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How is the Duty to Defend Determined in Insurance Coverage Cases?

How is the Duty to Defend Determined in Insurance Coverage Cases?

One of the most important considerations in insurance coverage cases is determining whether an insurance company has a duty to defend and a duty to indemnify its insured. But how is this determination of insurance coverage made?

Someone is injured and the injured person is claiming her or his injuries are the responsibility of your insured’s company. A lawsuit is filed. The insured submits the lawsuit to your insurance company because he or she believes their insurance premiums include a duty to defend the company in lawsuits as well as a duty to indemnify or pay any settlement or judgment for a lawsuit against them.

You, the insurance company, sends a letter denying insurance coverage for the pending lawsuit, stating that there is no duty to defend or indemnify the insured in the lawsuit pending against them. What happens next for both the insured and the insurer?

Insurance companies do not have a duty to defend and indemnify an insured for every lawsuit that is filed. Insurance policies will contain conditions and exclusions which could serve as a basis for the insurance company to deny coverage under the particular policy.

Duty to Defend Determination in a Typical Illinois Insurance Coverage Scenario

In Illinois, if an insurance company denies coverage, the proper course of action is for the insurance company to file a declaratory judgment action, which is a lawsuit seeking a determination of whether there is coverage for the lawsuit under the insurance policy. The insured will be named as the defendant in the declaratory judgment action, as will the plaintiff in the underlying case.

In most declaratory judgment actions, the determination of insurance coverage is made by a comparison of the allegations in the underlying complaint to the insurance policy at issue. If the allegations of the underlying complaint come within or potentially within the terms of the insurance policy, the insurance company will have a duty to defend. If the allegations do not come within or potentially within the terms of the insurance policy, the insurance company will not have a duty to defend or indemnify the underlying lawsuit.

There are circumstances where it is proper for evidence beyond the underlying complaint to be considered in determining an insurer’s duty to defend. One situation is where the insurer has knowledge of true but unpleaded facts that, when taken together with the allegations in the complaint, indicate that the claim is within or potentially within coverage. See Shriver Insurance Agency v. Utica Mutual Insurance Co., 323 Ill.App.3d 243, 247, 750 N.E.2d 1253 (2001).

In order to avoid future insurance defense litigation, it’s important for insurers to make their insureds aware of the terms and exclusions of any insurance policies as insurance policies do not have blanket insurance coverage for any lawsuit filed against the insured.

McKenna Storer attorneys are skilled in all facets of insurance coverage in Illinois. Please contact Kelly Purkey for questions about this articles or any insurance coverage concerns.

Categories Insurance Litigation Defense

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