Introduction
The standard comprehensive general liability insurance policy obligates the insurer to provide a defense to third party claims against the policyholder which seek to impose legal liability on the policyholder for covered damages. As the court's have made clear, as long as the third party complaint creates a potential for coverage -- the insurer must defend. The security of a legal defense is one of the primary purposes for obtaining liability insurance, as the costs of defending against a claim may far outweigh the value of the claim itself. Thus, the California Supreme Court has concluded that "[t]he insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability." Montrose Chemical Company v. Superior Court, (1993) 6 Cal.4th 287, 295, 296.
An insured essentially purchases "peace of mind" knowing that if it is the subject of a claim or suit, the policyholder can rely on the insurer's superior resources to provide a defense up front-- not after the lawsuit is resolved, and the costs of that defense will be borne by the insurer. Given the strong judicial pronouncements regarding the importance of the defense obligation, insurers that refuse to defend, risk exposure to bad faith liability and punitive damages. Insurers, therefore, have begun to defend claims that they routinely would have denied in the past, such as claims alleging liability for damages arising out of contamination to the environment and claims involving employment-related liabilities.
- The obligation to provide independent counsel
- Insurers improperly use Section 2860 to limit their defense obligations
- Policyholders must challenge the use of Section 2860 by insurers to limit their coverage obligations