Insurers Beware of the Broad Duty to Defend
Why purchase insurance coverage if you won't be covered when you need it? Generally, insurers have a duty to defend policyholders in legal actions, and to indemnify them from uncertain losses. Today, most people have insurance in one form or another, including life, health, professional services and automobile insurance.
In the commercial context, modern development would not be possible without some method of risk management. Insurance companies effectively appraise and control risks to allow businesses to engage in commercial activities that drive the economy.
Due to the high risks involved with commercial development, for example, today's developers must often obtain excess insurance policies to supplement their primary policies. Excess insurance policies are intended to provide coverage above and beyond the liability limits of a primary insurer. Yet, the lines between the duties of excess insurers and primary insurers are often blurred. Specifically, there are increasing issues involving the precise time at which excess insurers become liable to contribute to a policyholder's defense.
The Pennsylvania Superior Court's recent decision in Lexington Insurance v. Charter Oak Fire Insurance, 2013 Pa. Super. 286 (Nov. 6, 2013), addressed the specific question of when an excess insurer's duty to defend arises. The defendant, North River Insurance Co., provided an excess insurance policy to a subcontractor, JPC Group Inc. The plaintiff, CMX Inc., was a general contractor listed as an "additional insured party" on North River's policy with JPC.
In 2005, the city of Philadelphia contracted with CMX to work on a flood control project, and required that CMX maintain insurance and indemnify the city. CMX obtained a primary insurance policy through Hartford Fire Insurance Co. to fulfill the city's coverage requirements. A year later, the city subcontracted with JPC. The subcontract required JPC to also maintain insurance, and to name CMX as an additional insured party on the policy. JPC obtained a primary insurance policy through Charter Oak Fire Insurance Co. and an excess insurance policy through North River. North River's policy included an exhaustion clause, which provided that North River had a duty to defend the insured only after the limits of the underlying insurance had been exhausted.
After a fatal motor vehicle accident at the flood control project site, the city of Philadelphia, CMX and JPC were sued for negligence. The city and JPC negotiated a settlement, but CMX was not a party to it.
On several occasions, CMX sought North River's contribution to its defense, but the excess insurer declined to contribute on the ground that its duty to defend was not triggered per the terms of its policy. CMX subsequently filed suit against North River, alleging that the excess insurer violated its duty to defend and indemnify CMX in the negligence action. North River filed a motion for summary judgment, which was granted. The trial court reasoned that the available limits on CMX's primary insurance (the Hartford policy) were not exhausted; therefore, North River's duty to defend CMX was not triggered.
The Superior Court reversed in part. In doing so, the court addressed important issues regarding an excess insurer's duty to defend its policyholders.
Duty to Defend
The duty to defend is an insurer's obligation to contribute to the defense of its insured. When multiple insurers and policies provide coverage to an insured party, the issues of when a particular insurer is required to contribute to a defense are likely to arise. North River argued that its duty to defend a policyholder was only triggered after coverage of CMX's primary insurer was exhausted. According to North River, any alternative approach to triggering contribution would, in essence, convert the excess insurance policy into a primary insurance policy.
However, the court held that an insurer's duty to defend is quite broad. An insurer is obligated to defend its policyholders whenever a complaint encompasses an injury that is potentially within the scope of the policy. Further, an insurer may not justifiably refuse to defend a claim against its policyholder unless the claim does not potentially come within the coverage of the policy. The court also found that the duty to defend even extends to actions that are groundless, false or fraudulent.
The Superior Court ultimately determined that an excess insurer's duty to defend was not triggered by the exhaustion of the primary coverage, but rather by the actual payment of the relevant primary insurance. Accordingly, the Charter Oak policy was the only relevant primary insurance because it was directly related to the North River excess policy. As a result, the exhaustion of the Hartford policy was unnecessary, and North River's duty to defend CMX arose upon payment by Charter Oak.
In summary, where an excess policy is retained to supplement a particular primary insurance policy, and a third party is named as an additional insured, the third party's own primary insurance coverage is of no consequence. In fact, should a claim arise, the only relevant insurance policy is the primary insurance policy that the excess insurer was retained to supplement. Once the relevant primary insurer exhausts its coverage payment, the excess insurer has a duty to defend all insured, even if one of those insured has its own unexhausted coverage.
The Lexington decision makes it clear that an insurer's duty to contribute to a policyholder's defense is broad and may attach, irrespective to the exhaustion of additional policies.
Dave Dambreville is a law clerk with the Pennsylvania Court of Common Pleas. He intends to concentrate his practice on insurance litigation and business-related torts.