Often, insurance companies do the right thing and defend and indemnify their insured. That’s what people pay insurance companies to do!
Sometimes, insurance companies defend under what is called a “reservation of rights, " meaning they believe that your insurance policy might not cover the alleged conduct in a lawsuit. If this occurs, Montana courts have repeatedly admonished insurance companies that “the prudent course of action is to defend under a reservation of rights and file a declaratory action to resolve the coverage question.” J & C Moodie Properties, LLC v. Deck, 2016 MT 301, ¶ 22. A declaratory action is when a party asks the Court to clarify and define the parties’ rights and obligations under a given contract. Insurance policies are contracts that Montana courts interpret using dense and complicated rules of contract interpretation. The Court also uses Montana common law to determine if coverage is available for allegations contained in the applicable civil Complaint.
So, what does all of this mean, and what is at stake? A lot. Montana has two separate and distinct legal analyses to determine an insurance company’s “duty to defend” and “duty to indemnify,” which have severe potential consequences for the insured and insurer when these issues arise.
Duty to Defend
The duty to defend arises when a complaint against an insured alleges facts which, if proved, would result in coverage. Tidyman's Mgmt. Servs. Inc. v. Davis, 2014 MT 205, ¶ 22.
When allegations in a Complaint create an insurance coverage issue, an insurer must defend all counts “so long as one count potentially triggers coverage, even if the remaining counts would not be covered.” J & C Moodie Properties, ¶ 20.
The Montana Supreme Court has a history of warning insurance companies that “where an insurer refuses to defend its insured, it does so at its peril.” J & C Moodie Properties, ¶ 21. And “[u]nless there exists an unequivocal demonstration that the claim against an insured does not fall within the insurance policy's coverage, an insurer has a duty to defend.” J & C Moodie Properties, ¶ 20. In Montana, an insurance company that unjustifiably refuses to defend a claim becomes liable for “defense costs and the full judgment” including amounts “in excess of policy limits.” Tidyman's Mgmt. Servs. Inc. v. Davis, 2014 MT 205, ¶ 25. An insured can mitigate their risk with “a pretrial stipulated judgment [that] may be enforceable against the defendant's liability insurer if the insurer breache[d] its contractual obligation to defend the insured…the insured is justified in taking steps to limit his or her personal liability.” Tidyman's Mgmt. Servs. Inc., ¶ 25. But an insured should “seek court approval of stipulated settlements… to obtain judicial review of the settlements' reasonableness through a reasonableness hearing.” Tidyman's Mgmt. Servs. Inc. ¶ 40.
The duty to defend is “independent from and broader than the duty to indemnify created by the same insurance contract.” Tidyman's Mgmt. Servs. Inc, ¶ 22.
Duty to Indemnify
As opposed to the duty to defend, “[a]n insurer's duty to indemnify hinges not on the facts the claimant alleges and hopes to prove but instead on the facts, proven, stipulated or otherwise established that actually create the insured's liability.” State Farm Mut. Auto. Ins. Co. v. Freyer, 2013 MT 301, ¶ 26. The duty to indemnify relates to the company's duty to satisfy a judgment entered against the insured. That normally occurs after a trial when the fact-finder has determined the outcome of a lawsuit.
Under contract law, “a breach of contract is a failure, without legal excuse, to perform any promise that forms the whole or part of a contract.” Richard A. Lord, Williston on Contracts vol. 23, § 63:1 at 434 (4th ed., West Group 2002). Hence, the contractual duty to indemnify is breached when an “insurer has wrongfully refused to provide coverage to an insured.” State Farm Mut. Auto. Ins. Co, ¶ 27.
An insurer thus breaches the duty to indemnify by failing to provide coverage when (1) the established facts trigger coverage under the terms of the policy, and (2) the extent of the claimant's damages are undisputed or clearly exceed policy limits. State Farm Mut. Auto. Ins. Co. v. Freyer, 2013 MT 301, ¶ 27.
Conclusion
As stated, above, the duty to defend is triggered more easily than is the duty to indemnify. Generally, the duty to defend arises where the alleged facts even potentially fall within the scope of coverage, but the duty to indemnify does not arise unless the policy actually covers the alleged harm. Where there is no duty to defend, it follows that there can be no duty to indemnify. However, where there is a duty to defend, there is not necessarily a duty to indemnify. Skinner v. Allstate Ins. Co., 2005 MT 323, ¶ 18.
Carefully crafted allegations in a Complaint can keep insurance involved. Otherwise, an insurance coverage issue could leave the plaintiff going after a judgment-proof defendant without insurance coverage leading to major recovery issues. This area of law is complex, fact-intensive, and requires a knowledgeable and competent attorney to make it right. Call us for a free consultation to discuss your case.
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