It is a common situation: A liability insurer has assumed defense of a lawsuit, reserving its rights on the basis that some, but not all, of the causes of action in the underlying lawsuit are covered. In its reservation of rights letters, the insurer notes that it will provide a defense for the entire lawsuit but reserves the right to withdraw the defense if the covered claims are no longer pursued against the insured. The insurer then retains defense counsel to represent the insured.
During the course of the litigation, however, defense counsel, with the insured’s knowledge and consent, files a motion for summary judgment to dismiss all the claims against the insured—those that are covered by the liability policy and those that are not. The court issues its ruling and grants a partial summary judgment, dismissing the claims that are covered by the liability policy and leaving in the case only the claims that are not covered by the liability policy. The litigation in the underlying lawsuit continues, and the plaintiff does not seek certification of the partial summary judgment ruling as final. Is the insurer’s duty to defend completely terminated by the court’s ruling dismissing the covered claims?
As with most insurance law issues in a country with 50 states separately deciding those issues, the answer is, of course, it depends. As with many issues in insurance law, however, there does appear to be a majority—and perhaps better reasoned—rule that will provide us an answer to the question. This article reviews the two competing approaches for assessing when an insurer’s duty to defend is terminated and the reasoning employed in both approaches so that practitioners have a better understanding of how to advise their policyholders or insurer clients concerning this issue.
First, we review what appears to this author to be the majority position for evaluating and analyzing when the insurer’s duty to defend ceases. This approach is described as the “finality analysis.” Then we turn to the minority approach for assessing when the insurer’s duty to defend terminates. This approach is described as the “partial summary judgment analysis.” The third section of this article addresses the practical application of the two approaches.