Liability insurance policies protect your business against claims brought against you by third parties. Your insurer has a duty both to defend you against claims and to compensate you for losses covered under the policy. Generally speaking, the duty to defend is much broader than the duty to compensate, or indemnify you for your losses. But there are nonetheless limits to your business insurer’s duty to defend.
What Liability Policies Cover
General commercial liability (GCL) policies generally protect your business against claims of bodily injury, property damage or personal injury (such as libel or slander) brought by third parties. Depending on your business, you may have additional, more specialized liability insurance policies, such as directors and officers (D&O), errors and omissions (E&O), or employment practices liability (EPLI) insurance. All insurance policies have exclusions for which no coverage applies.
Duty to Defend vs. Duty to Indemnify
Insurers are only required to compensate you for losses that are covered under the policy. But they have a duty to defend your business if the facts alleged in the lawsuit potentially fall within the policy’s coverage. Most courts hold that an insurer must defend your claim unless it can establish as a matter of law that “there is no possible factual or legal basis on which the insurer might eventually be obligated to indemnify [the insured] under any policy provision.”1 As one court stated, “So long as the claims[asserted against the insured] may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer’s responsibility to pay, there is no doubt that it is obligated to defend.2 For instance, if it’s unclear at the start of a trial that the allegations in the complaint fall solely and entirely within a policy exclusion(s), the insurer must defend your business until adjudication. Further, if a complaint contains multiple claims against your business, and just one of the claims potentially falls within your policy’s coverage, the insurer must defend the entire action.3 And an insurer cannot escape its duty to defend even when the allegations stated in the complaint are demonstrably groundless, false or fraudulent.4
When Duty to Defend Does Not Apply
In order to trigger a duty to defend, the allegations must allege bodily injury, personal injury or property damage as defined under the terms of the policy. If a comparison of the policy with the complaint shows that there is no potential for coverage, the insurer is not obligated to defend you.
If all facets of the complaint clearly fall within a policy exclusion(s), there is no duty to defend. For instance, liability policies generally exclude coverage for intentional, wrongful acts. Therefore, underlying actions that allege intentional wrongdoing, such as assault and battery, are often held to be outside the scope of coverage and therefore do not trigger a duty to defend.
An insurer further has no obligation to defend an insured party that is not sued in an insured capacity. For instance, two directors of an insurance services company were covered under an errors and omissions liability policy solely in their capacities as directors of that company. When they were sued in their capacity as directors of a closely affiliated company, their insurer refused to defend them, and the court agreed. “Here, the insured capacities are not implicated…The directors of [the two separate companies] may well have been completely different people. What is important is not their identities but their capabilities…. Because there is no lawsuit against an insured party, there is no one to whom a duty to defend is owed.”5
If you are involved in a dispute with your business insurance company, contact Schwartz, Conroy & Hack. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
1 Villa Charlotte Bronte, Inc. v. Commercial Union Ins. Co., 64 N.Y.2d 846, 848, 476 N.E.2d 640, 641, 487 N.Y.S.2d 314, 315 (1985)
2 Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 310-11, 476 N.E.2d 272, 275, 486 N.Y.S.2d 873, 876 (1984)
3 Great American Ins. Co. v. Riso, Inc., 479 F.3d 158, 161 (1st Cir. 2007)
4 BP Air Conditioning Corp. v. One Beacon Ins. Group, 8 N.Y.3d 708, 871 N.E.2d 1128, 840 N.Y.S.2d 302 (N.Y. 2007);
5 Bowie v. Home Insurance Co., 923 F.2d 705 (9th Cir. 1991)
