Remedies for an Insurer's Breach of the Duty to Defend: A Policyholder's Perspective

September 05, 2001

Liability policies provide two primary benefits to the policyholder: the promise to pay the policyholder’s defense in a suit brought against him and the promise to pay a possible judgment or settlement on behalf of the policyholder.  Both promises are important, but it is the promise to defend that often becomes more significant to the policyholder if for no other reason than the fact that it is more likely that the policyholder will be sued than it is that the policyholder will have to pay a judgment or settle a claim.
The insurance company’s promise to defend offers the policyholder some peace of mind especially given the expensive cost of litigation.  It means that the policyholder, who purchased the promise with the payment of premium, will not be forced to deplete his own financial resources to defend against costly litigation.  It also means that he can rely on the expertise of someone else to handle the details of litigation, an area often foreign to the policyholder.
A defendant policyholder is well aware that it does not take much for a claimant to commence a suit against him.  He will often lament that the claims against him are groundless, frivolous, and brought only to harass and torment him.  Unfortunately, while the commencement of litigation is often effortless and inexpensive, the final resolution of the suit by dismissal or otherwise is often burdensome and quite expensive.  Thus, the insurer’s promise to defend suits against the policyholder is quite an appealing offer, which the policyholder is eager to accept for the payment of premium.
But what incentive does an insurer have to fulfill its contractual obligation? The consequences of a breach can often be dramatically different as between the insured and the insurer.  If the insurer is wrong it simply pays the contractual obligation (i.e., defense costs) later.  While the insurer may also be liable for interest and attorneys’ fees, that additional cost may be worth the breach to the insurer.  On the other hand, the consequence of a breach to the insured could be devastating.  An insured with limited resources may not have the financial ability to mount an adequate defense to the lawsuit. The insured’s budget may not have included any amounts for litigation, and the significant cost of defense may have multiple dire consequences to the insured, not to mention the emotional stress the insured must face.
This vulnerability of the insured is exactly why almost 14 years ago the Texas Supreme Court imposed a duty of good faith and fair dealing on insurers handling “first party” claims.  Although the tort of bad faith already exists in the “first party” context, what is missing from the courts is a clear pronouncement that an insured’s request for defense under a liability policy is indeed a “first party” claim.  Once this is clearly articulated, the insured should have the much needed protection of both contract and tort remedies against a recalcitrant insurer.
This paper explores the various remedies for an insurer’s breach of the duty to defend.  In Part 1, it begins with breach of contract.  One of the issues in determining an insurer’s duty to defend (and therefore whether the insurer has breached that duty) is the consideration of extrinsic evidence.  This issue will be addressed in Part 1 as well.  Part 2 of the paper will address the possibility of imposing Article 21.55 against the insurer in the context of an insured’s request for a defense under liability policies.  Part 3 focuses on the applicability of common law bad faith to an insurer’s wrongful failure to defend, and Part 4 addresses possible statutory claims against the insurer for its failure to defend.

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