Policy Requiring a Carrier to Investigate and Defend “Suits” Does Not Require It to Investigate and Defend Claims That Have Not Ripened Into Litigation

Policy Requiring a Carrier to Investigate and Defend “Suits” Does Not Require It to Investigate and Defend Claims That Have Not Ripened Into Litigation

Great Am. E&S Ins. Co. v. Kouw Pinnq Enter. Co. , 2013 U.S. Dist. LEXIS 146247 (C.D. Cal. Sept. 20, 2013) [enhanced version available to lexis.com subscribers]

In Great American, the district court held that a general liability insurer did not have an obligation to investigate, defend, or indemnify the insured because the insured had not alleged facts to support the existence of a suit alleging a legal obligation to pay damages as required under the policy. Because the insurer did not have a duty under the contract, the insured’s breach of contract claim could not stand.

The insured in Great American received notice of more than thirty claims alleging a failure of its product, but a lawsuit was not filed against it. The insured nevertheless submitted the claims to its insurer under several policies issued by that carrier and requested coverage. When the insurer subsequently discovered misrepresentations in the insured’s application during its investigation, the carrier filed a complaint for rescission and declaratory relief confirming its right to rescind its policies. The insured responded with a counterclaim for, among other causes of action, breach of contract, anticipatory breach, and bad faith. The carrier moved to dismiss the counterclaim on the basis that its policies only required it to defend and investigate “suits” and that the absence of any lawsuits filed against the insured meant that it had not breached those duties. Similarly, the carrier argued that its duty to indemnify had not been triggered because its policies only required it to pay for “Loss,” which was defined as “sums actually paid in the settlement or satisfaction of a claim,” and the insured had not alleged that it had paid any such sums. 2013 U.S. Dist. LEXIS 146247, at *10.

In response, the insured argued that Section 790.03(h) of the California Code of Insurance (“Section 790.03(h)”) [enhanced version available to lexis.com subscribers] is an implied term of all policies and that the carrier had breached the terms of that provision by failing to investigate the underlying claims and failing to defend and indemnify it against those claims. In rejecting this position and adopting the carrier’s argument, the court held that Section 790.03(h) only applies to claims that are otherwise covered under the policies at issue and does not create obligations relating to otherwise uncovered claims. The court also rejected the insured’s argument that the insurer’s complaint for rescission and declaratory relief amounted to anticipatory breach of the contract because the insurer’s actions did not constitute an absolute and unequivocal refusal to perform.

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