American University Law Review
Each year in America, an estimated $200 billion is spent purchasing third-party liability insurance. Fairly recent findings reveal that although some carriers try to settle third-party claims, an unacceptable number of liability companies simply refuse to settle or defend third-party suits. Each year, thousands of consumers and insurers petition state and federal courts for declaratory relief. The simple question asked in these cases is: do liability insurers have a duty to defend policyholders when third-party complainants only allege that insureds committed immoral or intentional acts?
Plaintiffs’ lawyers, defense counsels, state and federal judges, and state legislators and insurance commissioners should remember the public policy behind the evolution of liability contracts: Liability insurance is third-party insurance. Too often, this fundamental fact is overlooked, especially when insureds and insurers start debating whether liability carriers must defend against an underlying third-party claim. When judges refuse to order a legal defense, their declarations do not protect insureds from third parties. Rather, those declarations only protect the insurance companies’ and investors’ interests.
Furthermore, a careful analysis shows that unsuccessful insureds lose twice. First, they receive no benefits from the billions of dollars they pay to secure insurance coverage. Second, and more egregious, they must spend additional money to defend themselves, where third-party claimants have only alleged that the insureds committed some intentional act. By any reasonable measure, the courts’ failure to order a defense creates an unjust, financial windfall for insurance companies and their investors.
It is fundamentally unfair to force insureds to defend themselves where there has been no finding of intentional conduct in an underlying suit. Therefore, state legislatures should compel insurers to defend policyholders whenever third parties allege that they were victimized intentionally. If legislatures do not act, insurers will continue to petition state and federal courts for declaratory relief.
Willy E. Rice, Insurance Contracts and Judicial Discord over Whether Liability Insurers Must Defend Insureds’ Allegedly Intentional and Immoral Conduct: A Historical and Empirical Review of Federal and State Courts’ Declaratory Judgments—1900–1997, 47 Am. U. L. Rev. 1131 (1998).