Case law in nearly every state provides that the duty to defend is broader than the duty to indemnify. Typically courts look to the allegations in the complaint and compare those allegations to the coverage grants in the policy to determine if the allegations are sufficient to bring the claim within the possibility of coverage under the insurance policy. But what if no complaint is filed and the parties negotiate a settlement in advance of any lawsuit? Does the insurance carrier have to “defend” the insured and pay the costs associated with negotiating the settlement?
This is a simplified version of what the First Circuit Court of Appeals recently addressed in a case under Massachusetts law. Sanders v. The Phoenix Ins. Co., No. 15-2539 (1st Cir. Dec. 7, 2016). The case involved a claim by the estranged surviving spouse, as executor, against the lawyer who represented the deceased spouse in divorce proceedings. The lawyer and the client had an affair, and when the lawyer backed off the client committed suicide.
The surviving spouse sent a demand letter under Massachusetts General Laws Chapter 93A, Section 9 to the lawyer, who notified his homeowner’s insurance carrier of the demand (as the affair took place, in part, in his house). The insurance carrier denied coverage, stating that the client’s death was not an occurrence under the policy and that the policy’s professional services exclusion barred coverage.
The dispute went to mediation and the executor invited the insurer to participate. The insurer declined. The matter was settled by the lawyer’s law firm, whose insurance carriers paid the settlement. As part of the settlement, the lawyer assigned to the executor any rights and interests under the homeowner’s policy concerning the client’s death and any claims he had against the insurer for failing to defend or indemnify him. The executor then sent the insurer a Section 9 demand letter.
The executor filed suit and the district court granted the insurer’s motion to dismiss. In affirming the dismissal on appeal, the First Circuit found that the policy drew a clear distinction between the duty to defend (which applied to suits alone) and the right to investigate (which applied to both suits and claims). Accordingly, the insurer’s duty to defend was never triggered and never breached under the circumstances of this case.
The operative language in the insurance policy is as follows:
If a claim is made or a suit is brought against any insured for damages because of bodily injury . . . caused by an occurrence to which this coverage applies, even if the claim or suit is false, we will:
. . . .
b. provide a defense at our expense of counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate.
Focusing on the policy language, as the court must, the circuit court agreed with the district court that for the duty to defend to trigger, a suit had to have been brought. Here, no suit was brought and the consensual mediation was not deemed a suit by the court.
The court noted that in some circumstances a suit need not be filed, but those exceptions are narrow. The court spent time discussing a notice letter from the Environmental Protection Agency, which was found to be sufficient to trigger a duty to defend in Hazen Paper Co. v. U.S. Fid. & Guar. Co., 555 N.E.2d (Mass. 1990). The court distinguished Hazen, pointing out that it was narrow and case-specific, and that the Section 9 letter did not have the same consequences of an EPA notice letter.
Not all policies are the same and it is critical to understand the specific wording of the operative policy to determine whether the duty to defend requires an actual suit to trigger coverage.