An adjuster or defense counsel may recognize at some point in a claim – sometimes even pre-litigation – that the insured’s minimum exposure on the claim will exceed policy limits. The insurer may then opt to tender its policy limits to the claimant. We are sometimes asked by adjusters if the tender completes the insurer’s duty to defend the insured. After all, why should the insurer keep paying our firm’s bills to defend the insured, when the insurer will not be paying any settlement or judgment? The answer is that because insurance coverage typically includes both indemnification of the insured and defense costs for the insured and because these monies are kept separate (unless the policy is “wasting”), a tender of policy limits does not excuse the insurer from its duty to defend.
An insurer’s duty to defend its insured arises whenever a lawsuit is filed against the insured alleging facts and circumstances arguably covered by the policy.[i] This duty has been described as “one of the main benefits of the insurance contract.”[ii] The key consideration in assessing whether the duty has been triggered is whether the allegation, if proved, would cause the insurer to be liable under the policy.[iii] Thus, even if the insurer has knowledge of facts showing that the insured is not entitled to indemnity under the policy, the insurer must still pay the insured’s defense costs – through settlement or other termination of litigation – if the complaint alleges facts that would create indemnity coverage.
For instance, a plaintiff injured in a motor vehicle accident might sue an insured, alleging that the defendant drove the car that rear-ended plaintiff. The insurer might know (perhaps from the insured’s own statement or accident report) that the insured was only a passenger in the vehicle that hit plaintiff. Under these circumstances, the insurer would not have to indemnify the insured, but it would still have to pay the insured’s attorney fees for defense of the lawsuit. (The insurer in this example might opt to pay a nuisance-value settlement to avoid those attorney fees, but it would not be obligated to do so).
For another example, an insurer might know that the defendant driver was “off the clock” during the accident and thus not covered by her employer’s insurance policy. So long as the complaint alleged that the driver was in the employer’s employ at the time of the accident, the insurer would have a duty to defend the driver, although not to indemnify. (In this example, the employer’s insurer might work together with the employee’s individual auto insurance carrier to jointly defend the driver, reducing defense costs, with only the individual carrier responsible for indemnity).
If the insured is entitled to indemnity and defense, the insurer might opt for early resolution of its indemnity obligation by tendering its policy limits to the plaintiff. An example: Kelly is in a motor vehicle accident with Kevin on the highway. Kelly has liability coverage up to $25,000 through her policy with Ike’s Insurance. Kevin sues Kelly for personal injuries he claims to have sustained in the accident. Kevin produces medical bills in excess of $25,000, and the adjuster and/or defense attorney conclude that these bills are reasonable in cost and all relate to injuries from the accident. They further conclude that Kelly is fully to blame for the accident, so Kelly will be found responsible for all of Kevin’s bills (or alternatively, if Kevin is partly liable, that Kelly’s percentage of fault multiplied by Kevin’s total bills totals or exceeds Ike’s policy limits[iv]). Ike’s Insurance then tenders its policy limits to Kevin. At this point, Ike’s Insurance still has a duty to defend Kelly against Kevin’s lawsuit, meaning it must provide Kelly with legal representation free of charge through the end of the lawsuit (and even any appeal). However, it may be prudent for Kelly to retain separate legal counsel, given that she could be personally liable for any award to Kevin in excess of the $25,000 policy limit.
- The insured’s defense counsel must not provide coverage analysis to the insurer.
- Defense counsel should periodically analyze whether the insured’s exposure approaches policy limits, and advise both adjuster and insured client. Excess insurers should also be notified.
- Defense counsel should proactively request documentation of damages from plaintiff’s counsel, especially if the insured’s exposure seems to exceed policy limits.
- If the insured’s documented exposure exceeds policy limits, defense counsel should advise the insured client thoroughly regarding the possibility that the client will now be personally liable for the remaining amount of the claim.
An insurer’s failure to provide legal representation to an insured after tendering its policy limits can lead to serious consequences. If the breach of the duty to defend amounts to bad faith, the insured will be entitled to Consumer Protection Act (“CPA”)[v] remedies, subject to proof of causation and damages.[vi] CPA remedies include treble damages and attorney fees.
[i] “Lawsuit” might include administrative and other non-court proceedings.
[ii] Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 392, 823 P.2d 499 (1992).
[iii] Kirk v. Mount Airy Ins. Co., 134 Wn.2d 558, 561, 951 P.2d 1124 (1998).
[iv] Be careful, in this analysis, to account for your state’s comparative-fault and joint-liability rules.
[v] RCW 19.86 et seq.
[vi] Griffin v. Allstate Ins. Co., 108 Wn. App. 133, 29 P.3d 777 (2001).