Monday, July 25, 2011

Insurance Coverage – The Duty to Defend and The Duty to Indemnify

Because insurance is nothing more than a contract, certain terms can be negotiated away, and certain terms may not exist in a particular insurance policy. Because insurance policies are contracts, and can be very complicated, an attorney should be used to review the policy to make sure it provides adequate coverage. Insurance policies typically come with contractual obligations in the form of a duty to defend, a duty to indemnify, and a duty to pay claims in good faith; failure to do the latter can make an insurance company subject to a bad faith claim. Many attorneys recognize that often the value of the duty to defend is greater than the value of the duty to indemnify. Courts are typically liberal in finding coverage for the duty to defend. With regard to the duty to defend, New Mexico has adopted the following law:

“If the allegations of the injured third party's complaint show that an accident or occurrence comes within the coverage of the policy, the insurer is obligated to defend, regardless of the ultimate liability of the insured. The question presented to the insurer in each case is whether the injured party's complaint states facts which bring the case within the coverage of the policy, not whether he can prove an action against the insured for damages. The insurer must also fulfill its promise to defend even though the complaint fails to state facts with sufficient clarity so that it may be determined from its face whether or not the action is within the coverage of the policy, provided the alleged facts tend to show an occurrence within the coverage.” America Employers' Ins. Co. v. Continental Casualty Co., 85 N.M. 346, 348, 512 P.2d 674, 676 (1973) (quoting 1 Long, The Law of Liability Insurance § 5.02 (1973))

Because an insurance policy is a contract, a duty to defend is found by comparing the four corners of the complaint against the four corners (this is a contract law term meaning all aspects of the document) of the insurance policy. It must be noted that the duty to defend is distinct from the duty to indemnify; because while the duty to indemnify may not apply in a given case, the duty to defend may be applicable in the same case. The duty to indemnify applies if the event causing damage was covered under the terms of the insurance policy. Like the above case law indicates, the duty to defend can be triggered if there is a question about whether the insurance policy covers the event; meaning that while the duty to indemnify may not actually be triggered, the duty to defend is triggered.

As a business attorney I can appreciate the value of the duty to defend. Litigation can be very expensive and having legal defense included in the insurance contract can save a business or individual from having to pay legal fees out of pocket. The duty to defend is also triggered if the complaint for damages seeks compensation for covered and non-covered injuries. Some states allow insurance companies to stop defense if amended pleadings or discovery indicates facts that show that the harm is not covered within the insurance policy.

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