Insurer’s Right to Terminate its Defense Duty is Limited

In ProDriver Leasing Sys. v. Cincinnati Indem. Co., No. 16-CV-995-JPS, 2017 U.S. Dist. LEXIS 161529 (E.D. Wis. Sep. 29, 2017), Cincinnati Insurance Company sought to stop defending its insured. It claimed that facts came to light during its defense of a trademark infringement lawsuit through “independent counsel” it selected under Wisconsin law that eliminated its defense duty. In response, ProDriver urged that the pendency of ongoing settlement negotiations meant that the insurer’s recognition of the defense duty should last throughout the lawsuit before any adjudication might terminate that duty. Judge Stadtmueller (Eastern District of Wisconsin Federal Court) agreed to denying pending motions without prejudice. As discovery was incomplete in the underlying Texas litigation, “[t]he coverage determination can be made before liability in the underlying case is established only if the facts bearing on coverage are undisputed.”  Id., at *3., citing Olson v. Farrar, 338 Wis. 2d 215 (Wis. 2012); Oddsen v. Henry, 368 Wis. 2d 318 (Wis. Ct. App. 2016).  The underlying action and coverage case thereafter concurrently settled.

The district court’s view of the limitations on an insurer’s ability to terminate its duty to defend (while an underlying action is pending) is fully consistent with the seminal California decision in Prichard v. Liberty Mut. Ins. Co., 84 Cal. App. 4th 890 (2000). There, the court determined that in a “mixed action” where both potentially covered and uncovered claims were asserted, the defense duty persisted because some indemnification liability might arise after the close of evidence. It reasoned that:

Just because evidence has closed in the underlying case does not mean the facts against the policyholder have necessarily calcified. Here, a new trial might have been granted. Witnesses might have changed their stories or their memories might have improved. The defamation judgment against Prichard could have been overturned, yet another take its place on remand. In short, the potential for indemnification liability continued into the appeal period.

Id. at 903-04.

In concert with these views, Chief Judge Catherine C. Blake (District of Maryland) confirmed why it was inappropriate to adjudicate indemnity even following a determination that no duty to defend arose. Citing Westfield Ins. Co. v. Nautilus Ins. Co., 154 F. Supp. 3d 259, 271-72 (M.D.N.C. 2016), the court in Unwired Sols., Inc. v. Ohio Sec. Ins. Co., 247 F. Supp. 3d 705, 710 (D. Md. 2017) held that “[it] would be premature to make any final ruling on the duty to indemnify… [T]here may be instances where a duty to indemnify exists absent a duty to defend…[because] the duty to defend does not subsume the duty to indemnify.”

Similarly, in Diamond State Ins. Co. v. Duke, No. 14 CV 7764, 2016 U.S. Dist. LEXIS 42601, at *26 (N.D. Ill. Mar. 30, 2016), Judge Shah (Northern District of Illinois) held that “until the underlying action is resolved, one cannot know if [the insured’s] activity and any resulting loss actually falls within the policy’s coverage.”

As the underlying action moves towards trial, fact allegations may come to light which may implicate a defense. Business litigation matters often proceed in sinuous and unanticipated ways that create potential coverage even though it was not evident at the time the lawsuit was filed.

Attention, therefore, needs to be paid not only to any amended complaint counterclaim but on any discovery, motions, pre-trial conference order issued that can shift the basis for asserted liability in a manner conducive to finding potential coverage. It will be too late if the insureds wait until the end of the case to seek recovery as “[P]laintiffs’ tender of extrinsic material after the conclusion of the lawsuit did not trigger a duty to defend.” Basalite Concrete Prods., LLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2013 U.S. Dist. LEXIS 70597, at *25 (E.D. Cal. May 16, 2013).

Moreover, new policies of insurance procured after the complaint’s inception may well respond to distinct grounds for liability that did not come to light following the filing of the initial complaint. It is therefore incumbent on the insured’s counsel to watch developments to see if they could implicate insurance coverage.

 

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