Under a typical commercial general liability policy, the insurer agrees to defend a claim even if it is “groundless, false or fraudulent.” Numerous courts have held that the duty to defend is broader than the duty to indemnify. As a result, courts have developed a variety of familiar duty-to-defend rules for determining whether the defense obligation is triggered and the scope of that obligation. First, the insurer must defend if the underlying complaint asserts claims for damages potentially covered by the policy (sometimes referred to as the “potentiality standard”). Second, in determining whether the defense obligation is triggered, many jurisdictions confine the inquiry to the claims asserted in the complaint and the insurance policy language (sometimes referred to as the “four corners” or “eight corners” rule, or “pleadings” test). Finally, in many jurisdictions, if some of the claims in the underlying complaint are covered and some are not covered (a “mixed” action), the insurer has a duty to defend the entire action (sometimes referred to as the “one claim-all claims” principle).
Many types of insurance do not contain a duty-to-defend obligation; rather, the defense costs are advanced or reimbursed by the insurer. This is particularly common in umbrella/excess, directors and officers (D&O), errors and omissions (E&O), and fiduciary liability policies. Consequently, there may be an issue as to whether the traditional duty-to-defend standards apply to duty-to-reimburse policies. Few courts have addressed the scope of the insurer’s defense obligation in a situation where the policy provides only for the advancement or reimbursement of defense costs. This article evaluates the current case law on how and to what extent the duty to advance defense costs differs from the duty to defend.