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While the insurance law principle that says where there is no duty to defend, there is no duty to indemnify may be cited often, it does not hold true in all circumstances, says Joshua A. Mooney, an attorney with Ballard Spahr L.L.P. in Philadelphia. The application of this syllogism gives the principle a broad meaning that never was intended. Further, it violates the fundamental principle that the duties to defend and indemnify are independent duties, he says.
An oft-cited principle in insurance law is that where there is no duty to defend, there is no duty to indemnify.
Too often, however, this principle is cited without analysis or context, and it has taken on an ill-advised meaning.
The reality is that although this principle holds true in many circumstances, it may not in other circumstances. Although the duties to defend and indemnify share a commonality, they are not dependent upon one another. Each duty is independent of the other. Some courts across the country have taken a closer look at this principle and recognized that an absence of a duty to defend does not always foreclose a duty to indemnify. This article discusses that reality.
All jurisdictions uniformly hold that an insurer's duties to its insured derive from the express language of the insurance policy. Most insurance policies provide two duties: the duty to defend and the duty to indemnify. Commercial general liability policies, for instance, typically state that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury' or "property damage' to which this insurance applies.” Such policies further provide that the insurer “will have the right and duty to defend any "suit' seeking those damages.”
Many courts determine the duty to defend by comparing the express language of the insurance policy with the allegations in the underlying complaint. Some courts also permit an insurer to examine facts outside the complaint to determine whether it has a duty to defend.
In all jurisdictions, however, an insurer's burden to disclaim defense coverage is a heavy one, because the rule for determining defense coverage is a liberal one. If the complaint alleges facts that would support a claim within the coverage of the insurance contract, the insurer must provide the insured with a complete defense. The allegations of the complaint must be liberally construed in favor of coverage and, if there is any doubt as to whether a complaint alleges an insured risk, that doubt must be resolved in favor of the insured.
This liberal rule to determine the duty to defend often is explained with the proposition that an insurer's duty to defend is broader than its duty to indemnify. This description is a shorthand expression for the proposition that an insurer may have a duty to defend its insured against allegations in a complaint even if the allegations have no merit and/or the insurer ultimately is not liable to indemnify the insured. In this sense, the insurance policy is said to provide “litigation” insurance, because even where a claim has no merit, the insurance policy still provides coverage to the insured for the cost of defense. Insurance commentator Allan Windt has explained that the shorthand expression “simply means that the merits of the underlying claim, while determinative of the duty to indemnify, have no effect on the duty to defend.”
The shorthand expression that the duty to defend is broader than the duty to indemnify, however, has led to confusion. Specifically, the articulation of this principle has led some to conclude that where the “broader” duty does not exist, the narrower duty, by default, also cannot exist as a matter of law. At first glance, the application of this syllogism appears to be a correct one. If the broader duty does not exist, how can the narrower one exist? The application of this syllogism, however, gives the principle a broad meaning never intended. Further, it violates the fundamental principle that the duties to defend and indemnify are independent duties.
In order for the syllogism to work, the duty to defend must subsume the duty to indemnify. In reality, because both duties are independent of one another, one duty's existence, or lack thereof, should have no legal effect upon whether the other duty arises. This may be especially true in instances where the underlying complaint has been filed under the notice pleading standard of the Federal Rules of Civil Procedure, which require only a short and plain statement of the claim showing that the pleader is entitled to relief.
The duty to indemnify, like the duty to defend, is contractually derived from the express language of the insurance policy. Unlike the duty to defend, however, the duty to indemnify is based not on the allegations of the complaint, but rather upon the adjudicated facts of the underlying lawsuit as they are determined. Thus, jurisdictions uniformly hold that a duty to indemnify does not necessarily follow a duty to defend. There is no automatic determination that the duty to indemnify exists because that duty is based on adjudicated or stipulated facts, not allegations stated in a complaint.
For the same reasons, the reverse also must hold true. The absence of a duty to defend does not automatically foreclose the duty to indemnify. Facts that have not been expressly pleaded may be revealed in the adjudication of the matter, thereby triggering an insurer's indemnity liability under a policy.
Some courts have recognized this reality and have hesitated to find that an insurer has had no duty to indemnify based solely on the conclusion that it has no duty to defend. In Premier Pet Products L.L.C. vs. Travelers Property and Casualty Company of America, the U.S. District Court for the Eastern District of Virginia granted Travelers' motion for partial summary judgment, holding that Travelers had no duty to defend Premier Pet Products in an action alleging trademark infringement, false designation and unfair competition. Travelers argued, and the court agreed, that there was no coverage because the underlying complaint did not allege one or more of the enumerated “advertising injury” offenses listed in the policy. When determining whether a duty existed, the court relied solely upon the facts alleged in the underlying pleadings.
Although citing a Virginia federal court decision for the proposition that “if there is no duty to defend, ab initio, there can be no duty to indemnify” when discussing an insurer's duty to defend, the court ultimately did not dismiss Premier Pet Products' claim that Travelers had a duty to indemnify it on the basis that Travelers had no duty to defend. Instead, the court ordered further briefing by the parties because they had addressed only the duty to defend. Thus, although the court determined that Travelers had no duty to defend, it did not automatically hold that Travelers also had no duty to indemnify. The parties ultimately settled before the court could render a decision on the duty to indemnify.
Other courts have been more explicit in their finding that the absence of a duty to defend does not foreclose a duty to indemnify. In Grinnell Mutual Reinsurance Co. vs. Dieter Reinke et al., for instance, the insured sought reversal of the lower court's decision that the insurer had no duty to defend in order to help secure the availability of indemnity coverage. Dismissing the appeal as unripe, in an opinion by Judge Frank Easterbrook, the 7th U.S. Circuit Court of Appeals expressly rejected the conclusion that an absence of a duty to defend foreclosed as a matter of law a duty to indemnify.
In that case, Judge Easterbrook wrote that a “conclusion that the insurer must defend does not imply that it must indemnify; because of the possibility that the legal theory of the underlying suit may change, a conclusion that the insurer need not defend does not imply that it need not indemnify. It need not indemnify on allegations found insufficient to activate a duty to defend, but the theory of recovery is not fixed until the case ends.”
Nor is this concept new. The 2nd U.S. Circuit Court of Appeals reached a similar conclusion almost 46 years earlier. That case addressed the application of an exclusion that barred coverage for injuries arising from use of an elevator. In its opinion, the court noted that because of the plasticity of federal notice pleading, the absence of a duty to defend should not foreclose a duty to indemnify because, under notice pleading, an insured party “might conceivably recover on a claim, which, as he had alleged it, was outside the policy; but which, as it turned out, the insurer was bound to pay.” The court concluded that “such is the plasticity of modern pleading that no one can be positive that that could not happen.”
This possibility remains true today.
The potential that an insurer may be required to indemnify where it did not have a duty to defend, in particular, may exist where a contractor seeks coverage as an additional insured by reason of the fact that the alleged liability arises out of the work or operations of the named insured, a nonparty in the action. In such an instance, a plaintiff may not allege specific facts against the named insured due to litigation strategy, jurisdictional issues or prohibitions of workers compensation laws. Quite simply, the decision not to specifically name an insured may reflect a genuine unfamiliarity with the facts of the case in the beginning stages of the lawsuit.
In these instances, if there are no allegations illustrating the operations of the named insured, a court may determine that the allegations of the complaint do not allege an insured risk to trigger the duty to defend notwithstanding the fact that facts demonstrating coverage could come to light as the underlying case progresses. Such a result could leave an insurer with later demands for indemnity coverage without the advantage of having been involved in the underlying action.
What should one do? To begin, one should refrain from concluding that there can be no duty to indemnify simply because there is no present and apparent duty to defend. Instead, underlying pleadings—and in some jurisdictions, the events surrounding the allegations—should be scrutinized more closely. Is the underlying action one in which facts that may trigger coverage could be uncovered, especially in discovery? Coverage counsel also should be consulted. A good attorney will understand the nuances of the law of the relevant jurisdiction and could help map out a long-term strategy even where a triggered duty to defend does not lay in the immediate future.
Joshua A. Mooney is a senior associate at Ballard Spahr L.L.P. in Philadelphia, where he is a member of the firm's insurance and intellectual property practice groups. Mr. Mooney concentrates his practice handling first- and third-party insurance coverage disputes and intellectual property matters. The views expressed herein are solely those of the author and are not those of his firm or his clients.