Insurer Obligated to Defend if “Potential” of Coverage Exists

By:  Gregory J. Johnson, Esq

In most commercial general liability (“CGL”) policies, the liability insurer will have the “right” or “discretion” to investigate and settle claims prior to litigation and the “duty” to defend when a suit is commenced seeking covered damages. The insurer’s duty to defend is, of course, broader than the insurer’s duty to indemnify. Franklin v. W. Nat’l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn.1998). Under Minnesota law, an insurer is required to defend its insured when any part of the claim against the insured is “arguably” covered by the policy. Brown v. State Auto & Casualty Underwriters, 293 N.W.2d 822 (Minn. 1980).

But what does “arguably covered” mean? Can it include situations where the complaint is silent as to whether, for example, bodily injury or property damage occurred within the policy period?

Many liability insurers believe that their obligation to defend is limited to a comparison between the complaint and the terms of the policy – and if the allegations do not specifically satisfy the insuring clause, no duty to defend arises. While there is ample case law restating the rule, see e.g., Garvis v. Employers Mut. Casualty Co., 497 N.W.2d 254, 256 (Minn.1993), Minnesota courts long ago recognized that “an insurer may not safely assume that the limits of its duties to defend are fixed by the allegations a third party chooses to put in his complaint.” Iowa Nat. Mut. Ins. Co. v. Universal Underwriters Ins. Co., 276 Minn. 362, 370, 150 N.W.2d 233, 238 (Minn. 1967). “It must be kept in mind that . . . the insured . . . has no control over the allegations of the complaint.” Crum v. Anchor Cas. Co., 264 Minn. 378, 390 392, 119 N.W.2d 703, 711 712 (Minn. 1963). Thus, “the better rule is that . . . [where the facts] . . . present a potential liability on the part of the insured covered by the insurance contract, the insurer is obligated to undertake the defense.” Id. See also SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 316 (Minn. 1995) (insurer obligated to defend where it was “possible that the soil and groundwater contamination . . . began and continued throughout the coverage”); Westfield Ins. Co. v. Kroiss, 694 N.W.2d 102 (Minn. Ct. App. 2005) (although complaint did not allege that damages occurred during policy period; duty to defend existed because determination of whether damage occurred during policy period presented question of fact to be determined at trial); Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 391 (Minn.1979) (holding that duty to defend existed despite uncertainty over who had dominion or control over backhoe at the time of the accident). In this regard, Minnesota courts appear to have aligned themselves with other jurisdictions which recognize that an insurer is obligated to defend its insured unless it can establish as a matter of law that there is no potential that the policy may apply. Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833, 838 (Tex. App. Dallas 2004) (“[i]f the pleadings do not state facts sufficient to bring the case clearly within or without the coverage, the general rule is that the insurer is obligated to defend if potentially there is a case under the pleadings within the coverage of the policy”) (emphasis in original); Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 35 (1st Cir. 1997) (Massachusetts law); County of San Bernardino v. Pacific Indem. Co., 56 Cal.App.4th 666, 65 Cal. Rptr.2d 657, 667 (Ct. App. 4 Dist. 1997) (although complaint did not allege when pollution began, insurer had duty to defend because “the alleged damages potentially occurred” during the policy period); Harbor Court Associates v. Kiewit Const. Co., 6 F. Supp. 2d 449, 455 (D. Md. 1998); Illinois Tool Works Inc. v. Home Indem. Co., 998 F. Supp. 868, 872‑73 (N.D. Ill. 1998); Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 476‑77 (5th Cir. 2001) (Texas law).

As noted by a Texas appellate court:

[I]f the petition is silent as to when property damage occurred but leaves open the potential that it occurred during the policy period, summary judgment for the insurer is improper. [W]e conclude in this case that some property damage could have occurred during the necessary time frame, and thus that the claims against Byrne are potentially covered by the policies. As in Gehan Homes, Mercantile is suing Byrne for property damage that began to occur some time in the past, but the time that damage started to occur is left unclear. Read as a whole, the petition leaves open the possibility that property damage occurred during the necessary time period. Although [the] petition does not specify when the damage to the wooden structure of the building began, it says that S.W.I.’s defective installation of the stucco contributed to water infiltration, and that Subfloor’s defective construction of concrete floors and balconies contributed to water infiltration and caused water to run behind the walls. It requires no speculation to recognize that the first instances of water infiltration and resulting property damage potentially occurred the first time it rained after these subcontractors started performing their work.

Thos. S. Byrne, Ltd. v. Trinity Universal Ins. Co., — S.W.3d —-, 2008 WL 5095161 (Tex. Ct. App. Dallas) (judgment dismissed pursuant to settlement agreement between parties).

Moreover, in determining whether there is a duty to defend, Minnesota courts must give the benefit of the doubt to the insured. Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn.1979). If a claim is “arguably” within the scope of coverage afforded by an insurance policy, the insurer should defend and reserve its right to contest coverage based on facts developed at trial. Brown v. State Automobile & Casualty Underwriters, 293 N.W.2d 822 (Minn.1980); City of Thief River Falls v. United Fire & Cas. Co., 336 N.W.2d 274, 275 (Minn. 1983).

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.


This entry was posted in CGL, Coverage, Duty to Defend and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s