Insurer’s duty to defend – US judgment

Patrick Bracher.

An Illinois appeals court ruled that an insurer had a duty to defend toxic tort lawsuits brought against its insured even though the claims contained vague, ambiguous allegations which did not necessarily bring the claim within the policy coverage.

The court reiterated the principle that an insurer’s duty to defend arises when the claim alleges facts that could potentially fall within the scope of the policy, even if the allegations are said to be false and groundless. An insurer can only refuse to defend if the allegations preclude any possibility of coverage.

There was a multitude of claims by a number of plaintiffs who failed to identify the precise time when they were allegedly exposed or injured by exposure to products provided by the insured, Illinois Tool Works Inc. ITW was not in the welding products business when the plaintiffs were allegedly exposed to harm and only began making the products after the policies ran out, according to the insurers. But, according to the judgment, there were bare allegations that left open the possibility that the loss could be covered. The court said it was well-settled under Illinois law that vague or ambiguous allegations against the policyholder still give rise to a duty to defend until the factual ambiguities – such as the time of exposure – are resolved in favour of the insurer.

What does this mean in South Africa?

In South Africa, the standard clause says an insurer “may, without incurring any liability and without diminishing the right of the insurer to rely upon any conditions of this policy, take over and conduct in the name of the insured the defence or settlement of any claim”. The word “may” has been interpreted in the sense that it is a right and not an obligation of the insurer to conduct the defence. Usually when there is no advantage to the insurer, because there is little chance of any liability under the policy, the insurer will not take over the defence.

In this age of treating customers fairly and decisions based on equity that consider the legitimate expectations of a policyholder, it is important to make it clear that this is not an obligation to defend. And commercial policyholders should take out cover for their defence costs.

The case is Illinois Tool Works Inc v Travelers Casualty and Surety Company.

First published by: Financial Institutions Legal Snapshot