“The duty to defend is broader than the duty to indemnify.” For many policyholders, this oft-repeated maxim of insurance law embodies a variety of different expectations. The first and foremost expectation is that policyholders are entitled to a defense from their insurer even if coverage for future liability may be in doubt. A second common expectation is that a policyholder’s defense costs will be paid by its insurers as those costs are incurred. A third expectation is that a judicial decision obligating a primary carrier to pay defense costs will ensure that excess insurers also are obligated to pay any unreimbursed defense costs once the primary policy is exhausted.
Unfortunately, as many policyholders’ mass tort liabilities—such as asbestos and environmental claims—have begun to implicate higher-level excess policies, many of the above expectations have not only gone unsatisfied but have come under attack by increasingly obstructionist excess insurers. For some policyholders, this has resulted in a second generation of coverage litigation over liabilities and coverage issues long thought to have been resolved. In this environment, a number of excess insurers have started arguing that their policies contain neither a duty to defend nor a duty even to pay defense costs unless and until the policyholder becomes legally obligated to pay damages. In doing so, these insurers attempt to turn the maxim that defense is broader than indemnity on its head. Many courts have summarily rejected this argument, often, unfortunately, without written or reported opinions. A minority of courts, however, have accepted the insurers’ arguments and issued opinions that have further encouraged excess insurers to deny coverage for defense costs that in many instances have been covered by lower-level insurers for decades.
As a result, many policyholders have been placed in the untenable situation of potentially jeopardizing their insurance coverage for legal expenses if they successfully defend against unmeritorious claims and obtain a dismissal or verdict in their favor. Such policyholders might now be better off, at least in the short term, settling each and every claim filed against them for an amount within their policies’ limits than they would be mounting a vigorous defense. Recognizing both the “lack of common sense in a construction that makes coverage for defense costs dependent upon the policyholder losing the underlying claim” and the resulting “perverse incentives,” a trial court in Indianapolis, Indiana, recently granted summary judgment to Dana Companies, LLC, on coverage for its asbestos-related defense costs. The opinion can be found here.
Represented by Dickstein Shapiro LLP, Dana succeeded in obtaining a declaration from the Indiana court that the insurer’s position was “contrary to the terms of the policies, Indiana law, and common sense.” Specifically, the court found that the standard definition of “Ultimate Net Loss” contained in the defendant insurer’s policies included two separate components, one providing coverage for liability and a second providing coverage for defense costs. The court next concluded that the “adjudication or compromise” language in the definition relied on by the insurer “plainly” applied only to “the portion of the definition involving liability.” Finally, the court determined that the phrase “occurrence covered hereunder” was equally unavailing to the insurer because “occurrence” was found to mean “exposures to Dana’s asbestos-containing products” and not each “claim or suit.” Accordingly, the court held that the insurer “must pay Dana’s defense costs once one or more of its policies are reached and until its policies are exhausted, for all claims alleging potential occurrences, including those that do not result in an adverse judgment or settlement.”
Thus, in Dana Cos., LLC v. American Employers’ Insurance Co., the Indiana court reaffirmed the bedrock principle of insurance law that coverage for defense costs is broader than coverage for damages, and in doing so, rejected the opinions that have mistakenly narrowed defense coverage under excess “ultimate net loss” policies.