Can Insurers Refuse to Defend?

When you purchase an insurance policy, you’re buying protection. Most policies provide coverage for two types of claims: first-party claims made by the insured and third-party claims filed by another party against the insured.

The protection offered for first-party claims is comparatively straightforward. The insurer promises to compensate the insured if a covered event causes certain damages, such as an accident that totals your vehicle or a fire that destroys your home. You pay your premiums to ensure these unpredictable events do not cause you financial distress.

Third-party claims result from liability coverage, which is more complex. The insurer agrees to indemnify the insured against a third party’s claim, covering the costs the policyholder is found liable for the claimant’s losses. However, California law states that insurers also must defend policyholders who face liability claims that might be covered under their policy, as per the landmark case Buss v. Superior Court, among others.

However, insurers do not always fulfill this duty. Companies may refuse to defend their clients against claims that may relate to the liability coverage they have purchased to protect their bottom lines. While there are cases where refusal to defend is permitted, in many cases, the insurer has violated its contractual obligations, and the insured has the right to file a claim against it.

The Insurer’s Duty to Defend, Broken Down

Under the California Civil Code § 2778, the duty to defend is clearly imparted by any liability insurance coverage: “An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion.”

Furthermore, the law states that insurers are bound to defend policyholders in matters related to their policies at their request. Most importantly, it says, “If, after request, the person indemnifying neglects to defend the person indemnified, a recovery against the latter suffered by him in good faith, is conclusive in his favor against the former.” In other words, if an insurer declines to defend a policyholder in a matter that should have been covered and the client must pay damages to the claimant as a result, the insurer could be ordered to pay the entire damage award on the policyholder’s behalf.

When Do Insurers Need to Defend?

Insurers’ duty of defense is broader than their duty to indemnify. The insurance company is only obligated to indemnify clients against claims covered by the policy. However, the company must provide defense for its insured against any claim that may potentially be covered.

Substantial case law exists that supports this interpretation. The 1993 case Horace Mann Ins. Co. v. Barbara B.states that “the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.”

Despite regulations and case law, whether an insurer must defend against a specific claim is not always immediately clear. Typically, the type and amount of coverage will determine whether the insurer has the duty of defending the policyholder. Examples of situations in which this duty arises include:

• A person with a vehicle insurance policy is sued for causing an accident, whether or not they were at fault. If the policyholder has coverage for at-fault accidents, the insurer likely must defend them.
• A property owner is sued for causing a guest’s fall, but the visitor’s injuries might have occurred elsewhere. Unless the insurer can prove that there is no reasonable potential connection between the claim and the owner’s insurance policy, it must provide for their defense.
• A professional is sued for harming a client through malpractice, and it is unclear whether their conduct was negligent or criminal. The insurer must provide or fund the defense if there is a reasonable possibility that the conduct was negligent.

In each example, if the insurer does not participate or contribute to the clients’ defense, it has committed failure to defend.

Options When an Insurer Refuses to Defend

Despite the clear rules regarding liability insurance, indemnity, and legal defense, insurers may still refuse to defend their clients. Typically, this occurs because the insurer expects the client will not fight its decision. However, in many cases, policyholders successfully hold insurers accountable for wrongfully refusing to defend them against claims.

If you believe your insurer’s refusal violated your contract, you can and should take legal action. The most effective way to hold your insurer accountable is by consulting a skilled California insurance attorney. Your lawyer will help you accomplish the following:

• Analyze the claim and coverage to determine if a duty to defend arose. Your lawyer will help you confirm whether you have a strong case and the best way to present your argument in court.
• Make any final necessary coverage requests. If any remaining administrative requirements are barring you from filing a claim, your attorney will ensure you fulfill them.
• File a lawsuit against the insurance company and notify the company of the claim. Your lawyer will collect the appropriate documentation and submit it to the court. They will also ensure you fulfill notice requirements to allow the defendant to respond.
• Demonstrate the company’s refusal violated its legal duties. Depending on the insurer’s response, your lawyer will represent you at the negotiation table or in the courtroom. They will argue your case and highlight how the company violated its duty under your policy.
• Pursue damages. You may be eligible to seek damages such as the full amount of the excess judgment that resulted because the insurer refused to provide defense, as well as your legal costs and bad-faith punitive damages.

At Oksenendler Law, P.C., we are proud to represent clients in San Francisco and around California who have suffered due to insurers’ refusals to defend them. Schedule your consultation with our experienced insurance attorneys to start the process of holding your insurance company accountable for failing to defend you.