If there were a catechism for insurance coverage law, one of the first couplets of call and response would drill the aspiring coverage lawyer on the distinction between the duties to defend and indemnify:
Q. What is the difference between an insurers’ defense and indemnity obligations?
A. The duty to defend is broader than the duty to indemnify, meaning that an insurer must defend against allegations stating claims that are even “potentially or arguably within the policy coverage ….” City of Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St. 3d 177, 180, 459 N.E.2d 555, 558 (1984).
This maxim is so-well ingrained in coverage lawyers, and so often invoked in coverage opinions, that it is easy to pass over it with little thought as to its larger implications. We all appreciate that the duties of defense and indemnity are distinct as to the predicate for payment—a payment for indemnity costs is predicated on the policyholder’s actual liability for a covered loss, while payment for defense costs is predicated on allegations of conduct that is even arguably covered. But, if the distinction between the duties is considered reflectively instead of reflexively, there are other areas of possible divergence.
It is just these other areas of divergence that are being considered in a set of rulings out of the Federal District Court for the Southern District of Iowa in Pella Corporation, et al. v. Liberty Mutual Insurance Co., et al. In that case, the window manufacturer Pella was subject to over 100 underlying claims stemming from water damage caused by alleged defects in the policyholder’s windows. Based on these underlying allegations, Pella made a claim to its insurer, Liberty Mutual, which issued eight CGL policies and Aggregate SIR Policies covering an eight-year period. The parties filed a whole suite of sparring motions for summary judgment over a familiar set of issues—such as the number of occurrences, whether construction defects can give rise to an occurrence, the method of allocation, and the policy periods triggered. On these last two issues—allocation and trigger—the Court held that there was a difference between the duties to defend and indemnify.
In a ruling from last year, the Pella court held that, while the indemnity costs would be allocated across all triggered policy periods on a pro-rata basis, the defense costs would be allocated on an all-sums basis. See Pella Corp. v. Liberty Mut. Ins. Co., 244 F. Supp. 3d 931, 950 (S.D. Iowa 2017). In that same decision, the Court held that there was a genuine issue of material fact as to which policy periods were triggered, since the court could not determine, at the summary judgment stage, when the damage caused by the allegedly defective windows actually began. Id. The court previewed, however, that there could be yet another difference between the duty to defend and indemnify on this front as well. In a footnote, the Court pointed out that “Pella appears to be broadly correct in arguing that Liberty's obligation to reimburse defense costs could potentially be triggered before its obligation to indemnify Pella for damages is triggered.” Id. at n. 19. The court did not rule on this point, though, since the issue was not before the court at that time.
aking the cue, Pella later moved for summary judgment on the trigger period for the insurer’s defense obligation. And in a ruling issued on January 16, 2018, the court, as it earlier indicated, held that the duty to defend could be triggered earlier than the duty to indemnify. Because there is a duty to defend when claims are “‘arguably or potentially’ brought within the coverage of … particular policy periods,” the court concluded that every policy period from the date of installation forward was triggered and available to reimburse Pella’s defense cost. This is because, according to the court, the fact that a window was installed “shed[s] light on when damage may potentially have occurred.” Pella v. Liberty, No. 4:11cv273 (S.D. Iowa Jan. 16, 2018) (emphasis in original).
As a result of the Pella court’s two rulings, the policyholder may have more limited recovery options for its indemnity costs, since it has to allocate its losses on a pro-rata basis, and it can only pick from among the pool of triggered policies starting from the date of the first actual damage caused by the window defects. In contrast, the policyholder has broader options to recover its defense costs, since it can choose any policy from any policy period starting from the first installation forward to pay its defense costs. This is particularly helpful for Pella, which has an aggregate limit on its self-insured retention for each policy period. So, for each claim—each of which is a separate occurrence, according to one of the court’s earlier holdings—the policyholder has a greater likelihood of being able to pick a policy where it already reached its aggregate SIR limit, meaning the insurer must start paying defense costs immediately.
The Pella decision is a reminder that the defense obligation and indemnity obligation are not merely different versions of the insurer’s coverage obligation, but are distinct duties, each operating differently from the other. This means not only that the defense obligation will be broader within a single policy period, but across multiple policy periods, the defense obligation may be even broader yet, offering the policyholder a wider window of recovery than it has for its indemnity coverage.