Commercial Insurance and the Insurer’s Duty to Defend

Posted by Hecht Walker, P.C.
Posted on January 30, 2014

Businesses have many different types of insurance policies available to them that cover all types of eventualities and losses. With the exception of automobile insurance, all commercial insurance policies are treated in largely the same manner under Georgia law. Because an insurance policy is a contract, the language of the insurance policy controls what is covered under the policy. The common element to all commercial insurance policies is that they cover a business in case of particular types of loss or damage as defined by the policy. Regardless of the type of insurance policy a business is making a claim under, whether Commercial General Liability (CGL), Professional Liability Insurance, or other policies covering specific circumstances or type of injury, you must first look to the language of the policy to determine what duty the insurer has to the insured.

In addition to covering certain types of claims, injuries, and damages, many commercial insurance policies include a separate duty to defend covered or potentially covered claims made against the insured. The extent of the insurer’s duty is determined by the contract. Loftin v. United States Fire Ins. Co., 106 Ga. App. 287 (1962). This is not an independent duty of insurance carriers under Georgia law, but many insurance policies include provisions requiring the insurer to provide either a defense of any lawsuit or other claim made against the insured if covered under the policy, or reimbursement for the costs of a defense of a lawsuit or other claim covered by the policy. Unfortunately, many insurance companies will rely on any rationale or possible exclusion in the policy to deny an insurance claim or to avoid providing for the cost of a defense of a lawsuit.

Georgia law, however, tends to be favorable to insureds, rather than insurers, and provides that the duty to defend is actually broader than the duty to pay claims. A lawsuit filed against your business, even if it is frivolous and false, may require the insurance company to provide a defense of the lawsuit. Where the insurance policy provides a duty to defend, an insurer is required to defend a lawsuit, regardless of whether the allegations are true or false, if the allegations in the lawsuit would even arguably place the suit within the policys coverage.  City of Atlanta v. St. Paul Fire & Marien Ins. Co., 231 Ga. App. 206 (1998); Auto Owners Ins. Co. v. State Farm Fire & Cas. Co., 297 Ga. App. 751 (2009). This is true even if only a portion of the lawsuit would ultimately, if proven true, be covered by the policy.  Utica Mut. Ins. Co. v. Kelly & Cohen, 233 Ga. App. 555 (1998).

In addition to requiring insurers to provide coverage when the insurance policy contains a duty to defend and the complaint arguably places the injury within the policys coverage, Georgia law also provides that in certain circumstances, the insurer is required to provide a defense even where the allegations of the lawsuit would otherwise exclude coverage. A common example of this is when a Plaintiff in a lawsuit claims that the injury allegedly caused by the covered company is a result of intentional actions by the company or employees of the company. Most CGL policies will exclude injuries caused by intentional conduct from the policys definition of injuries covered by the policy. When a lawsuit against a covered company contains such allegations, the insurance company will usually deny a defense of the lawsuit based on such allegations.

Generally speaking, the insurer is under no obligation to investigate or verify the truth of a claim made.  However, even if the lawsuit on its face would not fall within the insurance coverage triggering the duty to defend under the policy, the insured can, through proper procedures, create a duty on behalf of the insurance company to investigate a claim.  When an insured provides notice to the insurer of facts that would place the lawsuit or claim within coverage, the insurer has a duty to investigate the lawsuit. Anderson v. Southern Guaranty Ins. Co. of Georgia, 235 Ga. App. 306 (1998); Colonial Oil Industries, Inc. v. Underwriters Subscribing to Policy Nos. TO31504670 and TO31504671, 268 Ga. 561 (1997). Once an insurer has been given notice of factual contentions by its insured, the insurer is required under Georgia law to base its decision whether or not to provide insurance coverage and a duty to defend on true facts.  Id. Many insurers, either because of internal practices or because they primarily provide insurance in states that do not require such an investigation, will not take this necessary step and simply rest on its denial of coverage. Failing to properly investigate the “true facts and base the acceptance or denial of liability for the lawsuit thereon can expose the insurer to penalties under Georgias bad faith denial of insurance coverage statutes.

Considering that even a frivolous lawsuit can cost tens of thousands or even hundreds of thousands of dollars in attorneys fees for a business, it is important that to properly create a duty to investigate and possibly a duty to defend as well as establish a bad faith claim in the situations in which an insurance company fails to make the proper investigation. Furthermore, because insurance companies are provided with an easy remedy under Georgia law to determine the extent of their liability for a particular claim by judicial determination, the Georgia courts have proven not to be particularly friendly to insurance companies that erroneously deny coverage or a defense of covered claims. Additionally, a properly preserved bad faith claim can entitle a covered company to recoup the cost of its attorneys fees in the defense of the original lawsuit and the amount of any damages that have to be paid in connection with the covered loss, plus a 50% penalty above and beyond the damages owed. Additionally, through a properly preserved bad faith action, the attorneys fees necessitated by that action are also recoverable under Georgias bad faith law.

At Hecht Walker we routinely deal with insurance coverage issues on behalf of insured businesses, including issues related to erroneous denials by insurance companies related to the duty to defend and/or investigate a claim, as well as the litigation involving bad faith claims against insurance coverage.  We represent businesses and individuals against insurance companies in actions seeking to recoup losses for improperly denied claims or for situations in which an insured does not provide a defense required under the policy. If we can be of any assistance to you please do not hesitate to contact our law firm.

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