In honor of the new Star Wars film let’s take a look at an epic type of battle in the insurance industry.
An insurance carrier has two duties in the policy that are regularly enforced by courts. One is the duty to defend. The other is the duty to indemnify. Both assist the policy holder, but they are not created equal.
Duty to Defend. When a policyholder is sued or a claim is made against him, the policy will cover his defense costs and expenses if the incident is of the type that is covered by the contract terms. This is called the duty to defend. An insurer’s duty to defend is separate and distinct from its duty to indemnify.
The duty to defend is measured by the allegations of the lawsuit against the insured. Cizek Homes, Inc. v. Columbia Nat’l Ins. Co., 22 Neb. App. 361, 367-68, 853 N.W.2d 28, 33 (2014), review denied (Jan. 14, 2015). To determine the duty to defend, an insurer must investigate and discover the relevant facts, in addition to looking at the allegations of the complaint. Id.
The duty to defend is broader than the duty to indemnify. Sometimes the costs of defending a case will exceed the policy limits. When that happens, the insurer must pay them all. What if one claim is covered but the rest of the allegations in the lawsuit are not? The insurer still must pay for the complete defense.
What if the insurer is uncertain as to coverage? In that situation the insurer has the duty to step up and provide a defense regardless. An insurer bears a duty to defend whenever it ascertains facts which give rise to the potential of liability under the policy. Id. In fact an insurer may find itself defending a lawsuit – even though later it may not owe on the claim. Courts have found that the duty to defend a policyholder is so broad that as long as there is a potential for coverage under the policy, the insurer must defend the policyholder “even though it has independent knowledge of the facts not in the pleadings that establish that the claim is not covered.” Travelers Indem. Co. of Ill. v. Insurance Co. of N. Am., 886 F. Supp. 1520 (S.D. Cal. 1995) (emphasis added).
The Duty to Indemnify. The duty to indemnify is much narrower. It, too, is based upon the insurance company’s promises in the policy. An insuranace company may either determine the policyholder’s liability (either by judgment or by settlement of the underlying claim) or reimburse the policyholder after he has paid a third party claim. Either way the obligation to indemnify is only triggered by express words in the policy. Whether an insurer has a duty to indemnify an insured depends upon whether the insured’s claimed occurrence falls within the terms of the insurer’s coverage as expressed in the policy. Federated Serv. Ins. Co. v. All. Const., LLC, 805 N.W.2d 468, 474-75 (2011).
So there you have it. The duty to defend is stronger, broader and more resilient. It favors the policyholder. In a battle of the duties in an insurance policy, it wins.