Obligations of Insurer and Policyholder
October 18, 2017
The liability insurance relationship is primarily one of contract, with the insur-ance policy as the principal source of the parties’ obligations. As with other types of insurance, the duties of the parties—and the consequences of breaching those duties—are affected by government regulation, primarily in the form of state statutes addressing insurer conduct. Another source of law affecting insur-ance obligations is the judiciary. As liability insurance disputes have become a staple of the courts’ civil dockets, recurring issues have generated a significant body of common law on the obligations of insurers and policyholders. Never-theless, in any study of the obligations of insurer and insured under liability cov-erages, there is no avoiding the oft-used insurer admonition, “Read your policy.”
Scope: The “Comparison Test”
The defense obligation arises when a defense is needed: at the outset of the suit. It follows that, unlike the duty to indemnify (which depends on the “true” facts as they are determined in the underlying action), the duty to defend arises from the facts as alleged in the complaint. See Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 847 (1993); Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677, 681 (1964). The process for determining the defense duty—often spoken of as a “comparison test”—is one of “envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy.” Cont’l Cas. Co. v. Gilbane Bldg. Co., 391 Mass. 143, 147 (1984) (quoting Sterilite Corp. v. Cont’l Cas. Co., 17 Mass. App. Ct. 316, 318 (1983)). Once the defense obligation arises, it ordinarily continues until the suit is resolved—notwithstanding that the facts proved at trial ultimately may show the liability to be outside the scope of coverage. See Magoun v. Liberty Mut. Ins. Co., 346 Mass. at 681–82.
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