility"
of covered liability.
Moreover, when an insurance company wrongfully denies a policyholder's
claim for a defense, it directly increases the insurer's profits.
As such, insurers have an economic incentive to "get it wrong."
Identifying and successfully challenging a wrongful denial of the duty
to defend can enable a policyholder to recover the full amount of its
defense costs, settlement costs, and judgment amounts, plus a portion
of attorney fees incurred in the coverage litigation, pre-judgment interest,
and punitive damages.
The bottom line is this: Any denial of the duty to defend should be viewed
with suspicion and, in a case of significant size, should be reviewed
by an insurance coverage lawyer as soon as possible.
Why do policyholders rarely challenge wrongful denials of the duty to defend?
Commercial policyholders, their lawyers, and their brokers are often simply
unaware of the
full scope of coverage a liability policy can provide, - especially when it comes
to the triggers and breadth of the duty to defend.
So what types of claims are typically covered by liability policies?
Far more than most insureds realize. For example, even the most basic General
Liability policy will often cover claims that are frequently pled in business
litigation such as libel, slander, trade libel, and invasion of privacy.
Even certain intellectual property and breach of contract claims can under
certain circumstances be covered by General Liability policies. The range
of potentially covered claims broadens dramatically if an insured has
purchased Directors and Officers and/or Professional Liability policies
and can extend to many torts and contract claims alleged in business litigation.
What is the legal standard in California governing an insurer's duty
to defend?
Under California law, the rules governing an insurer's duty to defend
favor policyholders. The mere "potential" that an insured faces
liability for a covered claim can trigger an insurer's duty to defend.
This potential can be gleaned from any factual allegation made in a third-party's
lawsuit, regardless of the causes of action pled, and even from facts
extrinsic to the lawsuit. If a policyholder is exposed to liability based
on a single potentially covered claim, then its liability insurer may
have a duty to defend the
entire lawsuit.
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How long does a policyholder have to challenge a wrongful denial of the
duty to defend?
Under California law, a policyholder has four years to challenge a wrongful
denial of the duty to defend. What is more, this four year period does
not even begin to run until the underlying lawsuit, which the insurer
has refused to defend, has concluded. For this reason, by way of example,
a wrongful denial of the duty to defend issued six years ago, in which
the underlying lawsuit did not conclude until only three years ago, can
still be challenged.
What is the cost of challenging a wrongful defense denial?
Although insurance litigation can be expensive, we are frequently willing
to review and challenge a wrongful denial of the duty to defend on a contingency
fee or "percentage-of-recovery" basis.
What monies can be recovered from the insurer?
Potential recoveries can include the attorney fees and costs incurred to
defend the third party lawsuit, the amount of any settlement or judgment
paid, as well as prejudgment interest, bad faith damages, and even punitive
damages. We have obtained substantial recoveries on behalf of clients
by successfully identifying and challenging wrongful denials of the duty
to defend.
Why should I select Osborne & Nesbitt as my coverage counsel?
In this field, expertise and experience matter. Coverage analysis and litigation
on behalf of policyholders is all we do. We have represented some of California's
leading companies against many of the nation's largest insurers. Having
ourselves at one time worked on behalf of the insurance companies, we
are able to apply an invaluable "Insider's Edge" to your claim.
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