In Harlor v. Amica Mut. Ins. Co., 2016 ME 161, 150 A.3d. 798 (2016), the court held that when an insurance company breaches its duty to defend, the insurer has the burden of allocating settlements reached by its insured and the claimant between covered and uncovered claims.
Under Maine law the question of whether an insurance company has a duty to defend its insured is a question of law. In determining whether the insurance company has a duty to defend, Maine courts compare the insurance policy and the underlying complaint allegations. Irving Oil, Limited v. Ace Ins., 2014 ME 62, 91 A.3d. 594.
In Harlor, Amica denied the defense to its insured, asserting that multiple allegations of the complaint were not covered because the complaint did not seek covered damages. On appeal, the Maine Supreme Court found that while the underlying complaint did not specifically include allegations of emotional distress or bodily injury, or a request for money damages for the same, there were sufficient allegations in the complaint regarding the damages that flowed from the insured’s alleged tortious conduct to arguably constitute “accident” or “occurrence” within the meaning of the policy’s personal liability coverage. Comparing the general allegations of the complaint with the terms of the insurance policy, the Court concluded that there was a possibility that the claimants could have established that they suffered bodily injury as a result of emotional distress and therefore the complaint raised sufficient allegations that could be potentially be covered requiring a defense under Maine Law.
The Maine Supreme Court then addressed whether Amica was liable for the insurance settlement and what the proper measure of the insureds damages were. Amica acknowledged that its breach of the duty to defend would render Amica liable for attorney fees that the insured had incurred in the underlying action as well as the declaratory judgment action. However, Amica argued that it was not liable for the insured’s settlement with the claimant because the payment did not establish that the claimants actually sustained an injury covered by the policy. The insured argued that the settlement cost should be awarded as consequential damages for Amica’s breach of its duty to defend and that Amica, by breaching the duty, lost the right to hold the insured to the burden of proving that the insured was liable for damages covered by the policy.
In resolving the issues before it, the Maine Supreme Court drew a distinction between the duty to defend and the duty to indemnify, which are two independent duties. In evaluating whether an insurer was liable for a settlement that potentiality involved both covered and uncovered claims following the insurer’s breach of a duty to defend, the Court was mindful of the distinction between the duty to defend and the narrower duty to indemnify. The Court held that the insurance company’s contractual duty to indemnify was limited to that portion of the judgment or settlement that was fairly allocable to the claims that were actually covered under the policy. The narrow duty to reimburse the insured for liability for covered damages remained unaltered by the breach of the independent duty to defend. An award to the insured for the entire settlement as consequential damages in situations where some claims against the insured were for covered damages and others were for uncovered damages, would improperly enlarge the bargained for coverage according to the Court. Previously, the Court had held that an insurance company did not, by breaching the duty to defend, lose the right to assert non-coverage as a defense to a claim for indemnification brought by the insured. However, the Court had also previously held that an insurance company that wrongfully declined to defend its insured assumed the burden of proving non-coverage.
Against this backdrop, the Maine Supreme Court held that when an insurance company can demonstrate that the liability of the insured was entirely uncovered by the insurance policy, the insurer would not be liable for any obligations incurred by the insured in a settlement. In a mixed complaint, where some claims were covered and others were not, the Court found that the insurer would remain obligated to reimburse the insured for any settlement obligation that was covered by the policy. A settlement encompassing both covered and uncovered claims had to be allocated fairly between the two. The burden of establishing an appropriate apportionment of liability between covered and uncovered claims fell to the insurance company. If the insurer could not meet that burden of proof; it would be held liable for the entire settlement.
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