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Explanation: It
is well known that an Insurance Companies duty to defend is broader than
its duty to indemnify. The
reason for this is that an Insurance Company must defend any claim on which
there is the potential for coverage, even if the facts disclosed later
in the case establish that the claim is not covered. In many situations however, along with a
claim that is or may be covered, the plaintiff will allege claims that are
clearly not covered. For example,
along with a negligence claim, a plaintiff may allege fraud, or the claim may
be barred by the retroactive date on the policy, or is an excluded business
pursuits claim. The law in most states requires
that, where one claim in a complaint triggers a duty to defend, the carrier
must defend all claims, including those that are clearly not
covered. Consequently, Insurance
Companies are forced to pay defense costs for uncovered claims simply because
the plaintiff has thrown in a covered claim.
In cases where the uncovered claims predominate over the covered
claims, this can involve very substantial sums of money. Fortunately, some state have provided
mechanisms for an Insurance Company to recover the defense costs it has
incurred on claims, to which there was never even the possibility of
insurance coverage. Policies typically
provide something like the following when the contract refers to the
Insurance Companies duty to defend: “the Company shall have the right and
duty to defend any suit against the Insured seeking damages to which this
insurance applies” or “the Company shall have the right and duty to defend
any claims based on an act or omission in the Insured’s rendering or failing
to render professional services for others, seeking damages that are covered
by this policy.” These clauses
explicitly state that the duty to defend only arises with respect to claims
that are covered by the policy. Thus,
the policy limits the insurer’s duty to defend to covered claims. Even though the policy may limit the duty to
defend only to covered claims, the majority position among state courts is
that an insurer has a duty to defend all claims in a complaint if at least
one claim is potentially covered. See
e.g., Mt. Airy Insurance Company v. Greenbaum, 127 F.3d 15, 19 (5th
Cir. 1997); Buss v Superior Court,
939 P.2d 766, 774, 65 Cal. Rptr. 2d 366, 374 (1997); Carpenter Weir &
Myers v. St Paul, 1998 Westlaw 976309, *11 n. 5 (D.Kan. 1998) (and cases
cited). These courts justify this rule
on the basis that it gives the insured an orderly defense in which one lawyer
can defend all claims, saving the insured from hiring one counsel to defend
the uncovered claims, while at the same time being defended on the covered
claims by the insurer’s appointed counsel.
As the California Supreme Court stated the justification for the rule:
“[t]o defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend
entirely.” Buss at 939 P.2d at
774, 65 |
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