CILC previously reported on the how your insurance for defending a lawsuit may be broader than your insurance for the costs to settle the case or resolve it in court. A recent case out of Georgia — Evanston Ins. Co. v. Sandersville R.R. Co., 2017 U.S. Dist. LEXIS 115686 (M.D.Ga. July 25, 2017) — illustrates this point and how you should be vigilant in ensuring that your insurance company defends you if and when the facts require.
Sandersville involved a railroad company and a claim against it on behalf of an injured employee. There was no dispute that the railroad’s comprehensive general liability (CGL) policy (rather than any state-regulated workers’ compensation insurance) provided coverage for a claim of this nature (under the Federal Employees Liability Act (FELA), 45 U.S.C. § 51, et seq.). The insurer simply argued that the pollution exclusion contained in the CGL policy operated to negate all available coverage, because the injuries at issue arose out of occupational exposure to welding fumes (“welder’s lung disease”). On a motion for summary judgment, the Court agreed with the insurer that it did not have to indemnify the railroad for the cost to settle the employee’s claim (which the railroad had done). As of the time of the summary judgment motion, the facts developed through discovery had established that the exposures at issue were in fact welding fume exposures barred by the pollution exclusion.
The Court, however, did not let the insurer off the hook entirely. The Court reiterated that the duty to defend can be broader than the duty to indemnify and is assessed solely in regards to the allegations of the underlying complaint, not against the facts as later established. If the allegations of the complaint in any way suggest that coverage might exist, the ambiguity is construed in favor of coverage, and the insurer must defend, at least until such time as the facts unequivocally demonstrate that an exclusion applies. Here, the Court noted that the employee’s underlying Complaint was “not a model of clarity” and did “not allege, specifically or generally, that [the employee]’s advanced lung disease was caused by workplace toxins, such as welding fumes.” In other words, the Complaint did not unequivocally establish the application of the pollution exclusion, and the insurer had to defend the lawsuit until the facts established otherwise (i.e., until the motion for summary judgment was granted in the insurer’s favor on the duty to indemnify).
Sandersville is also a reminder that your insurer is not always correct when it asserts a right to recoup defense costs. Sandersville involved two reservation of rights letters, one upon receipt of the employee’s initial demand letter and one upon receipt of his underlying Complaint. The reservation of rights letters claimed that the insurer could recoup once the insurer “establishe[d] that it owe[d] no coverage to the insured,” implying that the insurer could get its money back as long as it proved that the injuries at issue were barred by the pollution exclusion (which it ultimately did). The Court rejected this argument and emphasized that, in most, if not all, jurisdictions, an insurer can only recoup defense costs if it is established that it never had a duty to defend, not that it never had a duty to indemnify. Where, as here, a duty to defend exists (based on the allegations of the underlying complaint), the insurer cannot recoup the defense costs paid out even if it is later determined that it did not have a duty to indemnify (based on the facts developed in the record).