By Duane W. Shewaga
Adleson, Hess & Kelly, APC
Campbell, California
A strategy pursued by insurers in insurance bad faith or declaratory relief actions is to try to show that allegations in the underlying action that trigger its duty to defend have no merit. For example, the insurer may bring a motion for summary judgment arguing that there is no potential for coverage because there are no facts supporting the allegations triggering its duty to defend. The insurer knows that the policyholder is caught between a rock and a hard place. If the underlying litigation is ongoing, the policyholder does not want to argue that the claims in the underlying litigation have potential merit especially when the declaratory relief action is an open public record. However, a recent decision of the Ninth Circuit Court of Appeals may put a damper on this strategy.
On November 12, 1997, the Ninth Circuit Court of Appeal issued its decision
in Reese v. The Travelers Insurance Company, 97 D.A.R. 13923 (9th
Cir. 1997) and held that an insurer owes a duty to defend its insured even
if the policyholder cannot show that the allegations triggering coverage are
potentially meritorious. In the Reese case, officers and directors
of a metals reclamation operation were sued for damages as a result of environmental
contamination. The defendants tendered the claim to Travelers, their company's
commercial general liability carrier. Although the policy had an owned property
exclusion, the complaint alleged that the contamination had migrated outside
of the site triggering the insurer's duty to defend under its coverage for
property damage.
Travelers initially accepted the tender of defense and then later withdrew.
In a motion for summary judgment in the insurance bad faith and declaratory
relief action, Travelers argued that there was no evidence that the contamination
had migrated. The district court entered summary judgment for Travelers, but
the Ninth Circuit reversed. The Ninth Circuit emphasized that the duty to defend
clause provided a defense even if the claim was "groundless, false or
fraudulent". The Court of Appeal held that the allegation of migration
alone, even if groundless, was enough to maintain the insurer's duty to defend
until conclusion of the case.
Travelers argued that under Montrose I, its duty to defend ended when
it could conclusively establish that there was no potential for coverage, which
the concurring opinion likewise cited. However, the majority stated that the
issue in Montrose I was "whether or not the third party's complaint
referred to a covered risk" and here the third party complaint did refer
to a covered risk. "An insurer cannot avoid the duty to defend merely
by concluding, based on its own investigation, that the insured has done no
wrong" (97 D.A.R. at 13925 citing A-H Plating, Inc. v. American Nat'l
Fire Ins. Co. (1997) ___ Cal.App.4th ___, 67 Cal.Rptr.2d 113.)
The Travelers' policy also had a limited pollution exclusion with respect to
environmental claims expected or intended by the insured. However, the Ninth
Circuit also reaffirmed that simply because a business was involved the disposal
of toxic wastes did not preclude the possibility that the property damage may
have resulted from accidental causes.