Tilly & Fitzgerald- Attorneys at Law; Articles

Commercial liability policies are an important asset of every business. Depending on the type of coverage purchased, such policies may provide coverage for many types of claims which businesses may face, such as environmental liability claims, intellectual property (trademark, copyright, and patent infringement) claims, antitrust claims, employment practices claims, products liability, premises liability, and ordinary tort claims. Given the potential costs involved in defending business and commercial litigation, so-called "litigation insurance" can protect businesses from the prospect of litigation costs that can threaten the company's financial stability. However, in order to obtain the full benefit of such coverage, it is important that the insured understand the nature of the insurer's duty to defend. This article will discuss the law of Oklahoma as it relates to that topic.¹

The Insurance Policy - Initially, it should be observed that the relationship between the insurer and its insured is contractual in nature, and the rights and liabilities of the parties are governed by their contract, i.e. the insurance policy. Since the standard commercial general liability (CGL) policy obligates the insurer to defend any suit seeking damages that are covered by the policy, the first inquiry must be whether the damages sought in the suit are covered by the policy.

Risks Covered by the Policy - Various types of risks may be covered by liability insurance, but the most common risks are "bodily injury" or "property damage" caused by an "occurrence," and "advertising injury" or "personal injury" caused by an offense.² These quoted terms are defined in the policy.

Once it has been determined that the damages sought are within the risks which the insurer has agreed to accept, it must then be determined whether the damages are of a type which is excluded from coverage. In some instances, a particular risk may appear to be within the "coverage" provisions of the policy, and yet be excluded from coverage under the "exclusion" provisions of the same policy. In cases of doubt, words of inclusion are liberally applied in favor of the insured, and words of exclusion are strictly construed against the insurer. Dodson v. St. Paul Ins. Co., 812 P.2d 372, 376 (Okla. 1991). Where the insuring clauses (the duty to pay and duty to defend) are broadly drafted, and it is unclear whether an exclusion has any effect on the duty to defend, such unclearness will be resolved in favor of the insured. U.S. v. U.S. Fidelity & Guar. Co., 601 F.2d 1136, 1141 (10^th Cir. 1979).

Under the "reasonable expectations" doctrine, if the insurer or its agent creates in the insured a reasonable expectation of coverage that is not supported by policy language, the expectation will prevail over the policy language. Max True Plastering Co. v. U.S. Fidelity and Guaranty Co., 912 P.2d 861, 863-870 (Okla. 1996). The "reasonable expectations" doctrine is only applicable in those instances where the policy language is ambiguous, or where the policy contains unexpected exclusions arising from technical or obscure language or which are hidden in policy provisions. Id. at 868.

When Does the Duty Arise? - Most CGL policies contain provisions which require that the insured promptly notify the insurer in the event that a claim is made, or a lawsuit is commenced, against the insured that may fall within the insurance coverage. Prompt notice of the claim permits the insurer to investigate the claim, and prepare a timely defense. The insurer generally has no duty to defend an insured absent a request to provide a defense, which act serves to trigger the insurer's performance under the contract. First Bank of Turley v. Fidelity and Deposit Ins. Co. of Md., 928 P.2d 298, 304 (Okla.1996). Thus, it is important that the insured promptly notify the insurer not only of lawsuits which are filed, but of other informal claims which might be asserted, such as demand letters, cease and desist letters, and potentially responsible party (PRP) letters.

The insured's compliance with the notice provisions of a CGL policy is a condition precedent to recovery under the policy. As a result, the insured's failure to provide prompt notice of claims or suits to the insurer may prompt the insurer to deny liability for either coverage or defense obligations. However, unless the insurer is prejudiced by the lack of notice, failure to give the insurer notice of a lawsuit will not relieve the insurer from liability for the claim. Independent School Dist. No. 1 of Tulsa Co., Okla. v. Jackson, 608 P.2d 1153, 1155 (Okla. 1980). Thus, if the insured fails to give the insurer notice of the suit, takes initial steps to defend the claim at its own expense, and subsequently tenders defense of the claim to the insurer, most courts have held that the insurer is nonetheless obligated to defend the claim unless the insurer is able to show that it was prejudiced by the absence of timely notice. See TPLC v. United National Ins. Co., 44 F.3d 1484 (10^th Cir. 1995) (applying Pennsylvania law).

Even if the insurer is obligated to defend the suit after notice is given, however, many courts have held that the insured is not entitled to reimbursement for the defense costs which were incurred before the insurer was provided notice of the claim. These courts have stated that, because there is no duty to defend prior to notice of the suit, the insurer is not liable for pre-notice attorneys fees. See, e.g. Hartford Acc. and Indem. Co. v. Sherwood Brands, Inc., 680 A.2d 554 (Md.App. 1996). Contra, TPLC v. United National Ins. Co., supra, at 1492-93 (applying Pennsylvania law) (holding that insurer was obligated to pay costs incurred by insured in defense of claims covered by policy even prior to insurer's receipt of notice of the claim).

How Broad is the Duty? - An insurer has a duty to defend an insured whenever it ascertains the presence of facts that give rise to the potential of liability under the policy. The insurer's duty is determined on the basis of information contained in the petition (or complaint), as well as other pleadings, and from other sources of information available to the insurer when a defense is demanded. The insurer has the duty to look beyond the third party's allegations to determine whether coverage is possible. First Bank of Turley v. Fidelity and Deposit Ins. Co. of Md., supra, 928 P.2d at 303-04. While the insurer's duty to indemnify the insured against claims is limited to coverage provided in the policy, the duty to defend may extend to claims not falling within the policy coverage.

Id., at 303 & 304 n. 16. For example, if multiple claims or theories of recovery are asserted against the insured, some of which fall within the policy coverage, and others of which do not, most courts have held that the insurer is nonetheless obligated to defend the entire suit.³ One commentator has referred to this doctrine as the "1 per cent rule".

Antognini, What You Need To Know About Intellectual Property Coverage, 31 Tort & Ins. L.J. 895, 905 (1996).

As a general rule, the insurer's duty to defend extends only to suits against the insured, and does not encompass the duty to pursue affirmative relief on behalf of the insured against the third-party claimant. However, where affirmative claims are part of the same dispute and are advanced to defeat or reduce liability, the pursuit of such affirmative claims may fall within the scope of the insurer's duty to defend. For example, in Smart Style Industries v. Pa. General Ins. Co., 930 F.Supp. 159 (S.D.N.Y. 1996), the court held that the insurer was liable for "defense" costs where the insured initiated a preemptive action seeking declaratory judgment that it was not guilty of trademark infringement.

Control of Defense, and Selection of Defense Counsel - The typical CGL policy states that the insurer has the "right and duty" to defend any suit seeking damages covered by the policy. Such a provision is a two-edged sword, to the extent that it generally provides the insurer with the "right" to control the defense of suits asserting covered claims against the insured. Assuming that the insurer would be obligated to pay any judgment rendered against the insured, it is logical that the insurer would want to secure the right to control the defense of claims, since a successful defense will potentially eliminate or reduce the insurer's exposure for such claims.

However, the right of an insurer to control litigation under a liability policy carries with it the correlative duty to exercise diligence, intelligence, good faith, honest and conscientious fidelity to the common interest of the parties. Moore v. U.S. Fidelity & Guar. Co., 325 F.2d 972, 974 (10^th Cir. 1963) (applying Oklahoma law). While the insurer is entitled to give consideration to its own economic interests, it is required to give at least equal consideration to the interests of its insured, and if it fails to do so, is guilty of bad faith. American Fidelity & Cas. Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10^th Cir. 1949) (applying Oklahoma law). An insurer is guilty of bad faith if it exercises its authority to control the defense of a lawsuit against its insured with an eye solely to its own interests and in disregard of the interests of its insured. National Mutual Cas. Co. v. Britt, 200 P.2d 407 (Okla. 1949).

The insurer's right to control the defense of a covered claim may give rise to conflicts between insurer and insured regarding the particular defense strategy being employed. Such a dispute may arise when the insurer agrees to defend the suit under a "reservation of rights," agreeing to defend the suit, while reserving the right to withdraw its defense or deny liability if subsequent facts disclose that the claims against the insured are not covered by the policy. The insurer must retain independent defense counsel selected by the insured in those cases where the defense attorney's duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only on grounds that would render the insurer liable. See Nisson v. American Home Assur. Co., 917 P.2d 488, 490 (Okla. App. 1996) (requiring insurer to pay for the insured's choice of counsel).

One important aspect of the insurer's duty to defend is the fact that most CGL policies place no limit on the dollar amount which an insurer must pay to defend a covered claim, and defense costs are paid by the insurer in addition to the stated policy limits. For example, an insurer who issues a policy providing $100,000 per accident coverage may pay out an unlimited amount of money to defend a case, even if the defense costs dwarf the carrier's maximum possible obligations to pay a judgment. The insurance carrier may not avoid this aspect of its duty by tendering the policy limits to the insured at the outset of or during a suit and then refuse to defend. Chubb/Pacif Indem. Group v. Insurance Co. of N. Am., 233 Cal. Rptr. 539 (Ct. App. 1987).

Consequences of Insurer's Failure to Defend - An insurer who disputes an insured's demand to defend has three options. It can seek declaratory relief that would define the insurer's rights and obligations, defend the insured under a reservation of rights, or refuse to defend at the risk of subsequently being found in breach of its duty to defend. First Bank of Turley v. Fidelity and Deposit Ins. Co. of Md., supra, 928 P.2d at 304. If held liable for breach of its contractual duty to defend, the insurer is responsible for all reasonable costs incurred by the insured in defense of the third-party action. Id., at 305. This includes reasonable counsel fees incurred by the insured in defense of the underlying action. Id., at 305, n. 36. The insurer will face difficulty if it refuses to defend, and subsequently attempts to avoid liability for the insured's defense costs on the grounds that the expenditures were not "reasonable and necessary." Maryland Casualty Co. v. Wilsey, 380 P.2d 254 (Okla. 1963).

In addition to the costs incurred by the insured in defending the underlying suit, the insured is also entitled to recover an award of attorney's fees in an action against its insurer to obtain reimbursement for those defense costs. Okla. Stat. tit. 36, � 3629. An-son Corp. v. Holland-America Ins. Co., 767 F.2d 700 (10^th Cir. 1985) (applying Oklahoma law).

In addition to liability for breach of contract, an insurer may also incur liability in tort for a wrongful refusal to defend and/or pay a claim for defense costs incurred by the insured. Oklahoma law recognizes that a liability insurance carrier has an implied duty to deal fairly and act in good faith with its insured and that violation of this duty gives rise to an action in tort for which consequential and, in a proper case, punitive damages may be sought. Timmons v. Royal Globe Ins. Co., 653 P.2d 907, 911 (Okla. 1982). Consequential damages recoverable in a "bad faith" action may include the insured's financial losses, embarrassment and loss of reputation, and mental pain and suffering. Id. The application of the "bad faith" doctrine to a liability insurer's refusal to provide a defense has not been addressed by the Oklahoma Supreme Court. See First Bank of Turley, v. Fidelity and Deposit Ins. Co. of Md., 928 P.2d 298, 306 n.28 (Okla.1996). However, the Oklahoma Uniform Civil Jury Instructions provide "failing to defend [Plaintiff] in the previous lawsuit that [the Claimant] brought against [him/her]" as one example of the insurer's violation of its duty of good faith and fair dealing which would subject the insurer to liability in tort. See OUJI2d, Instruction No. 22.3.⁴

Conclusion - As one court has stated, "[t]he insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability."⁵ Whether or not the protection afforded by so-called "litigation insurance" is a primary motive for obtaining liability insurance coverage, such protection is an asset of enormous value, and should not be overlooked by businesses and their counsel. �

¹	For an informative article discussing the insurer's duty to defend from a national perspective, see Mayerson, Insurance Recovery of Litigation Costs: A Primer for Policyholders and Their Counsel, 30 Tort & Ins. L.J. 997 (1995).
²	Whether or not a particular claim is covered by the policy is a topic which is beyond the scope of this article.
³	See Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037, 1042 (7^th Cir.1987) ("As long as only one of the many grounds for recovery is potentially covered by the policy, the insurer must provide a defense against the entire complaint, even if one or more theories of recovery are specifically excluded under the policy."), cited with approval in First Bank of Turley v. Fidelity and Deposit Ins. Co. of Md., supra, 928 P.2d at 304 n. 16.
⁴	The Oklahoma Uniform Civil Jury Instructions are adopted by the Oklahoma Supreme Court, and all trial courts in Oklahoma are required to use those instructions in a proper case "unless the court determines that it does not accurately state the law." Okla. Stat. tit. 12, � 577.2.
⁵	Montrose Chemical Corp. of Cal. v. Superior Court, 6 Cal. 4^th 287, 295, 24 Cal. Rptr. 2d 467, 471, 861 P.2d 1153, 1157 (1993).