Defense Counsel Journal - International Association of Defense ...

Splitting the File in Liability InsuranceBy Douglas R. RichmondLIABILITY INSURERS owe theirinsureds contractual duties of defenseand indemnity. { XE "para:N104CF"}Both duties are linked to coverage, butthey are different in key respects. { XE"para:N104E8" }The duty to indemnifyexists as soon as the contract is formed,but the duty is conditional; the insurer'sduty to pay proceeds is not due and owinguntil the insured’s liability is established. 1The duty to defend is not similarlyconditioned; it exists as soon as a claimpotentially within coverage is made,regardless of whether the law wouldimpose liability in the circumstances. 2The fact that an insurer’s duty to defendarises at the outset of litigation while itsduty to indemnify is determined at theconclusion of the litigation means { XE"para:N104FD" }that an insurer may haveto defend an action in which there will beno duty to indemnify the insured. 3 { XE1 Penn-Star Ins. Co. v. Griffey, 306 S.W.3d591, 601 (Mo. Ct. App. 2010) (stating that theduty to indemnify is determined by the facts asthey are established at trial or as they arefinally determined by some other means, suchas summary judgment) (quoting Penn-Am.Ins. Co. v. The Bar, Inc., 201 S.W.3d 91, 98(Mo. Ct. App. 2006)).2 See Trailer Bridge, Inc. v. Ill. Nat’l Ins. Co.,657 F.3d 1135, 1142 (11th Cir. 2011)(explaining that the merits of the underlyingsuit have “no bearing” on the duty to defend);Abouzaid v. Mansard Gardens Assocs., LLC,23 A.3d 338, 347 (N.J. 2011) (stating thatwhen analyzing the duty to defend, “thepotential merit of the claim is immaterial”).3 Colony Ins. Co. v. Peachtree Constr., Ltd.,647 F.3d 248, 254 (5th Cir. 2011) (applying"para:N104FD" } Insuch cases, insurersIADC member DouglasR. Richmond isManaging Director inthe ProfessionalServices Group of AonRisk Services inChicago, Illinois. Before joining Aon,Doug was a partner with ArmstrongTeasdale LLP in Kansas City, Missouri(1989-2004), where he had a nationaltrial and appellate practice. He is a coauthorof a leading insurance lawtreatise, UNDERSTANDING INSURANCE LAW(5th ed. 2012).typically defend insureds under areservation of rights.An insurer’s defense underreservation of rights sometimes concernsinsureds and courts because of potentialconflicts of interest that can arise. 4 Thereare essentially three issues: (1) whetherthe insurer may defend the case in such away as to defeat coverage; (2) whetherthe insurer may mount less than a fulldefense if it believes it will be able tolater deny coverage or that any ultimateloss will not be covered; or (3) whetherthe insurer will gain access to theinsured’s confidential or privilegedTexas law); ZRZ Realty Co. v. Beneficial Fire& Cas. Ins. Co., 266 P.3d 61, 66 (Or. 2011).4 But see Douglas R. Richmond, IndependentCounsel in Insurance, 48 SAN DIEGO L. REV.857, 859-860 (2011) (explaining that areservation of rights creates a conflict ofinterest entitling the insured to independentcounsel at the insurer’s expense only if themanner in which the case is defended canaffect coverage).