When evaluating the duty to defend under liability insurance policies, the primary focus often is on the express allegations in a third-party complaint. Still, in California (and most other jurisdictions), the inquiry does not end there. As the California Supreme Court stated nearly 25 years ago, “[t]he duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source.” Montrose Chem. Corp. of Cal. v. Superior Court, 6 Cal. 4th 287, 300 (1993) (emphasis added). Therefore, even if the facts alleged in a complaint do not themselves trigger an insurer’s duty to defend, an insured nonetheless will be entitled to a defense if facts extrinsic to the complaint demonstrate the potential for a covered claim under the policy. See id. at 295 (“Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.”).
Given the potential significance of facts and evidence outside the complaint, insureds should keep the following points in mind when seeking a defense from their liability insurers.
First, even if an underlying complaint does not itself suggest a potential for coverage, a liability insurer’s duty to defend may be triggered by statements made by the third-party plaintiff outside the complaint. See, e.g., Millennium Labs., Inc. v. Darwin Select Ins. Co., 2014 WL 12102168 (S.D. Cal. May 13, 2014). In this regard, it is common for a third-party plaintiff to elaborate on its claims in discovery responses, deposition testimony, and other communications with the insured defendant. Such statements—even though outside the four corners of the plaintiff’s complaint—may suffice to trigger an insurer’s defense duty.
Millennium is instructive. In Millennium, the underlying complaint did not include potentially covered allegations sufficient to trigger the insurer’s duty to defend its insured. Id. at *7. However, during discovery in the underlying litigation, the third-party plaintiff served interrogatory responses alleging it had been libeled, slandered, and disparaged by a PowerPoint presentation disseminated by the insured defendant. Id. at *5. Although the insured provided these discovery responses to its insurer, the insurer refused to provide a defense. In subsequent coverage litigation between the insurer and the insured, the court rejected the insurer’s position, holding that the underlying plaintiff’s discovery responses had triggered the insurer’s defense duty. Id. (duty to defend triggered based on information conveyed through underlying plaintiff’s discovery responses). The court reached this conclusion even though the underlying complaint was devoid of potentially covered allegations. Id. at *7.
As Millennium makes clear, an insurer’s duty to defend may be triggered by litigation events months—or even years—after the underlying complaint is filed. For this reason, insureds seeking a defense should not hesitate to provide their insurers with copies of relevant discovery responses, deposition testimony, and other communications from third-party plaintiffs. Often, such documents will afford insureds with a strong basis to demand a defense.
Second, under California law, an insurer’s duty to defend is also informed by facts communicated by its insured. See, e.g., Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 276 (1966) (“Since modern procedural rules focus on the facts of a case rather than the theory of recovery in the complaint, the duty to defend should be fixed by the facts which the insurer learns from the complaint, the insured, or other sources.” (emphasis added)); Montrose, 6 Cal. 4th at 300. Indeed, several California courts have recognized that an insurer’s duty to defend can be triggered by facts communicated by its insured that, if true, would give rise to the potential for coverage under the policy. Id. Notably, this is the case regardless of whether the insurer subjectively believes the insured. See, e.g., Amato v. Mercury Cas. Co., 18 Cal. App. 4th 1784, 1792 (1993) (“Human nature being what it is, we have no doubt that insureds sometimes lie to their carriers and vice versa. This possibility does not provide sufficient reason to overturn the rule of Gray and its progeny, especially when consideration is given to the vast investigative resources of insurance companies and the variety of procedural options available to them when presented with a demand for defense.”).
Third, a liability insurer is not permitted to disclaim its duty to defend without first performing a thorough investigation into its insured’s claim. See, e.g., Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 819 (1979) (“an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial”); Eigner v. Worthington, 57 Cal. App. 4th 188, 195 (1997) (“‘The risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage.’”); see also Cal. Ins. Code § 790.03(h)(3) (requiring prompt investigation of all claims). For this reason, a liability insurer is charged with knowledge of those facts that it would have learned had it performed a proper investigation into its insured’s claim. See KPFF, Inc. v. Cal. Union Ins. Co., 56 Cal. App. 4th 963, 973 (1997) (“the insurer is charged with constructive notice of facts that it might have learned if it had pursued the requisite investigation”); California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 37 (1985) (when evaluating duty to defend, law charges insurer “with notice of all those facts which [it] might have ascertained had [it] diligently pursued the requisite inquiry”). In other words, in the appropriate circumstances, an insurer’s duty to defend may be triggered by facts outside the complaint—even if the insurer has no actual knowledge of those facts.
Thus, although liability insurers often attempt to base their coverage decisions solely on the express allegations in an underlying complaint, insureds should not forget that the duty to defend also can be triggered by facts outside the complaint. By keeping this point in mind, insureds may substantially increase their chances of obtaining a defense.