Under California law, the duty to defend is broader than the duty to indemnify, encompassing potentially covered claims. This uniquely favorable law has wide implications, and efforts to chip away at or narrow this legal rule are continuous. A recent California Supreme Court decisionreasserts the broad and favorable principles for insureds that govern the duty to defend.
In Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C. (2015) 61 Cal.4th 988, the California Supreme Court addressed the insurer’s right to seek reimbursement from attorneys hired by the insured, where the insurer paid the bills pursuant to a court order and later claimed they were inflated. Although the holding in the case was based on unique facts, in making its decision, the California Supreme Court issued some sweeping statements reinforcing the broad duty to defend under California law.
The first sentence of the opinion reasserts California’s fundamentally broad duty to defend: “This court has long maintained that if any claims in a third party complaint . . . are even potentially covered by the [liability] policy, the insurer must provide its insured with a defense to all claims.” (Id. at 991.) This is an important principle in a couple of respects. It means that the third party claims alleged against the insured don’t have to be actually covered, only potentially covered. And it means if even one claim alleged against the insured is potentially covered, the insurer must pay to defend the insured against the entire lawsuit.
This latter point involves what California courts often referred to as a “mixed” action, because the third-party action mixes potentially covered and non-covered claims. (Id.at 998-999.) Hartford Casualty unequivocally states when a third-party lawsuit “includes some claims that are potentially covered, and some that are clearly outside the policy’s coverage”, the insurance company must nevertheless “defend the entire action.” (Id. at 997-998.)
Hartford Casualty also states emphatically and clearly that an insurance company owes “an immediate, complete defense in such a ‘mixed’ action. . .” (Id. at 991.) This confirms that a delayed defense breaches the insurer’s duty to defend. This is important because insurer’s often belatedly pick up a defense or offer to pay some or all defense costs, and argue that extricates them from liability for harm caused by the delay.
The Supreme Court in Hartford Casualty also confirms that when an insurance company defends a third-party lawsuit, but reserves its right to deny coverage, there is a conflict of interest between the insurance company and insured. (Id. at 998.)Hartford Casualty emphasizes that, under such circumstances, “the insurer must pay reasonable costs for retaining independent counsel by the insured.” (Id.) The Court added that the burden to prove defense costs were “unreasonable and unnecessary falls entirely on the insurer.” (Id. at 1007.)
Hartford Casualty is a helpful decision to insureds, in reaffirming California’s strong laws in favor of a broad duty to defend against third party claims.