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Duty of Liability Insurer to Defend Its Insured Extremely Broad

Westport Ins Co. v. Napoli, Kaiser & Bern
2010 WL 3749242 (SDNY Sep 27, 2010)

This case involves a dispute over whether an insurance company had the duty to defend its insured against a lawsuit where the only allegation was for fraud which was not covered by the insurance policy. The court held that the insured was entitled to a defense because the insurer knew that there were other potentially covered claims that might be brought against its insured.

Contractors need to be aware of their rights to a defense under their liability insurance policies, because “litigation insurance” is one of the primary benefits provided by these policies.

This decision provides a good and current summary, as federal cases often do, of NY law, in this case pertaining to an insurer’s duty to defend. Some of the court’s statements of NY law are as follows:

Under New York law, an insurer’s duty to defend is extremely broad and is distinct from the duty to indemnify.

To determine whether the duty to defend exists, courts first look to “the allegations within the four corners of the underlying complaint,” but courts must also look beyond the four corners of the complaint to determine whether there is any potentially covered occurrence.

Thus, the duty to defend exists unless ” ‘there is no possible factual or legal basis on which the insurer will be obligated to indemnify the insured.’”

To avoid defending the insured based on a policy exclusion, the insurer must show that the allegations in the complaint fall solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation.

The insurer thus bears a “heavy burden” to show that the allegations of the complaint cast the pleadings wholly within the exclusions and that there is no possible factual or legal basis for finding liability covered by the policy.

Moreover, “if any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action.”

It is well settled that labels placed on allegations are not controlling. It matters not what name a plaintiff gives to its cause of action: the substance of the factual allegations overrides the form.


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