In a recent 93-page opinion found here, Judge William Smith of the U.S. District Court for the District of Rhode Island decided a host of issues relating to an insurer's (and an excess insurer's) duty to defend. Emhart Industries, Inc. v. Home Ins. Co. et al., C.A. No. 02-53S (Sept. 26, 2007).
In connection with a CERCLA Superfund claim submitted by the insured, a group of insurers denied coverage and refused to defend. Years later, after the insured's coverage action went to trial, a jury agreed that there was no duty to indemnify because the occurrence had not triggered place during the relevant policy periods. However, the court held that there had been a duty to defend on the part of the carrier that had issued the primary and first excess policies, and awarded the plaintiff $4.2 million, plus interest, in defense costs. In the process of so ruling, the court:
- Rejected a pleadings test whereby the duty to defend arises only upon a showing of a "reasonable possibility" of coverage based upon the allegations in the underlying complaint, and instead applied a test whereby the duty arises upon a showing of "potential" for coverage for the complaint.
- Rejected the insurer's request to consider extrinsic evidence in determining a duty to defend.
- Held that an excess carrier has a duty to defend where the primary carrier has not paid its limits, so long as it is clear that the amount of the claim will exceed the primary carrier's limits (the parties had stipulated that indemnity costs had exceeded the limits of the primary policy).
- Held that a duty to defend ceases at the time a court determines that there is no duty to indemnify, meaning the second excess carrier's duty to defend was never triggered (and suggested that an insured might wait to file a coverage action in order to increase the amount of defense costs reimbursed).
- Held that, where there has been a breach of the duty to defend and where there was no duty to indemnify, the measure of damages -- at least in CERCLA cases -- should be limited to the amount of defense costs and not include indemnity costs.
- Held that, where there has been a breach of a duty to defend, an insurer is not estopped from challenging the reasonableness of costs (however, the court upheld most of the costs in this case as reasonable and declined to audit in the manner of an insurer).
- Held that the insured was reasonable in hiring an out-of-state firm with a national reputation, despite its higher hourly rates, where potential liability was in excess of $100 million.
- Declined to apply a "time-on-the-risk" allocation formula with respect to defense costs.
- Reiterated Rhode Island's rejection of a continuous trigger test for occurrence-based policies in favor of a tripartite discovery/manifestation/discoverability trigger.
- Ruled on a number of other issues in the insurance context, including successor liability and reformation due to a scrivener's error.