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Vol. 3, Iss. 15
November 5, 2014

When The Duty To Defend Doesn’t End

The rules that determine when an insurer’s duty to defend attaches are well-known and need no mention here. Less clear is when the insurer’s duty to defend may un-attach. It is often stated that the duty to defend continues until all potentially covered claims have been dismissed. To take a simple CGL example -- a complaint contains two causes of action: one potentially covered (defamation) and one not covered (say, involving financial losses). The potentially covered defamation claim triggered a defense. Now suppose that the defamation claim is dismissed on summary judgment. As the only claim left in the underlying action is the one involving non-covered financial losses, the insurer can withdraw its defense. This is the rule in the great majority of states. [Whether an insurer can look to information uncovered in discovery, as a basis to conclude that a defense is no longer owed, is a different, and more complex, issue.]

But in a few states the insurer’s defense may continue on – and perhaps for a while -- even if the only potentially covered claims were dismissed. I have not done the research that it would take to put together a complete list of these states, but several were discussed in Well’s Dairy, Inc. v. Travelers Indemnity Co., 336 F. Supp. 2d 906 (N.D. Iowa 2004).

In Well’s Dairy, the Iowa federal court addressed whether an insurer was obligated to continue to defend an insured, in an underlying action, where summary judgment on a breach of contract claim was denied -- but granted on a negligence claim. So with only a non-covered breach of contract claim at issue in the case, the insurer maintained that it no longer owed a defense. The Iowa federal court cited a litany of cases from across the country that have adopted a rule that “an insurer can withdraw from a defense after all arguably covered claims have been extinguished.”

But here’s the rub. The court noted that such decisions “often do not address the question of when the dismissed claims become final so as to permit an insurer to withdraw its defense.” With no Iowa decisions on point, the court adopted the rule from the Minnesota and Hawaii Supreme Courts: “An insurer is not relieved of its duty to defend as a result of the granting of a partial summary judgment until no further rights to appeal arguably covered claims exist.” [The Minnesota and Hawaii Supreme Court decisions relied upon were Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411 (Minn. 1997) and Commerce & Indus. Ins. Co. v. Bank of Hawaii, 832 P.2d 733 (Hawaii 1992).]

The Well’s Dairy court also concluded that such rule applied in Oregon and New York. The court cited Klamath Pac. Corp. v. Reliance Ins. Co., 950 P.2d 909 (Ore. Ap. Ct. 1997) for the proposition that, although the trial court dismissed the one covered claim, the insurer was still obligated to provide a defense because an “intermediate order from a trial court dismissing a claim is not a final resolution of that claim.” The Well’s Dairy court also cited Harrington Haley L.L.P. v. Nutmeg Ins. Co., 39 F. Supp. 2d 403 (S.D.N.Y. 1999) and described its holding as follows: “[U]nder New York law [] insurer’s duty to defend continued to exist even though covered claims had been dismissed where it was possible that the appellate court would reverse.”

Given that almost all cases settle, a rule that the duty to defend continues on, until no further rights to appeal potentially covered claims exist, is, in essence, a rule that the duty to defend goes to the end of the case, despite what happens along the way. Perhaps counsel in these five states will dispute that such a seemingly unending duty to defend is in fact the law. In any event, I have not examined the issue beyond how it was addressed by the Iowa federal court in Well’s Dairy. Well’s Dairy is not a new decision. And Coverage Opinions tends to focus on recent decisions. But this is an interesting issue and one that doesn’t get much discussion. So I thought I’d toss it out there for consideration.

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