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Vol. 5, Iss. 9
September 7, 2016

Consequences For Breach Of The Duty To Defend


Admittedly, KM Strategic Management, LLC v. American Casualty Co., 15-1869 (C.D. Cal. July 25, 2016), a case involving an insurer’s consequences for breaching the duty to defend, is likely only impactful to a coverage case involving California law. This is because of California’s unique rules concerning an insurer’s ability to seek reimbursement of defense costs associated with uncovered claims (subject to the ability to establish such apportionment). Nonetheless, it is a very interesting case and worth the minute that it will take to read about it.

KM Strategic Management filed suit against American Casualty Co., alleging that the insurer breached its duty to defend KM in two underlying actions. [There is no discussion in the opinion of the facts of the underlying cases or coverage issues, but such information is not required.] The court granted KM’s motion for summary judgment and held that the insurer if fact did breach its duty to defend.

KM now sought damages. Not surprisingly, it sought all reasonable fees and costs that it incurred to defend the two underlying suits. American Casualty said, aah, but, under California law, it need only pay for the defense costs associated with covered claims. In general, under California law (Buss), when an underlying action involves both potentially covered, and not covered, claims -- a so-called “mixed action” -- an insurer must defend the claim in its entirety. Thereafter, the insurer can seek to recover the costs incurred to defend the claims that were not covered.

For sure such an allocation can be difficult to achieve, as defense work is often performed for the benefit of the entire case -- and not in such a neat and tidy manner that it can be shown that this work was performed for this claim and that work was performed for that claim. But, here, American Casualty had an expert, who reviewed the defense bills and materials from the underlying actions, and concluded that 95% of the defense costs were related to the defense of non-covered claims. So, as American Casualty saw it, if it had to pay all of the reasonable fees and costs that KM incurred to defend the two underlying suits, the insurer was being deprived of its right to limit its obligation to only the defense costs associated with covered claims.

The court was unimpressed with American Casualty’s argument, holding that “having breached its duty to defend, American Casualty is required, as a matter of law, to pay as damages all reasonable and necessary fees and costs that plaintiffs incurred to defend against the underlying . . . Actions, including any fees and costs related to the defense of claims for which there was not even a potential for coverage.”

The court’s decision was not based on its own expressed reasoning, but, rather, arrived at by rejecting American Casualty’s various arguments. But you get a sense that the court was guided by two things. First, even in a so-called “mixed action,” an insurer must defend the claim in its entirety. Second, if American Casualty could breach the duty to defend, and then turn around and limit its defense obligation to only those fees and costs associated with potentially covered claims, it would be getting off without any real consequences for its actions.

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