Part 5- Property, Chapter 27: Insurance Law, Doc 6

This section addresses the insurer’s duties in liability insurance, particularly the duty to defend and the duty to pay, as well as cases illustrating the boundaries of coverage based on policy language and exclusions. Key Points: 1. Duty to Defend: o Liability insurers must defend the insured in legal claims if the allegations potentially fall within policy coverage. This duty is extensive: insurers may need to provide a defense even if claims appear groundless, so long as they’re potentially within coverage. o If a claim’s applicability to the policy is unclear, insurers have options: they can file a declaratory judgment action to clarify their duty to defend, or they can defend under a reservation of rights, preserving their ability to deny payment of damages later if deemed outside coverage. 2. Duty to Pay: o If the insured’s liability is within the scope of policy coverage, the insurer is required to pay the compensatory damages (up to policy limits) awarded against the insured. However, liability for punitive damages, designed to punish rather than compensate, is generally not covered, either due to policy provisions or public policy restrictions. o Policy Limits: The insurer’s payment obligations are capped by policy limits. For example, if damages exceed the policy limit, the insured remains liable for the excess amount. 3. Case Examples: o Medmarc Casualty Insurance Co. v. Avent America, Inc.: Medmarc’s policy covered “bodily injury” claims, but in this case, plaintiffs sought economic damages related to alleged BPA health risks in Avent’s products. Since no actual bodily injury or direct exposure was alleged, the court ruled Medmarc had no duty to defend Avent, as economic losses unrelated to bodily injury were outside the policy’s scope. o America Online, Inc. v. St. Paul Mercury Insurance Co.: AOL customers claimed damages for computer malfunctions attributed to AOL software. The court ruled that computer systems, software, and data were intangible, and the policy covered only physical damage to tangible property. Because no physical damage to computers occurred (only functional issues), the impaired property exclusion applied, relieving St. Paul of its duty to defend. Summary: The duty to defend in liability insurance is broad, requiring insurers to provide a defense when claims potentially fall under policy terms. The duty to pay, however, is limited to compensable damages within the policy limits and typically excludes punitive damages. The Medmarc and St. Paul cases highlight the importance of precise policy language in determining coverage, with exclusions and definitions often limiting insurers’ obligations when claims involve economic losses or intangible property issues.