Insurers refusing to defend insureds may lose defenses to coverage

An interesting ruling came down in New York recently about the duty to defend. The duty to defend requires an insurance company to pay for a legal defense whenever one of its insureds gets sued. The duty to defend is very broad, and can only be defeated where the allegations in the lawsuit against the insured make it clear there is no insurance coverage. 

In contrast, the duty to indemnify is much narrower. It requires a judgment against the insured (or a settlement) before an insurance company must pay for damages. In some cases, coverage questions or disputes over the amount of damages warrant taking a case to a jury. If the jury decides there is no coverage or no damages, the duty to indemnify is never triggered. However, the insurance company is still required to foot the bill for its insured's legal defense.

In the New York case, the insured had to fight the insurance company over whether his company would be provided a lawyer.  The insurance company lost that battle and tried to claim it had no duty to indemnify the insured based on a coverage issue. New York's highest court of appeals rejected that argument. That Court held that the insurance company's wrongful decision to refuse a lawyer to its insured meant that the insurance company was liable up to its policy limits.

In many cases, insurance companies try to prolong the litigation process in hopes that its opponents will give up or run out of money. With such deep pockets, insurance companies can afford to take several bites at the apple. Kudos to the New York Court of Appeals for recognizing this fact and ruling that an insurance company must play fair if it wants to preserve all of its legal defenses.

We could use a rule like this in Arkansas. I worked a case once where a farmer spent six figures in legal fees defending three lawsuits against his farm. His insurance company wrongfully denied coverage, and it took more than a year in litigation to force the insurance company to pay for his defense. Luckily for him, he had the resources to pay his attorneys; many people would have been bled dry and simply given up. A version of this New York rule would be a good candidate for insurance reform in upcoming legislative cycles.