WHAT HAS EIGHT CORNERS, BUT ISN’T A CUBE?
ISSUES ARISING FROM THE DUTY TO DEFEND
Kathy J. Maus
Michael Hamilton
Julius F. “Rick” Parker III
Kathy J. Maus is a Partner at Butler, LLP, having joined the firm in 1991. She
devotes her practice to first- and third-party coverage, extra-contractual matters,
auto and premises liability defense. She has significant trial and appellate
experience and is recognized in Florida as a Super Lawyer in Insurance
Coverage. She graduated cum laude, in 1991 from the Florida State University
College of Law. She is an active member and former Director for DRI and IADC.
Michael Hamilton is a Partner with Goldberg Segalla’s Global Insurance
Services Practice Group and has more than two decades’ experience handling
sophisticated and high-exposure insurance coverage claims and litigation for
major insurers throughout the United States. Mike has an extensive background
in environmental claims, coverage issues involving construction-related issues,
and business torts and advertising injury coverage issues. He is an active
member of DRI, and was the immediate past Chair of the Insurance and
Reinsurance Committee for the IADC. Mike graduated from Penn State
University’s Dickinson School of Law in 1993 where he served on the Law
Review.
Julius F. "Rick" Parker, III is a Partner at Butler Pappas, having joined the firm
in 2004 and devotes his practice to third-party coverage defense, extracontractual matters, premises liability defense and appeals. He has significant
trial and appellate experience. He graduated, cum laude, in 1998 from the
Florida State University College of Law, where he also served as Articles and
Notes Editor for the Journal of Land Use & Environmental Law.
What are the most frequent issues in defending insureds in third party claims?
This program will cover those, including the “eight corners rule” and its
exceptions, defending under a reservation of rights, withdrawal from the defense,
the insurer’s rights/obligations concerning declaratory relief, retention of
independent counsel; trigger theories and overlapping coverage, refusal of defense
by the insured, and waiver and coverage by estoppel.
The “Eight Corners Rule”
The “eight corners rule” holds that an insurer’s duty to defend is determined
solely by the four corners of the complaint and the four corners of the insurance
policy. See, e.g., Ewing Const. Co., Inc. v. Amerisure Ins. Co., 420 S.W.3d 30
(Tex. 2014); Donegal Mut. Ins. Co. v. Baunhammers, 938 A.2d 286 (Pa. 2007).
In other words, if the complaint alleges facts which, if true, would trigger
coverage under the insurance policy, the insurer must defend the insured,
regardless of whether the actual facts may trigger an exclusion or otherwise
negate coverage. “In reviewing the pleadings and making the foregoing
determinations, courts look to the factual allegations showing the origin of the
damages claimed, not to the legal theories or conclusions alleged.” Id. at 33.
“The insured has the initial burden to establish coverage under the policy. … If it
does so, then to avoid liability the insurer must prove one of the policy's
exclusions applies. Id. If the insurer proves that an exclusion applies, the burden
shifts back to the insured to establish that an exception to the exclusion restores
coverage.” Id. citing Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377,
380 (Tex. 2012); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast
Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); Gilbert Texas Const., L.P. v.
Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010) (internal citations
omitted).
Exceptions to the Eight Corners Rule
Some states allows a court to consider evidence outside of the complaint when
determining coverage “if uncontroverted evidence places the claim outside of
coverage, and the claimant makes no attempt to plead the fact creating coverage
or suggest the existence of evidence establishing coverage.” Nationwide Mut.
Fire Ins. Co. v. Keen, 658 So. 2d 1101, 1102-03 (Fla. Ct. App. 1995) (citing
Tennessee Corp. v. Lamb Bros. Constr. Co., 265 So. 2d 533 (Fla. Ct. App.
1972)).
In Composite Structures, Inc. v. Continental Ins. Co., 560 F.App’x 861, 865 (11th
Cir. 2014), the Eleventh Circuit Court of Appeals explained:
The Florida Supreme Court has recognized there are exceptions to
the general rule that the duty to defend is determined solely from
the allegations of the complaint: “[T]here are some natural
exceptions to this standard where an insurer's claim that there is no
duty to defend is based on factual issues that would not normally
be alleged in the complaint.” . ... Similarly, Florida District Courts
of Appeal have concluded that, under certain circumstances, facts
outside the underlying complaint can be considered when assessing
the duty to defend.
(internal citations omitted) (citing Higgins v. State Farm Fire and Cas. Co., 894
So. 2d 5, 10 n.2 (Fla. 2005); Acosta, Inc. v. National Union Fire Ins. Co., 39 So.
3d 565 (Fla. Ct. App. 2010); Nationwide Mut. Fire Ins. Co. v. Keen, 658 So. 2d
1101, 1103 (Fla. Ct. App. 1995). Therefore, in Florida, extrinsic evidence may be
used to deny a duty to defend in limited circumstances.
Texas also adheres to the eight-corners rule. See GuideOne Elite Ins. Co. v.
Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). However, it has
also recognized a limited exception to the rule in certain circumstances. See Pine
Oak Bldrs., Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009)
(adopting limited exception, “permitting the use of extrinsic evidence only when
relevant to an independent and discrete coverage issue, not touching on the merits
of the underlying third-party claim”).
Illinois follows a similar rule. “[I]n evaluating an insurer’s duty to defend, the
trial court may look beyond the underlying complaint as long as the trial court
does not determine an issue critical to the outcome of the underlying lawsuit.”
Bartkowiak v. Underwriters at Lloyd’s, 39 N.E.3d 176 (Ill. 1st Dist. 2015). See
also Pekin Ins. Co. v. Wilson, 930 N.E. 2d 1011 (Ill. 2010) (extrinsic evidence
may be considered if it does not determine an issue critical to the underlying
action); Landmark American Ins. Co. v. Peter Hilger, 2016 U.S. App. LEXIS
17343 (7th Cir. Sept. 22, 2016).
New Jersey courts are split on whether extrinsic evidence can be used to defeat
the duty to defend. See Polarome Intern., Inc. v. Greenwich Ins. Co., 961 A.2d
29, 48 (N.J. Super. Ct. 2008). For instance, New Jersey courts have held that
examining facts beyond the complaint may be considered when those facts will
not be decided and are irrelevant in the underlying case. Burd v. Sussex Mut. Ins.
Co., 267 A.2d 7, 9-10 (N.J. 1970). However, several decisions indicate that
extrinsic evidence may not be used to dispute coverage. Kent Motor Cars, Inc. v.
Reynolds & Reynolds, 25 A.3d 1027, 1042 (N.J. 2011).
ALI’s Position on Evaluating The Duty to Defend
The American Law Institute (ALI) is the preeminent independent legal
organization producing scholarly work, including its “Restatement of the Law”
treatises which inform practitioners on general principles of common law. The
ALI initiated its Insurance Law project, ultimately leading to the development of
the Restatement of the Law of Liability Insurance. Recently, ALI’s membership
voted to approve Chapters 1 and 2 of the Restatement of the Law of Liability
Insurance, which included duty to defend issues.
Section 13 of the Restatement addresses when undisputed facts known by the
insurer—but not within the four corners of the complaint—would justify a denial
of coverage. The Restatement generally adopts the “complaint-allegation” rule,
which provides that an insurer’s duty to defend is governed solely by the facts
alleged in the complaint, although an insurer also has a duty to defend if the
insurer knows or reasonably should know of information beyond the allegations
of the complaint that would give rise to a duty to defend. The Restatement carves
out three narrow exceptions to this rule and permits an insurer to rely upon facts
outside of the complaint to deny a duty to defend when such facts relate to
whether: (1) a person or entity is insured under the policy, (2) a vehicle is covered
under the policy, or (3) notice was timely under a “claims made” policy. The
Restatement’s limitation of the use of evidence outside of the complaint to the
three narrow exceptions discussed above could require insurers to defend claims
for which there is clearly no coverage based upon undisputed facts. The relevant
provisions are set forth below:
§ 13. Conditions Under Which the Insurer Must Defend
(1) An insurer that has issued an insurance policy that includes a
duty to defend must defend any claim that is based in whole or in
part on any alleged facts that, if proven, would be covered by the
policy, without regard to the merits of those allegations or any
associated legal theory.
(2) For the purpose of determining whether an insurer must defend,
the claim is deemed to be based on:
(a) Any allegation contained in the complaint or comparable
document stating the claim; and
(b) Any additional allegation that a reasonable insurer would
regard as an actual or potential basis for all or part of the claim.
(3) For the purposes of determining whether an insurer must
defend, the following coverage questions are determined based on
all of the facts and circumstances reasonably available to the
insurer at the time the determination is made:
(a) Whether a person or entity is insured under a liability
insurance policy; and
(b) Whether a vehicle at issue in a claim is a vehicle for which
insurance coverage is available under an automobile or similar
liability insurance policy.
Tender of the Defense
Some states require the insured to actually “tender” the claim to the insured in
order to trigger the insurer’s duty to defend. See, e.g., Hartford Accident &
Indem. Co. v. Gulf Ins. Co., 776 F.2d 1380 (7th Cir. 1985); American States Ins.
Co. v. Pioneer Elec. Co., 85 F. Supp. 2d 1337 (S.D. Fla. 2000); Forum Ins. Co. v.
Ranger Ins. Co., 711 F. Supp. 909 (N.D. Ill. 1989). However, other states hold
that the insurer’s duty to defend is triggered upon the filing of a lawsuit alleging
covered claims, regardless of whether the insured actually requests a defense. See
Sherwood Brands, Inc. v. Hartford Accident & Indem. Co., 698 A.2d 1078 (Md.
Ct. App. 1997). Thus, these courts reason that a formal tender of defense to a
carrier is not required because actual notice is sufficient to trigger a carrier’s duty
to defend. Cincinnati Cos. v. W. Am. Ins. Co., 701 N.E.2d 499 (Ill. 1998). In
Illinois, after receiving actual notice, i.e., where the carrier knows that a cause of
action was filed and the complaint falls or potentially falls within the scope of
coverage of one of its policies, a carrier is expected to contact the policyholder to
determine if it wants to be defended.
Scope of the Duty to Defend
In the majority of states, if a complaint contains counts which are covered and
counts which are not covered, the insurer must defend the entire complaint. See,
e.g., American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752
F.2d 71, 75 (3d Cir. 1985); Foundation Reserve Ins. Co., Inc. v. Mullenix, 642
P.2d 604, 606 (N.M. 1982); Montrose Chemical Corp. v. Superior Court, 861
P.2d 1153, 1157 (Cal. Ct. App. 1993); Baron Oil Co. v. Nationwide Mut. Fire Ins.
Co., 470 So. 2d 810 (Fla. Ct. App. 1985). However, a minority of jurisdictions
only require the insurer to defend claims falling within coverage. See, e.g.,
Lockwood Intern., B.V. v. Volm Bag Co., Inc., 273 F.3d 741, 743 (7th Cir. 2001);
MIB Group, Inc. v. Federal Ins. Co., 473 F. Supp. 2d 142, 147 (D. Mass. 2006);
Perdue Farms, Inc. v. Travelers Cas. & Surety Co. Of Am., 448 F.3d 252, 257
(4th Cir. 2006); New Jersey Mfrs. Ins. Co. v. Vizcaino, 920 A.2d 754 (N.J. App.
Div. 2007).
Generally, an insurer is required to defend counterclaims against the insured, even
where the insured initiated the litigation at issue. See Berkeley v. Home Ins. Co.,
68 F.3d 409 (D.C. Cir. 1995); American Home Assur. Co. v. Miller, 717 F.2d
1310 (9th Cir. 1983). However, at least two states allow an insurer to refuse to
defend a counterclaim filed against an insured where the insured initiated
litigation. See Parameter Driven Software, Inc. v. Massachusetts Bay Ins. Co.,
856 F. Supp. 314 (E.D. Mich. 1993), aff'd, 25 F.3d 332, (6th Cir. 1994) 3250
Wilshire Blvd. Bldg. v. Employers Ins. of Wausau, 46 Cal. Rptr. 2d 399 (Ct. App.
1995).
Defending Under a Reservation of Rights
Insureds have attempted to argue that a defense under a reservation of rights is a
breach of the duty to defend per se. That strategy has not been well received.
See, e.g., Law Offices of Zachary R. Greenhill, P.C. v. Liberty Ins. Underwriters,
Inc., 128 A.D.3d 556 (N.Y. Ct. App. 2015); Cent. Mut. Ins. Co. v. Tracy’s
Treasures, Inc., 19 N.E.3d 1100 (Ill. Ct. App. 2014); Babcock & Wilcox Co. v.
American Nuclear Insurers, 76 A.3d 1 (Pa. Sup. Ct. 2013), rev’d on other
grounds, 131 A.3d 445 (Pa. 2015); Passaic Valley Sewerage Comm’rs v. St. Paul
Fire & Marine Ins. Co., 21 A.3d 1151 (N.J. Ct. App. 2011); Travelers Indem. Co.
of Ill. v. Royal Oak Ent., Inc., 344 F.Supp.2d 1358, 1370 (M.D. Fla. 2004);
Prichard v. Liberty Mut. Ins. Co. 84 Cal.App.4th 890 (Cal. Ct. App. 2000).
However, several courts have held that, where the insurer offers to defend under a
reservation of rights, the insured may reject that defense. See State ex rel. Rimco,
Inc. v. Dowd, 858 S.W.2d 307 (Mo. Ct. App. 1993). The Dowd court explained:
… [T]here are good reasons for allowing the insured the election.
A reservation of rights may chill a zealous defense based on the
insurer’s assessment of the liability and it presents a possible
conflict of interest because the insurer may be more concerned
with developing facts showing non-coverage than facts defeating
liability.
Id. at 308, citing State ex rel. Mid–Century Insurance Co. Inc. v. McKelvey, 666
S.W.2d 457, 459 (Mo. Ct. App. 1984). See also, Carrousel Concessions, Inc. v.
Fla. Ins. Guaranty Ass=n, 483 So. 2d 513 (Fla. Ct. App. 1986) (allowing the
insured to reject subjectively inadequate defense under reservation of rights). But
see Aetna Cas. & Sur. Co. v. Protective Nat’l Ins. Co., 631 So. 2d 305 (Fla. Ct.
App. 1993); Travelers Indem. Co. of Ill. v. Royal Oak Ent., Inc., 344 F. Supp. 2d
1358 (M.D. Fla. 2004) (rejecting Carrousel Concessions).
In New Jersey, an insurer that wishes to control its insured’s defense, and
simultaneously reserve the right to deny coverage, can only do so with the
insured’s consent. Merchants Indem. Corp. v. Eggleston, 179 A.2d 505, 512 (N.J.
1962). If the insured does not consent, it is free to defend itself, but the insurer’s
potential obligation to reimburse defense costs is subject to the applicability of SL
Indus. Inc. v. Am. Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992) which permits
allocation of defense costs between covered and uncovered claims when feasible.
Recently, the Pennsylvania Supreme Court held that where a liability insurer
agrees to provide a defense to its insured in an underlying tort action subject to a
reservation of rights, but refuses to consent to a settlement in that action, the
insured may nevertheless accept the settlement over the insurer’s objection where
the settlement is “fair, reasonable, and non-collusive” from the perspective of a
reasonably prudent person in the insured’s position in light of the totality of the
circumstances and is covered. Babcock-Wilcox v. Am. Nuclear Insurers, 131
A.3d 445 (Pa. 2015).
Withdrawal from the Defense
In most jurisdictions, once the insurer’s duty to defend terminates, the insurer is
free to withdraw from the defense. An insurer’s duty to defend terminates upon
the good faith exhaustion of the policy limits, the payment of judgments or
settlements, or upon dismissal of the only covered claim. See Society Ins. v.
Bodart, 343 Wis. 2d 418 (Ct. App. 2012); Reller, Inc. v. Hartford Ins. Co. of the
Southeast, 765 So. 2d 87 (Fla. Ct. App. 2000). Most jurisdictions permit an
insurer to exhaust its policy limits in settlement of less than all claims in good
faith. See Harmon v. State Farm Mut. Auto. Ins. Co., 232 So. 2d 206 (Fla. Ct.
App. 1970). As long as it attempts to settle all claims globally, and as long as it
uses reasoned claims settlement judgment in order to settle those claims which
create the greatest exposure to its insured, if it can do so, it can proceed to exhaust
its limits in settlement of less than all claims. Its decision must be reasonable and
not simply an effort to exhaust the policy limits in order to escape the duty to
defend. See Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So. 2d 555 (Fla.
Ct. App. 2003).
In Underwriters Guaranty Ins. Co. v. Nationwide Mut. Fire Ins. Co., 578 So. 2d
34 (Fla. Ct. App. 1991), a Florida Court of Appeal held that, upon exhaustion of
an insurer’s policy limits to obtain a release of its named insured’s liability, the
insurer’s duty to defend ceased, notwithstanding the fact that an action remained
pending against an additional insured under the policy. While the court in
Underwriters recognized the possibility that exhaustion of policy limits in bad
faith in such a situation could give rise to a bad faith claim, no such claim was
pled; thus the court did not address the issue.
However, another Florida court later released its decision in Contreras v. U.S.
Sec. Ins. Co., 927 So. 2d 16 (Fla. Ct. App. 2006). Contreras specifically
approved of the insurer’s settlement of liability against one of its insureds where
obtaining a release of liability against both insureds was not possible. Id. at 21.
Some jurisdictions will permit the insurer to withdraw the defense if it obtains
evidence during the course of defending the insured which then confines the
coverage to a non-covered claim or covered claims are dismissed. See
Nationwide Property and Casualty Ins. Co. v. Shearer, 2016 U.S. App. LEXIS
9635 (3d Cir. May 26, 2016); Conway Chevrolet-Buick, Inc. v. Travelers
Indemnity Co., 136 F.3d 210 (1st Cir. 1998). The ALI, however, takes a very
policyholder-friendly approach to this issue, concluding that withdrawal from the
defense is permitted without seeking a declaratory judgment if based upon
extrinsic evidence that the person or entity is not an insured, or a vehicle is not
covered under the policy. Otherwise, a declaratory judgment is required for the
insurer to withdraw its defense.
Consequences of Breach
Generally, if the insurer wrongfully fails to defend its insured, the insured is free
to enter into reasonable settlements with the claimant and such settlements will be
binding on the insurer in the absence of fraud or collusion. See, e.g., Arensen v.
Nat’l Auto & Cas. Ins. Co., 286 P.2d 816 (Cal. 1955); Ahearn v. Odyssey Re
London Ltd., 788 So. 2d 369 (Fla. Ct. App. 2001).
Declaratory Relief
Most jurisdictions encourage insurers to seek declaratory relief when a coverage
issue exists. Some states even encourage resolution of the coverage issue as early
as possible, even if it involves the finding of facts pertinent to liability in the
underlying case. See, e.g., Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5
(Fla. 2005); George F. Hillenbrand, Inc. v. Ins. Co. of N. Am., 104 Cal. App. 4th
784 (Ct. App. 2002).
However, some federal courts refuse to entertain an action for declaratory relief
prior to resolution of the underlying action against the insured. See, e.g.,
Mitcheson v. Harris, 955 F.2d 235 (4th Cir. 1992). The rationale for such a rule
lies in the comity federal courts afford to state courts on questions of state law and
the possibility of inconsistent adjudications. Where questions of state law are to
be resolved and are not otherwise removable, federal courts will defer to the state
court to resolve those questions. Mitcheson is certainly the minority rule.
Independent Counsel
A number of states recognize the inherent tension arising from the “tripartite”
relationship created by liability insurance. On the one hand, the insurer is funding
the defense. However, where there are coverage issues present, there is a
temptation for the insurer to direct the defense toward resolving coverage
questions adverse to the insured. Accordingly, several states require the insurer to
retain “independent counsel” to represent the insured. See, e.g., San Diego Navy
Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (Ct. App.
1985); Williams v. American Country Ins. Co., 359 Ill. App. 3d 128, 137–38
(2005).
Some states will not create a hardened rule that independent counsel is required in
all instances where coverage issues exist and an insurer is defending under a
reservation of rights. Rather, courts will examine whether an actual conflict exists
in each particular instance. Where a “conflict of interest between the insurer and
its insured arise[s], such that a question as to the loyalty of the insurer’s counsel to
that insured is raised, the insured is entitled to select its counsel, whose reasonable
fee is to be paid by the insurer.” Rector, Wardens & Vestryman of Saint Peter’s
Church v. Am. Nat’l Fire Ins. Co., No. 00-2806, 2002 U.S. Dist. LEXIS 625 (E.D.
Pa. Jan. 14, 2002) (an actual conflict existed because the underlying liability
could rest on two causes of action, one covered and one not).
Other states merely preclude retained defense counsel from discussing coverage
issues with the insured. In that situation, retained counsel is considered strictly
the insured’s counsel. The defense must be conducted on the merits and without
any attempt to resolve fact questions pertaining to coverage adverse to the
insured. See, e.g., Travelers Indem. Co. v. Royal Oak Ent., Inc., 344 F. Supp. 2d
1358, 1370 (M.D. Fla. 2004) (citing Taylor v. Safeco Ins. Co., 361 So. 2d 743,
745-46 (Fla. Ct. App. 1978)); Remodeling Dimensions, Inc. v. Integrity Mut. Ins.
Co., 819 N.W. 2d 602 (Minn. 2012). However, Florida does require the
appointment of mutually agreeable counsel when the reservation of rights triggers
the Claims Administration Statute. See Fla. Stat. § 627.428 (2014).
Trigger Theories
Trigger of coverage theories first arose in the context of long-term exposure
cases, usually to asbestos. The essential question is how to allocate the
responsibilities of the parties when a single claim alleges multiple discreet injuries
or a continuing exposure to an injuries substance, spanning different policy
periods and/or a period of self-insurance or self-insured retention. That is the
problem addressed by the courts in Ins. Co. of North Am. v. Forty-Eight
Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980) and Keene v. Ins. Co. of North
America, 667 F.2d 1034 (D.C. Cir. 1981).
Courts have recognized four separate “trigger” theories: manifestation, exposure,
injury-in-fact and continuous injury. Under the manifestation theory, only the
policy in place when the plaintiff’s injuries “manifest” themselves, or become
evident, is triggered. Forty-Eight Insulations, 633 F.2d at 1216. Under the
exposure theory, each policy in effect when the plaintiff was exposed to the
injurious substance is triggered. Id. at 1217. Under the injury-in-fact theory, only
the policy in place when the plaintiff is actually injured is triggered. See Axis
Surplus Ins. Co. v. Contravest Const. Co., 921 F. Supp. 23 1338 (M.D. Fla. 2012).
And finally, under the continuous injury theory, all policies in place during the
time the plaintiff suffered actual injury are triggered. Keene, 667 F.2d at 1047
(referring to the theory as “exposure in residence”).
Insurance practitioners must be careful because courts may apply different trigger
theories within the same jurisdiction, depending on the type of underlying case.
For example, in cases involving asbestos, Pennsylvania courts apply the
continuous trigger theory of liability. J.H. Fr. Refractories Co. v. Allstate Ins.
Co., 626 A.2d 502 (Pa. 1993). Yet Pennsylvania follows the first manifestation
rule involving property damage. Specifically, coverage is triggered when
“property damage becomes reasonably apparent.” Pa. Nat’l Mut. Cas. Ins. Co. v.
St. John, 106 A.3d 1, 22-23 (Pa. 2014).
Allocation Approaches
Assuming the court selects the continuous injury or exposure theory, the court
will be faced with the task of allocating coverage among those carriers “on the
risk.” Whether in the asbestos context or some other long-latency injury or
continuing tort scenario (most notably, water intrusion claims in construction
defect claims), the problem of allocating defense costs (and correspondingly
indemnity) among insurers and self-insureds on the risk is generally approached
in one of two ways: 1) pro rata by time on the risk as espoused by the Sixth
Circuit in Ins. Co. of North Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212
(6th Cir. 1980); and 2) the “targeted tender” approach, as espoused in Keene v. Ins.
Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981). Each approach has its
advantages and drawbacks, given the fact that claims spanning multiple policy
periods are generally not contemplated by insurers. What is generally
contemplated are accidents, or events which happen suddenly and fortuitously,
and result in specific injury. The continuing injury context was simply a problem
not foreseen by earlier insurers or insureds.
Reduced to their essence, the two approaches can be stated succinctly. Under
Forty-Eight Insulations, each insurer whose policy is triggered by a claimant’s
exposure to asbestos during its policy period shares a responsibility with all other
carriers to pay a pro rata share of defense costs based upon the percentage its
time on the risk bears to the entire period of injury. Indemnity is treated the same,
except that the limit each insurer must provide is equal to the highest limit it
wrote during any one period of coverage. Where the insured has no insurance for
any given period, the insured must bear its pro rata share as well.
By contrast, the approach advocated by the D.C. Circuit in Keene v. Ins. Co. of
North America, 667 F.2d 1034 (D.C. Cir. 1981), differs from Forty-Eight
Insulations in that it prorates the insurers’ obligations based upon comparison of
their other insurance clauses (the targeted insurer has a right of contribution from
other insurers on the risk). The other major difference is that the Keene approach
gives the insured a free ride during periods of self-insurance. The stated reason
for doing so is that the Court considered each policy, other insurance clause in the
proration formula, and since self-insurance is not insurance, the insured has
nothing to compare to.
Contribution from Other Insurers
Most states allow co-insurers of the same insured to recover defense costs for
defending the mutual insured from other carriers under theories of subrogation or
contribution. See, e.g., Potomac Ins. Co. of Ill. v. Pa. Mfrs. Assoc. Ins. Co., 73
A.3d 465 (N.J. 2013); Hartford Casualty Ins. Co. v. Argonaut–Midwest Ins. Co.,
854 F.2d 279, 280 (7th Cir.1988); Forum Ins. Co. v. Ranger Ins. Co., 711 F.
Supp. 909 (N.D. Ill. 1989); Centennial Ins. Co. v. United States Fire Ins. Co., 105
Cal. Rptr. 2d 559 (Ct. App. 2001). A minority of states, however, do not. See,
e.g., Continental Cas. Co. v. City of S. Daytona, 807 So. 2d 91 (Fla. Ct. App.
2002); Argonaut Ins. Co. v. Maryland Cas. Co., 372 So. 2d 960 (Fla. Ct. App.
1979); Fidelity & Cas. Co. of New York v. Ohio Cas. Ins. Co., 482 P.2d 924, 926
(Okla. 1971); Sloan Const. Co., Inc. v. Cent. Nat. Ins. Co. of Omaha, 236 S.E.2d
818, 820 (S.C. 1977); Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236
S.W.3d 765 (Tex. 2007).
Waiver
In most states, an insurer may waive “coverage defenses,” i.e., defenses to
coverage which otherwise exists, such as failure to cooperate or late notice. See
AIU Ins. Co. v. Block Marina Investments, Inc., 544 So. 2d 998 (Fla. 1989)
(holding that “coverage defense” within meaning of section 627.426, Florida
Statutes, means a defense to coverage which otherwise exists); Steptore v. Masco
Const. Co., Inc., 643 So. 2d 1214 (La. 1994). Coverage defenses are to be
distinguished from “policy defenses,” i.e., exclusions to coverage or failure of a
claim to trigger the insuring agreement in the first instance.
Coverage by Estoppel
In general, courts will not create coverage under an insurance policy by estoppel,
except under very limited circumstances. See Mid-Century Ins. Co. v. Johnson,
372 P.2d 446 (Kan. Ct. App. 2016); Kahn v. Safeco Surplus Lines, 2014 WL
3907976 (Tex. Ct. App. Aug. 12, 2014); Doe v. Allstate Ins. Co., 653 So. 2d 371
(Fla. 1995). One recognized exception to the rule is where the insurer undertakes
the defense of the insured without raising applicable exclusions and then seeks to
withdraw the defense at a time when doing so would prejudice the insured. See
Cigarette Racing Team, Inc. v. Parliament Ins. Co., 395 So. 2d 1238 (Fla. 4th
DCA 1981).
Similarly, in New York, if the insurer does not disclaim as soon as reasonably
possible, it may be estopped from raising its coverage defenses if the insurer’s
delay prejudiced the insured. Hanover Ins. Co. v. Suffolk Overhead Door Co.,
207 A.D.2d 428 (2nd Dept.. 1994). Where an insurer is aware of a coverage
defense, but fails to timely assert it, some New York courts hold that the insurer
may be estopped from asserting the defense. Greater N.Y. Savings Bank v.
Travelers Ins. Co., 173 A.D.2d 521 (2nd Dept. 1991).
By contrast, Washington applies a punitive form of coverage by estoppel. See
Ledcor Ind. v. Mutual of Enumclaw Ins. Co., 206 P.3d 1255 (2009). The Ledcor
court held that, where an insurer denies a claim in bad faith, the insurer is later
estopped to enforce coverage or policy defenses. Ledcor is an outlier and defies
common sense. If a policy does not provide coverage, then the insurer cannot
possibly deny coverage in bad faith. The decision puts the proverbial cart before
the horse.
The consequences of breaching the duty to defend are similarly draconian in
Illinois. If the duty to defend is breached, an insurer is estopped from raising
coverage defense as to its indemnity obligations. Emp’rs Ins. of Wausau v. Ehlco
Liquidating Trust, 708 N.E.2d 1122 (Ill. 1999). Essentially, an insurer would be
forced to pay damages that are not covered under the policy. Nonetheless,
insurers can protect themselves from this rule if they promptly initiate a
declaratory judgment action or defend the insured under a reservation of rights.
Conclusion
Most jurisdictions are in agreement regarding the basic rules pertaining to an
insurer’s duty to defend. However, given the number of potential issues arising
from various factual scenarios, it is imperative that insurers know the above rules
in any jurisdiction in which they write coverage or find themselves covering a
claim in a foreign jurisdiction. Given the potential consequences of a wrongful
failure to defend, it always makes sense to consult counsel before deciding to
withdraw from the defense or deny a defense outright.