Property and Casualty Insurance · Casualty Insurance · 6 min read
Defense Obligations and Extra Payments
- Differentiate between an insurer's duty to defend and its duty to indemnify under standard liability policies.
- Identify the items covered as supplementary payments under standard ISO CGL and PAP forms and explain how they affect policy limits.
- Explain when the duty to defend terminates and how defense provisions operate in specialized liability policies.
The Insurer's Twin Obligations: Defend and Indemnify
Standard ISO Commercial General Liability (CGL) and Personal Auto Policy (PAP) liability coverages generally establish two major duties for an insurer: the duty to defend covered suits and the duty to pay covered damages. The duty to defend requires the insurer to provide or pay for a legal defense against lawsuits that allege claims potentially covered by the policy. The duty to indemnify requires the insurer to pay covered settlements or judgments on your behalf, subject to the policy terms and stated coverage limits.
The duty to defend is broader than the duty to indemnify. Under a policy featuring a duty to defend, allegations in a lawsuit that could fall within coverage generally trigger an obligation to defend, subject to policy terms and applicable state law. Courts often evaluate this obligation using the four corners rule, which compares the allegations written in the complaint against the policy terms. Some states also permit courts to consider facts outside the complaint. Furthermore, the insurer must defend you even if the allegations in the lawsuit are groundless, false, or fraudulent. If a complaint contains a mix of both covered and excluded allegations, the insurer must generally defend the entire lawsuit.
Consider an auto accident where an injured party files a lawsuit claiming you were negligent and demands damages. Even if the claims are completely false, your personal auto insurer generally must defend a suit that alleges an accident and damages potentially covered by the policy, subject to policy terms and state law. If the insurer questions whether a claim is truly covered, it may defend you under a reservation of rights. This formal notice informs you that the insurer is providing a defense now but may later deny coverage or withdraw that defense if the policy terms and applicable state law permit.
Common mistakes
- Assuming supplementary payments reduce the policy's liability limits on standard ISO forms, when they are actually paid in addition to the limits.
- Believing that an insurer can end its duty to defend simply by depositing the policy limits with a court, rather than exhausting the limits through qualifying payments of settlements, judgments, or CGL Coverage C expenses.
- Confusing the daily loss of earnings limits between policies, which are commonly up to 200 dollars per day under the PAP and commonly up to 250 dollars per day under the CGL.
- Thinking that court costs covered under supplementary payments include legal fees and attorneys' expenses taxed against the insured, which standard ISO forms specifically exclude.
Key points
- The duty to defend requires the insurer to provide counsel for covered or potentially covered allegations and is broader than the duty to indemnify, which pays covered settlements and judgments.
- Under standard ISO CGL and PAP forms, defense expenses and supplementary payments are paid in addition to policy limits and do not erode the limits available for damages.
- Certain specialized contracts, such as directors and officers or professional liability policies, may utilize defense within limits, also known as a wasting policy.
- Supplementary payments cover items such as court costs (excluding taxed attorneys' fees and expenses), prejudgment and postjudgment interest, loss of earnings while attending hearings at the insurer's request, and specific bond costs.
- The standard PAP provides bail bond coverage commonly up to 250 dollars, while loss of earnings is commonly up to 200 dollars per day under the PAP and commonly up to 250 dollars per day under the CGL.
- The duty to defend terminates when the applicable policy limit is exhausted by the payment of covered judgments, settlements, or CGL Coverage C medical expenses.
- Standard liability forms grant the insurer discretion to settle claims without the insured's consent, whereas professional liability policies may require consent subject to a hammer clause.
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