What happens in a situation where a policyholder (an individual or a business) is alleged to have caused damage to someone else? What if there is an auto accident and the other driver claims the policyholder caused it? Or what if a customer comes in to the policyholder’s place of business, trips and falls and is injured? This is where a policyholder’s “liability coverage” comes into play. When there is such coverage, the insurance company owes both a “duty to indemnify” (pay the claim against the policyholder if it is valid) and a “duty to defend.”
There are several aspects of an insurance policy commonly thought of as “coverage” provided to the policyholder. Under an auto policy, if your car is damaged there is “coverage” to repair or replace it. Under a homeowners policy, there is “coverage” to fix your roof after a hailstorm. Most people don’t think of the insurance company’s obligation to defend them as part of the “coverage” because most folks never get sued. This can be a very valuable policy benefit if a policyholder is unfortunate enough to have a lawsuit filed against them.
When the “duty to defend” is triggered, the insurance company is required to hire a lawyer for the policyholder, at the insurance company’s expense, to defend the lawsuit. However, not every claim that might be made against a policyholder is covered. If there is no coverage under the insurance policy for the claim made against the policyholder by the allegedly injured person, there is no duty to defend.
The rub comes when it is not entirely clear there is or is not coverage for the claims being made against the policyholder. Oklahoma law provides the insurance company’s “duty to defend” is triggered when there is the potential for coverage for the claims against the policyholder. The question of whether there is the potential for coverage must be answered by looking beyond the “four corners” of the lawsuit filed against the policyholder to all of the facts of the allegations against the policyholder.
If an insurance company denies it has a duty to defend a lawsuit against a policyholder, it has concluded there is not even the potential for coverage under the facts of the claim. This can be dangerous territory for an insurance company. If the policyholder takes issue with the insurance company’s position on coverage (and thus the duty to defend) the insurance company’s investigation and evaluation of the coverage dispute could be subject to scrutiny in a bad faith case. The insurance company must be able to prove it had a good faith basis for its coverage analysis and decision.
There has been a good deal of bad faith litigation in Oklahoma involving denials by insurance companies of their “duty to defend.” These can be highly technical cases involving interpretation of arcane insurance policy provisions. However, if it is determined the insurance company breached its duty to defend in bad faith, the policyholder may recover the out-of-pocket cost they incurred in hiring a lawyer on their own and any resulting financial impact (and other compensatory damages for bad faith) they suffered. Punitive damages may also be in play.