Duty to Defend
Dual-Promise Policies
Duty to Defend
When liability insurance was first offered to the public it was concerned only with indemnity. As liability insurance developed, the concern about defense costs matured into clauses promising defense as well as indemnity — the so-called dual-promise policies.
These clauses have led to the development of a considerable body of law interpreting the agreements to defend. To properly investigate a casualty or liability claim for defense and indemnity, an adjuster must understand the history of the promise to defend and understand how it grew from the original promise to indemnify.
In RLI Ins. Co. v. Conseco, Inc.,[1] the Seventh Circuit denied a defense because a settlement agreement released any claims that the class members had arising out of the insureds’ manipulation of and false reporting regarding securities during 1999 and 2000. It was the same false reporting and manipulation alleged in the securities action that precipitated the underlying action.
The court concluded:
When an insurer agrees to defend its insured it must do so if there is a potential for the loss or claim to be covered by the terms and conditions of the policy. When a suit is improperly filed by someone without authority in the name of the insured against officers and directors of the insured, the insurer must consider extrinsic evidence before making a decision to defend or not unless the claim is in a four corners or eight corners state that limits the analysis to the wording of the suit and the policy.
In Equine Assisted Growth and Learning Association v. Carolina Casualty Insurance Company,25 the Utah Supreme Court moved to the majority of jurisdictions when it decided that the so-called eight corners rule26 — review of the pleadings alone to the policy to determine if there is a duty to defend — does not always apply and that under certain circumstances, the court must consider extrinsic evidence before making a decision to defend.”[2]
Insurers who insure bars and other places where alcoholic beverages are sold are loathe to insure the bar against liability for barroom fights, acts of security personnel (bouncers), or any form of assault or battery. This concern is usually avoided by including in the policy wording, or an endorsement, a clear and unambiguous exclusion for any claim arising from an assault or a battery.
Plaintiffs’ lawyers recognize this fact and will therefore add to their pleadings allegations of negligence on the part of the bar or its owners to attempt to drag the insurer and its big pockets of cash into the case to compel a settlement that is less than the cost of defense.
Some courts fall prey to the claim of a plaintiff that the assault or battery was negligence, insurers like the plaintiff, Catlin Specialty Insurance Group v. RFB, Inc. D/B/A Max & Henry’s A/K/A Henry’s Sports Bar, Frank Clyburn, And Jess Bess, United States District Court, D. South Carolina, 2017 WL 2493125, Civil Action No. 2:16-3135-RMG, (06/08/17) tried to avoid the scheme by providing the coverage with a very small limit.
Defendant Jesse Bass alleged that on December 6, 2012, Cedrick Price, a bouncer at a bar owned by Defendant Frank Clyburn and Defendant RFB, Inc. (together, “Henry’s”), struck him with force sufficient to knock him unconscious and to inflict serious brain injury. Mr. Bass filed a federal lawsuit seeking damages. In that matter, claims against Elite Security have settled and Mr. Price is in default. Regarding Henry’s, Mr. Bass asserted a claim of negligence, alleging Henry’s breached its duty to exercise reasonable care in the hiring, supervision, and retention of Elite Security.
Plaintiff Catlin Specialty Insurance Group issued a commercial general liability (“CGL”) policy to Henry’s that was in effect at the time of the incident. Catlin is defending Henry’s in the underlying lawsuit, subject to a reservation of rights. The policy limit is $1 million per occurrence. The policy, however, had an Assault and Battery Endorsement that sets a sub-limit of $25,000 per occurrence.
The sublimit applied to claims for bodily injury arising from an assault and battery or out of any act or omission in connection with the prevention, suppression, or failure to protect or suppress such acts including the failure to warn, train, or supervise, whether caused by or at the instigation or direction of the insured, his employees, patrons, or other person.
In South Carolina, an assault is conduct that places another in reasonable fear of bodily harm, while a battery is the actual infliction of any unlawful, unauthorized violence on the person of another. Mr. Bass alleged he was struck in the head, knocking him unconscious by Mr. Price. There was no genuine dispute that Mr. Bass’s alleged his injuries arose from an assault and battery.
Mr. Bass sued Henry’s for negligence, not the intentional torts of assault and battery.
The court recognized that alleging negligence in a case where a patron was battered is a common pleading practice. Since insurers who insure bars are reluctant to insure the bar against liability for barroom fights or for the actions of bouncers. Plaintiffs often attempt to plead into coverage by asserting negligence — attempts federal and state courts routinely reject.
Although the injuries may have been caused by the negligent acts of the defendant, that does not necessarily mean that they did not arise out of an assault and/or battery. Plaintiffs cannot mischaracterize intentional acts as negligence claims in order to avoid the exclusions contained within the insurance policy. Even if Henry’s was negligent, and even if that negligence proximately caused Mr. Bass’s injuries, Mr. Bass’s injury nonetheless arose out of a battery. Mr. Bass could not avoid a policy sublimit by mischaracterizing Mr. Price’s admittedly intentional act as negligence.
If a sublimit for injuries arising from an assault and battery does not apply to punching a man in the head intentionally during a fight at a bar, then it is difficult to imagine when it would ever apply. Mr. Bass argued that “assault and battery” is ambiguous because the insurance policy does not define those terms. That argument was found to be without merit. The terms assault and battery are well defined under South Carolina law.
Mr. Bass also argued that there is a question of disputed material fact about whether Mr. Bass’s injuries arose from a battery. If
The Court, following the law, granted Plaintiff’s motion for summary judgment and concluded that under the assault and battery endorsement of commercial general liability policy Plaintiff Catlin Specialty Insurance Company is not obligated to indemnify Defendant RFB, Inc. and Defendant Frank Clyburn for any amount above $25,000 with respect to the claims.
Such a case was also presented to the District Court, District of Nevada in Versatility, Inc v. Capitol Indemnity Corporation, et al.,27 which refused to submit to the artful pleading of the plaintiff’s lawyer and upheld an assault and battery exclusion.[3]
In order to determine whether an insurer owes a duty to defend an insured, Colorado courts apply the “complaint” or “four corners” rule. The duty to defend arises when the underlying complaint against the insurer alleges any facts that might fall within the coverage of the policy.”[4]
States that apply the “four corners rule” or the “eight corners rule” when interpreting an insurance policy to determine if a duty to defend exists refuse to listen to arguments that facts extrinsic to the pleading make it clear no duty to defend exists. The purpose of the four-corners or eight-corners rules is served once the insurer has elected to provide a defense based on the four corners of the suit and the four corners of the policy, pending a final determination on coverage.
At that point, the insurer has protected its insured by providing a defense. The insurer has also protected itself from liability for a breach of contract. When the insurer obtains evidence that is extrinsic to the lawsuit that reveals lack of coverage or not, the four-corners rule is not further implicated, and the court proceeds to a determination of coverage based upon the available evidence.[5]
When asked to determine a duty to defend, the courts in Texas, are required to apply the eight corners rule and limit their analysis of coverage to the allegations of the complaint filed by the plaintiff. But when they are asked to determine whether there is coverage for indemnity, they must look to both the eight corners and extrinsic evidence.
Why extrinsic evidence cannot be used to determine coverage for a defense, as it is in other states, is not explained by the Supreme Court of Texas in The Burlington Northern and Santa Fe Railway Company f/k/a the Atchison, Topeka and Santa Fe Railway Company v. National Union Fire Insurance Company of Pittsburgh, Pa.[6] Insurers doing business in Texas must make decisions, therefore, based upon the eight corners of the lawsuit and the policy and cannot accept or reject coverage for defense based on extrinsic evidence. This means that lawyers can control decisions as to what is a covered loss by artful pleading.
In states that apply the four-corners or eight-corners rule the determination of the duty to defend is limited to the allegations of the suit rather than the actual facts that brought about the suit. As a result, an artful pleader can either cause coverage to be applied or refused. Other states allow the court to consider extrinsic evidence when determining the duty to defend and emasculates the artful pleader who writes a law suit with an intent to allow the insured to have coverage or to punish the insured by alleging only intentional torts so as to eliminate the ability of the insured to rely on insurance for his, her or its defense.
In Catlin Specialty Insurance Group v. RFB, Inc. Insurance Company, No. 16-1891, United States Court of Appeals for the Third Circuit (June 6, 2018), Lenick Construction, Inc. appealed a summary judgment in favor of Selective Way Insurance Company on Lenick’s declaratory judgment action for insurance coverage. The District Court held that Selective had no duty to defend or indemnify Lenick in state-court litigation that arose out of problems experienced by a condominium development in South Philadelphia, Pennsylvania applying the law of the state.
Soon after it had been joined as a defendant, Lenick notified its insurer (Selective) of the claims, stating that the commercial general liability (CGL) policy in effect when the defects were discovered entitled Lenick to defense and indemnification. Selective initially denied Lenick’s request, but eventually agreed to defend Lenick, subject to a reservation of rights.
If the complaint filed against the insured avers facts which would support a recovery that is covered by the policy, it is the duty of the insurer to defend until such time as the claim is confined to a recovery that the policy does not cover.
An insurer’s duty to defend and indemnify is determined solely in a four-corners state like Pennsylvania from the language of the complaint against the insured.
Lenick pointed only to extrinsic evidence to support its argument for coverage. Because the pleadings do not contain allegations sufficient to support a claim that the windows, doors, and/or panels used by Lenick “actively malfunctioned, directly and proximately causing” the property damage to the project, this argument failed.
Coverage would have been found if the plaintiff alleged that the windows, doors and/or panels actively malfunctioned. Since it did not Lenick received no coverage for defense or indemnity. Many states allow extrinsic evidence to allow a court to fairly determine the duty to defend. Pennsylvania does not and contractors like Lenick will lose coverage it should be entitled to until the law is changed.
The "duty to defend comes into being when the complaint states a claim constituting a risk insured against." Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255, 1259 (N.J. 1992) (citation omitted). Whether an insurer has a duty to defend is determined by comparing the allegations in the complaint with the language of the policy. When the two correspond, the duty to defend arises, irrespective of the claim's actual merit."... [Montville Twp. Bd. of Educ. v. Zurich Am. Ins. Co. (3rd Cir., 2019)]
In the leading California Supreme Court decision, Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P2d 168 (Cal. 1966) the court explained the duty to defend as follows:
We have explained that the insured would reasonably expect a defense by the insurer in all personal injury actions against him. If he is to be required to finance his own defense and then, only if successful, hold the insurer to its promise by means of a second suit for reimbursement, we defeat the basic reason for the purchase of the insurance. In purchasing his insurance the insured would reasonably expect that he would stand a better chance of vindication if supported by the resources and expertise of his insurer than if compelled to handle and finance the presentation of his case. He would, moreover, expect to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own. The courts will not sanction a construction of the insurer's language that will defeat the very purpose or object of the insurance.
The insurer had refused to defend Dr. Gray because the suit filed by Mr. John R. Jones alleging that Dr. Gray wilfully, maliciously, brutally and intentionally assaulted him. Dr. Gray successfully defended himself on a theory of self-defense establishing that there was coverage available for the claimed injuries.
Dual-Promise Policies
Modern liability policies make two promises:
to defend the insured; and
to indemnify the insured if the insured is found liable for damages.
The cost of defense often exceeds the amount of indemnity owed to the third party. Cost makes the duty to defend one of the most important aspects of any liability policy since most policies provide no limitation on how much must be spent to defend the insured. People buy liability insurance to get protection from the expense of unwarranted litigation and do not care that the cost of defense might exceed the cost of indemnity.