LeeGT Insurance

If you and your insurer disagree about whether the insurer has a duty to defend or indemnify you, either you or your insurer can file a "declaratory judgment" lawsuit. It is called a "declaratory judgment" because the plaintiff (the person filing the lawsuit) is seeking a "declaration" by the court that the plaintiff's interpretation of the insurance policy is correct.

The current law in Massachusetts is that if an insured wins a declaratory judgment lawsuit regarding the duty to defend, the insurer has to pay the attorney's fees incurred by the insured in the declaratory judgment lawsuit. This is true whether the insurer or the insured is the plaintiff in the lawsuit. Even if the insured wins a lawsuit regarding the duty to indemnify, however, the insurer is not obligated to pay the insured's attorney's fees.

There are a number of questions that remain unresolved about attorney's fees. For example, it is unclear what happens if a declaratory judgment lawsuit seeks a declaration about both the duty to defend and the duty to indemnify. In other contexts, where a party is entitled to an award of attorney's fees for some claims but not for others in the same lawsuit, the court will attempt to divide up the attorney's fees between the claims. That is always a difficult undertaking, but it would be particularly hard to divide the time spent by the attorney between the duty to defend and the duty to indemnify, because the two issues are so interrelated.

As I discussed in my last post, an insurer has two duties: the duty to defend and the duty to indemnify. The insurer may have a duty to defend but ultimately no duty to indemnify.

While the duty to defend is determined by what is alleged in the complaint, the duty to indemnify depends on the "true" facts as determined by a court. So, going back to the example in the last post, if you are insured for injuries caused by apples falling from your apple tree, your insurer will defend you if someone states in a complaint that he or she was injured by an apple falling from your apple tree.

The case eventually goes to trial. Maybe you win at trial altogether. Your attorney convinces the jury that the plaintiff was not injured; or was not injured by something falling out of your tree. The plaintiff does not appeal. You are all set. The insurance company has paid an attorney to represent you; no damages have been found against you; and the case is over. While you have been inconvenienced and undoubtedly stressed by the lawsuit, you have not suffered any monetary loss.

But if you lose at trial, the insurer, having reserved its rights at the beginning of the case, will make a decision about whether to pay your damages awarded by the court to the plaintiff or to deny coverage. If the facts at trial demonstrated that the plaintiff was hit by an apple that fell from your tree--the very thing that your insurance policy covers--the insurer will pay the damages.

If the facts at trial showed that the plaintiff was hit by a falling acorn, then the insurer will "disclaim coverage"--refuse to pay the claim. Unless you have other insurance that will cover the claim, you will be personally liable to pay the damages assessed.

In my last post I talked about "reservation of rights letters" and what they mean. You might be wondering why your insurer will agree to pay for an attorney to defend you in a lawsuit but will not agree to pay any judgment against you that will come at the end of the lawsuit.

A liability insurer has two duties: the "duty to defend" and "the duty to indemnify." The duty to defend is the duty to pay an attorney to defend you in a lawsuit that is brought against you. The duty to indemnify is the duty to pay a judgment against you.

Whether or not the insurer has a duty to defend is determined by the allegations of the complaint that the plaintiff files against you in court. The insurer reads the complaint and determines whether, regardless of whether everything (or anything) in the complaint is true, the facts stated in the complaint could be covered by the insurance policy. If so, the insurer has to defend you.

For example, let's say that you have an insurance policy that provides insurance only if a person is hurt by an apple falling from your apple tree. Someone sues you and says in the complaint that they were injured when they were hit by an apple that fell from your apple tree. Your insurance company will have to defend you in that lawsuit. It doesn't matter that the person is lying and was actually hit by a falling acorn--your insurer still must defend you.