Insurance Company’s Duty to Defend in Real Estate Cases

Insurance coverage exists for so many areas of every day life—for example, medical insurance, automobile insurance, and title insurance.  We typically come across the duty to defend in real estate cases in the context of general liability policies, title insurance policies in the context of cases involving easements, general premises liability, title disputes and some landlord tenant matters.  In each of these cases, the insurance company (“the insurer”) provides the insured party (“the insured”) coverage based on the terms of the insurance contract. As part of these contracts, the insurer may include a provision that if the insured becomes party to a lawsuit involving the covered risks of the insurance policy, the insurer may defend the insured throughout the course of that lawsuit. These provisions are often very complicated and have specific requirements to activate the duty to defend. Nonetheless, the law in this area applies the presumption that the insurer has an implied duty to defend. (Montrose Chem. Corp. v. Superior Court (1993) 6 Cal.4th 287, 300.) That is to say that the insurance companies have a very high burden to overcome to demonstrate they do not have a duty to defend. Courts resolve any doubt regarding coverage in the insured’s favor. (Id.)

To demonstrate that a duty to defend exists, the insured must only prove the existence of a potential for coverage. On the other hand, the insurer must prove the absence of any such potential. (Montrose Chem. Corp., supra, 6 Cal.4th at 300.) In other words, the insurer has the higher burden to establish the claim cannot fall within policy coverage, whereas the insured only needs to show the claim may fall within policy coverage. (Id.) If a covered risk may possibly have caused the harm and may possibly have resulted, at least in part, within the policy period, the duty to defend extends to all points of time at which some harm resulted. (Aerojet-Gen. Corp. v. Transp. Indem. Co. (1997) 17 Cal.4th 38, 72–73.) Indeed, the duty to defend is not limited to the policy period. (Id. at 74.) In other words, although the trigger of the duty to defend is limited to the policy period, the extent of the duty to defend is not. (Id. at 75.)

In cases where insurance companies do not meet their obligation to defend, the insured can bring suit for bad faith. (Bosetti v. U.S. Life Ins. Co. in City of N.Y. (2009) 175 Cal.App.4th 1208, 1236–37.) Ultimately, the court is looking to see whether the insurance company is remaining true to the mutually agreed upon common purpose of the insurance contract. (Id. at 1236.) In other words, the insurance company must observe the insured’s justified expectations. (Id.)

Courts apply an objective standard of reasonableness to review the insurer’s conduct in denying coverage. Therefore, to bring a successful action for bad faith, the plaintiff must demonstrate that the insurance company acted without proper case. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574.) The plaintiff may be entitled to punitive damages if he can also demonstrate that the insurance company acted with malice. (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922.) Nonetheless, the insurance company may rightfully deny or delay defending the insured if the company can demonstrate that a genuine dispute exists regarding policy coverage. (Bosetti, supra, 175 Cal.App.4th at 1237.) If an insured is successful, he can collect the costs and attorneys’ fees he had to expend to implement the duty to defend and to defend the underlying action that initiated the insurer’s duty to defend. (Emerald Bay Cmty. Ass’n v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078, 1088–89.)

For more information regarding whether an insurance company’s duty to defend applies in your case, please contact us at (310) 954-1877 or