COURTS SHOULD RULE ON THE DUTY TO INDEMNIFY AND THE DUTY TO DEFEND AT THE SAME TIME
By: Jack McCall
When a third-party liability claim is made against an insured, a key tool for insurers challenging coverage is a declaratory judgment action, seeking judicial resolution of whether there is coverage for the claim. Two principle duties arise from a standard liability insurance contract: (1) the insurer’s duty to defend the insured and (2) the insurer’s duty to indemnify the insured. The duty to defend is generally determined by comparing the complaint and the insurance contract to determine if the allegations of the complaint are covered by the terms of the insurance contract. Hoover v. Maxum Indem. Co., 291 Ga. 402 (2012). The duty to indemnify is generally triggered when the insured is determined to be liable for damages within the policy's coverage. Erie Indem. Co. v. Acuity, A Mut. Ins. Co., No. 1:06–CV–0174–TWT, 2006 WL 2048310, at *2 (N.D. Ga. July 19, 2006).
The duty to defend is broader than and encompasses the duty to indemnify. Elan Pharmaceutical Research Corp. v. Employers Ins. of Wausau, 144 F.3d 1372, 1375 (11th Cir.1998) (applying Georgia law). As a result, where the insurer has no duty to defend, it should also have no duty to indemnify the insured. Nat'l Cas. Co. v. Pickens, 582 F. App’x 839, 841 (11th Cir. 2014) (applying Georgia law). Accordingly, when presented with a third-party liability claim where the insurer disputes it has a duty to defend, the insurer should also ask the reviewing court to declare there is no duty to indemnify the insured.
There is a current trend where courts rule on the duty to defend but refuse to address the duty to indemnify at the same time. See Nationwide Mut. Fire Ins. Co. v. Dillard House, Inc., 651 F. Supp. 2d 1367, 1373 (N.D. Ga. 2009) (citing Emps. Mut. Cas. Co. v. All Seasons Window & Door Mfg., Inc., 387 F. Supp. 2d 1205, 1211 (S.D. Ala. 2005)). These courts believe the duty to indemnify does not arise unless liability is found and, thus, it would be premature to rule on the duty to indemnify until the resolution of the underlying claim. Based on this trend, insureds often argue the court should not rule on the duty to indemnify because the issue is premature, or not ripe, in an effort avoid the complete foreclosure of coverage for an underlying action.
By contrast, several courts in Georgia have exercised their discretion to rule on the duty to defend and the duty to indemnify at the same time. In such a scenario, insurers can hopefully avoid piecemeal coverage litigation by insisting the court rule on both the duty to indemnify and the duty to defend. “[T]he propriety of deciding both a duty to defend and to indemnify in the same declaratory judgment action is well established.” Auto-Owners Ins. Co. v. Earley, No. 1:16-CV-1180-SCJ, 2017 WL 3449600, at *5 (N.D. Ga. Feb. 2, 2017) (quoting ALEA London Ltd. v. Woodcock, 286 Ga. App. 572, 578 (2007)); see also Allstate Ins. Co. v. Airport Mini Mall, LLC, 265 F. Supp. 3d 1356, 1365 (N.D. Ga. 2017).
The practical effect of a ruling on the duty to defend, but not the duty to indemnify, is that the insurer loses the ability to control the defense of the case, but must continue to monitor the case from start to finish, potentially for years and at great cost, due to the risk that the claimant could hypothetically assert a new claim for which coverage may apply. If both duties are ruled upon, then when a new claim is asserted, it becomes the duty of the insured to notify the insurer of the new claim, rather than force the insurer to monitor the case.
The argument that the court should not rule on the duty to indemnify because the issue is “premature” is inconsistent with the general rule that the duty to defend is broader than the duty to indemnify. Accordingly, there should be no need for concern about ripeness, because by ruling there is no duty to defend, the court intrinsically rules there is no duty to indemnify. Third-party claimants and insureds try to sidestep this logical conclusion by contending that there could be “any number of eventualities” changing the claims asserted by the third-party that could affect whether there is coverage. All Seasons Window & Door Mfg., Inc., 387 F. Supp. 2d at 1211.
However, if a third party asserts a new claim, a coverage analysis of both duties will be necessary regardless of any ruling on the original claims, so there is no efficiency in reserving resolution of the duty to indemnify as to the original claims. Indeed, no matter the assertion of a new claim, the original claims remain the same, as does the analysis of the duty to defend or indemnify against them. As a result, regardless of the “eventualities,” an early ruling on the duty to indemnify against the original claims would not be affected, would not be “premature” and would be the most practical and efficient approach.
For these reasons, where an insurer disputes that it has a duty to defend, the insurer should also request that the reviewing court relieve it of its duty to indemnify the insured at the same time. This will allow the insurer to avoid the time, cost and expense associated with monitoring litigation for which it contends there is no coverage.
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