Saturday, January 06, 2007

The Mere Potential of Coverage Triggers the Duty to Defend

The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Montrose Chemical Corp. v Superior Court, 6 Cal.4th 287, 295 (1993). Facts extrinsic to the complaint also give rise to the duty to defend when they reveal a possibility that the claim may be covered by the policy. The carrier must defend a suit which potentially seeks damage within the coverage of the policy. Gray v Zurich Insurance Co., 65 Cal.2d 263 (1966). A liability insurer owes its insured a broad duty to defend its insured against claims that create a potential for indemnity. Horace Mann Ins. Co. v Barbara B., 4 Cal.4th 1076 (1993). The duty to defend may exist even where the coverage is in doubt and ultimately does not develop. Montrose I citing Saylin v California Ins. Guarantee Assn., 179 Cal.App.3d 256, 263 (1986).

The Court in Montrose II held that coverage may be sought for continuous or progressively deteriorating property damage or bodily injury losses insurable under a third party CGL policy, as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured, and no legal obligation to pay third party claims has been established. Montrose Chemical Corp. v Admiral Insurance Company, 10 Cal. 4th 645, 677-678 (1995).

Travelers Casualty and Surety Company v Employers Ins. of Wausau held that an insurer is liable for defense fees from the date of tender if the potential for coverage was present. 130 Cal. App. 4th 99 (2005). The burden of proof shifts to the nonparticipating insurer to prove the absence of actual coverage once a prima facie showing of coverage is established by the settling insurers. Safeco Ins. Co. of America v The Superior Court of Los Angeles County, 140 Cal. App.4th 874 (2006).

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