Insurance Coverage and Bad Faith

An insurance company’s responsibilities to its insureds are defined by the insurance contract, statutes and regulations. Case law further refines an insurer’s duties. The primary responsibilities of the insurer defined by the insurance contract are the duty to defend and the duty to indemnify.

Most liability insurance policies include a contractual duty on the part of the insurance company to defend the insured in a claim or lawsuit brought by a third-party against the insured. The duty to defend has been interpreted to be a “distinct obligation, separate and apart” from the duty to indemnify. See, e.g., Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987). The duty to defend has also often been said to be broader than the duty to indemnify. See, e.g., Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 896 n. 7 (Pa. 2006). This is because an insurer who has contracted to defend an insured is obligated to defend its insured if the factual allegations of the underlying complaint are potentially within the scope of coverage of the policy. To determine the existence of a duty to defend, the court must compare the insurance policy to the factual allegations of underlying complaint against the insured, accept the allegations as true, and determine whether they state a claim for which the policy potentially applies. Penn-America Ins. Co. v. Peccadillos, Inc., 27 A.3d 259, 265 (Pa. Super. 2011), appeal denied, 34 A.3d 832 (Pa. 2011). In this respect, Pennsylvania has been said to follow what has commonly been referred to as the “four corners” rule in determining whether or not there is a duty to defend since the duty to defend is determined solely by comparing the four corners of the insurance contract to the four corners of the underlying complaint. If a duty to defend is owed, the duty to defend exists until a claim is confined to a recovery that the policy does not cover. Cadwallader v. New Amsterdam Cas. Co., 152 A.2d 484, 488 (Pa. 1959).

The Supreme Court of Pennsylvania has most recently described the duty to defend as follows:

• An insurer’s duty to defend is broader than its duty to indemnify. It is a distinct obligation, separate and apart from the insurer’s duty to provide coverage. An insurer is obligated to defend its insured if the factual allegations of the complaint on its face encompass an injury that is actually or potentially within the scope of the policy. As long as the complaint might or might not fall within the policy’s coverage, the insurance company is obliged to defend. Accordingly, it is the potential, rather than the certainty, of a claim falling within the insurance policy that triggers the insurer’s duty to defend.
• The question of whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract to the four corners of the complaint. An insurer may not justifiably refuse to defend a claim against its insured unless it is clear from an examination of the allegations of the complaint and the language of the policy that the claim does not potentially come within the coverage of the policy. In making this determination, the factual allegations of the underlying complaint against the insured are to be taken as true and liberally construed in favor of the insured. Indeed, the duty to defend is not limited to meritorious actions; it even extends to actions that are groundless, false, or fraudulent as long as there exists the possibility that the allegations implicate coverage.

American & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 540-541 (Pa. 2010) (internal citations and quotation marks omitted).

On the other hand, the duty to indemnify under a liability insurance policy is the duty to provide coverage and make payment to the insured for damages to a third-party plaintiff. An insurer has a duty to indemnify its insured only if it is established that the insured is held liable for damages that are actually within the policy coverage. American States Ins. Co. v. State Auto Ins. Co., 721 A.2d 56, 64 (Pa. Super. 1998). That is, the duty to indemnify is based on actual coverage rather than potential coverage. Accordingly, unlike the duty to defend, the duty to indemnify cannot be determined merely by looking to see whether the factual allegations of the underlying complaint state a potentially covered claim. Regis Ins. Co. v. All Am. Rathskeller, Inc., 976 A.2d 1157, 1161 (Pa. Super. 2009). Rather, the duty to indemnify must be determined by the facts actually developed, either at trial in the underlying action or otherwise. State Farm Fire & Cas. Co. v. De coster, 67 A.3d 40, 50 (Pa. Super. 2013). The duty to indemnify does not arise until the liability imposed against the insured is conclusively established. Therefore, a determination of whether there is a duty to indemnify generally cannot be made until the underlying claim is litigated to conclusion or settled. Unionamerica Ins. Co., Ltd. v. Johnson, 806 A.2d 431, 434 (Pa. Super. 2002). Because the duty to defend is broader than the duty to indemnify, if there is no duty to defend it naturally follows that there is no duty to indemnify. Scopel v. Donegal Mut. Ins. Co., 698 A.2d 602, 605 (Pa. Super. 1997); Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 225 (3d Cir. 2005).