In a new appellate case published on May 5, 2023 (Dua v. Stillwater Insurance), the California Court of Appeal reminded insurance companies that an insurer’s duty to defend is broader than the duty to indemnify — much broader.
In California, the duty to defend and the duty to indemnify are two important obligations that insurance companies have towards their policyholders. The key difference between the two duties is that the duty to defend is based on the potential for coverage, while the duty to indemnify depends on the actual outcome of the claim or lawsuit.
Generally speaking, the duty to indemnify is the obligation of the insurance company to pay damages or losses awarded against the insured party in a covered claim or lawsuit. If the insured is found liable for damages that are covered by the insurance policy, the insurance company has a duty to indemnify, meaning they must reimburse the insured for the covered losses up to the policy limits.
On the other hand, the duty to defend arises when an insured party faces a claim or lawsuit that potentially falls within the scope of coverage provided by their insurance policy. In such cases, the insurance company has a duty to defend the insured, meaning they must provide legal representation and cover the costs of defending against the claim or lawsuit. This duty is triggered if the factual allegations in the claim potentially give rise to liability covered by the insurance policy, regardless of whether the claim ultimately succeeds or fails. This means that even if a claim turns out to be meritless or outside the policy coverage, the insurance company may still have a duty to defend the insured if the initial allegations suggest potential coverage. This broader duty to defend is intended to protect policyholders by ensuring they have legal representation and support throughout the legal process, even in cases where the ultimate outcome may not result in indemnification.
Courts have consistently held that an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded; in fact, the duty to defend applies to claims that are groundless, false, or fraudulent. Not only is the burden on the insurer to show the claim falls within an exclusion to coverage, exclusions are narrowly construed. In Dua, the Second District Court of Appea reiterated that an insurer can be excused from the duty to defend only if the third party complaint can by “no conceivable theory” raise a single issue within the policy’s coverage.
Of course, it is important to note that the specifics of insurance policies and the application of the duty to defend and duty to indemnify can vary depending on the policy language, the nature of the claim, and other relevant factors. Policyholders should carefully review their insurance policies and consult with their broker and other insurance and legal professionals to understand their specific rights and obligations in particular situations.
—CN
For more information, please contact:
Christopher E. Ng at cng@gibbsgiden.com, (310) 734-3367
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