Insurance companies should be careful when refusing a defense

On Behalf of | Jun 22, 2022 | Insurance Coverage Defense |

Liability insurance carriers in New York, and in other states for that matter, have two basic obligations to their customers.

First, they have to pay covered claims up to the limits of their insurance policy.

Second, if their policyholder gets sued, the insurance company must defend the policyholder. Under New York State law, the duty to defend is broad.

In an analysis of the duty to defend, the New York Department of Financial Services, which regulates insurance companies in this state, repeated that if any part of a lawsuit could end with an insurance company making a payment, the insurance company must pay for an attorney to defend the lawsuit on the policyholder’s behalf.

The flip side is that since the insurance carrier pays the bill for a legal defense, it gets to decide which attorney will defend the policyholder.

The insurance carrier also has the final say on litigation strategy, including negotiation.

However, the carrier must negotiate in good faith and only after doing a thorough investigation of the lawsuit.

Even if the lawsuit has little or no merit, the insurance carrier must defend the suit if it falls within the duty to defend. Likewise, even if the insurance carrier does not expect to end up paying for a liability claim, the carrier must still defend the lawsuit.

There can be disputes over whether the duty to defend applies

Although each state is a little different, all of them address an insurance carrier’s duty to defend in some way.

The duty to defend does not apply to all lawsuits against a policyholder. If an insurance carrier can prove definitively that any judgment coming out of a lawsuit would not be covered, the carrier does not have to defend.

Even so, it is a risky move for an insurance company not to defend a lawsuit against a policyholder. If it turns out to be the wrong decision in the eyes of a court, it could mean an insurance company will be liable to the policyholder for amounts that may far exceed the limits of the policy.

Insurance companies of all sizes should consult with experienced local legal counsel about their options in the event of a dispute over the duty to defend. Experienced counsel can help the company decide if it should just defend the claim, perhaps under a reservation of rights.

Another alternative to simply denying a defense is to take the matter before a court by filing an action for declaratory relief.