An Insurer’s Duty: To Defend or Not To Defend

Primary insurance policies include the duty to defend an insured in connection with a covered loss. The insurer is sometimes presented with the question of whether a defense is owed when many of the allegations are not apparently covered by a particular policy. In this circumstance, how does an insurer determine its obligation? The law provides the answer: the “eight corners” rule—do the four corners of the policy unambiguously exclude coverage in all respects when viewed within the context of the four corners of the petition? If the answer is “no,” the duty to defend arises. Mossy Motors, Inc. v. Cameras America, 2004-0726 (La. App. 4 Cir. 3/2/05), 898 So.2d 602, 606.

Courts generally hold that the duty to defend the case extends to ALL claims, not just the covered claims. This duty can often prove quite costly, especially when non-covered claims are high-value or involve extensive factual development or testimony to defend. In some instances, the answer under the eight corners analysis is not so clear. The safe choice for the insurer is to provide a defense and hire separate counsel to handle the coverage side of the case.

In this scenario, where an insurer has serious coverage defenses, but agrees to provide the defense, when does the duty to defend terminate? The Louisiana First Circuit Court of Appeal recently ruled on this issue again in Ponchartrain Natural Gas System, K/D/S Promix, L.L.C. and Acadian Gas Pipeline System v. Texas Brine Company, L.L.C., No. 2018 CA 0254 (La. App. 12/12/19), stating:

            “Our previous decisions in the related sinkhole appeals clearly set out the well-established rule of law that an insurer’ s duty to defend terminates once the undisputed facts establish, or a judicial determination is made, that the claims asserted are not covered under the policy. See Florida Gas, 272 So. 3d at 551; Pontchartrain, 264 So.3d at 553- 54; Crosstex, 240 So.3d at 1032.”

So, the duty to defend ends when undisputed facts establish OR a judicial determination is made that the asserted claims are not covered. Of course, who is to say that the facts are “undisputed” without a judicial determination that confirms this conclusion.  An insurer could unilaterally determine that facts are undisputed and terminate the defense before a judicial determination, but if the court does not agree, the insurer may have issues. Accordingly, the safe course is to await a judicial determination before an insurer terminates the defense.

It is important to distinguish the duty of an excess carrier because such policies generally do not provide an obligation to defend. Instead, the excess carrier may exercise its “right to defend.”