June 24, 2015
Individuals and businesses purchase insurance to protect themselves and their assets: automobile insurance to protect them in the event of an accident involving a motor vehicle; homeowners insurance to protect their house and property; commercial general liability insurance to protect their businesses; professional liability insurance to protect professional business activities.
Each of these types of insurance generally protects the insured in the event a lawsuit or legal claim is filed or asserted against them. Often, insureds expect that if a claim is filed against them, their insurance company will step up and defend the person or business.
Insurance policies offer two types of protection: defense and indemnification. An insurance company’s duty to defend requires that the insurance company defend the insured if a legal claim is asserted against the insured and the allegations “may potentially come within the policy’s coverage,” Sphere Drake, P.L.C. v. 101 Variety, Inc., 35 F. Supp. 2d 421, 426 (E.D. Pa. 1999). (emphasis added). The duty to defend exists even if the “claims against the insured [are] groundless, false, or fraudulent.”
On the other hand, the duty to indemnify is narrower. It requires that the insurer pay for any losses for which the insured is found liable. An insurer has a duty to indemnify “only where the insured is held liable for a claim actually covered by the policy. Whole Enchilada, Inc. v. Travelers Prop. Cas. Co. of Am., 581 F.Supp.2d 677, 694-95 (W.D. Pa. 2008).
Insureds are sometimes faced with situations in which a legal claim is asserted against them, but their insurance company denies coverage and refuses to defend them. This leaves insured wondering what to do and where to turn. Individuals or businesses could face significant expense to defend against the alleged claims. This is especially difficult when the insured has been paying premiums expecting that their insurance company would protect them in the event of a lawsuit.
In these cases, its important to understand that just because the insurance company asserts that the policy does not provide coverage does not necessarily make it true.
When an insurance company denies coverage, the insured can defend the claim itself or file a declaratory judgment action against the insurance company. In a declaratory judgment action, the insured asks the court to review the insurance policy and the claims asserted and determine if the insurance company is required to defend the insured. Many times, the court determines that the insurance company is wrong and that the insurance company is required to defend the insured.
Similarly, insureds can also face difficult and confusing situations when their insurance company initially agrees to defend them, but then files its own declaratory judgment action asking the court to rule that the insurer is not required to continue defending the insured. If the court agrees with the insurer’s position, then the insurer would stop defending the claim. Therefore, the insured has a strong interest in defending the claim to ensure that the insurance policy provides coverage.
Finally, there is a potential that an insurance company’s failure to defend an insured constitutes bad faith. In such a situation, an insured may be able to recover their attorneys’ fees from the insurer.
Any time an insurance company does not agree to provide coverage under an insurance policy, it is important for an attorney to review the insured’s legal rights and options.
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The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.