The question "when does the duty to defend start?" arises quite frequently. Succinctly, it starts immediately upon the filing of a covered lawsuit and tender to the insurer. "The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage, . . . Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.” Haskel, Inc. v. Superior Court of Los Angeles County, 33 Cal. App. 4th 963, 974 (1995) (citing Montrose Chemical Corp. v. Superior Court, 861 P.2d 1153 (Cal. 1993)) (emphasis in original; citations omitted).
Upon receiving tender of the defense, an insurer may (1) refuse to defend at the risk of acting in bad faith, (2) defend under a reservation of rights and attempt to litigate the coverage issues, or (3) assume the defense without reservation. An insurer is NOT entitled to conduct discovery or conduct an unreasonably long investigation into the underlying lawsuit. If an insurer pursues options #1, it is immediately required "to prove that it would be impossible for the [claimant] to prevail against [the insured] in the underlying lawsuit . . . on a claim covered by the policies.” Tri-S Corp. v. Western World Ins. Co., 110 Hawai`i 473, 488, 135 P.3d 82 (2006) (quoting Dairy Road Partners v. Island Ins. Co., Ltd., 92 Hawai`i 398, 412-413, 992 P.2d 93, 107-108 (2000)) (emphasis added). This is, obviously, a very high standard – "impossibility." Failure to meet this standard and the past/concurrent refusal to defend puts the insurer at the risk of a bad faith claim.
On the other hand, an insured need merely demonstrate a mere possibility of coverage, which requires nothing more than a review of the allegations in the underlying complaint and the insurance policy. As a matter of public policy, any "close calls" are construed in the insured's favor because insureds should not be required to litigate both the underlying case and a coverage case at the same time — the so-called "procrustean dilemna."
As an example of this principle at work, in Haskel, the California court overruled a trial court that had “simply” taken a motion for summary judgment off calendar and refused “to hear it until the insurers’ discovery was complete.” 33 Cal. App. 4th 963 at 976.
If the claims asserted in the underlying action raise a potential for coverage, the insurers have a duty to provide a defense to Haskel upon tender of those claims unless and until they produce in court undisputed extrinsic evidence which conclusively establishes that there is no potential for coverage.
The insurers were either aware of such evidence at the time of the tender or they were not; they did not need discovery from Haskel to determine the existence of that evidence. The insurers, if they wanted to defeat Haskel’s summary adjudication motion, should have set forth such conclusive evidence in a proper opposition to the motion. If, on the other hand, they did not have such conclusive evidence, then they could not successfully oppose Haskel’s claim for an immediate judicial recognition of the fact that a defense obligation then existed.
Id. at 976-77 (emphasis added). Further,
The insurers contend that this case really only involves a discovery dispute. They argue that they require a full opportunity to complete their discovery into coverage questions before they can file a proper opposition to Haskel’s summary adjudication motion. This confuses the principles surrounding the creation of a defense obligation with those applicable to its termination.
Id. at 977 (emphasis added); see also The Travelers Indem. Co. Of Illinois v. Ins. Co. Of North America, 886 F. Supp. 1520, 1526-27 (S.D. Cal. 1995).
I like to think of this principle in this fashion: the creation of the duty to defend starts at the earliest possible moment. To obtain a duty to defend, the requisite "proof" is deliberately set at a low threshold. Termination, on the other hand, occurs only upon the establishment of conclusive proof and requires a much higher threshold (impossibility of coverage). This sometimes can occur as a matter of law, e.g., the policy period is inapplicable, but frequently involves issues of fact that cannot be resolved until the underlying case is completed. Unfair to the insurer? Not really. This is what bargain for when we purchase an insurance policy.