When threatened with a lawsuit, an insured’s first call is often to his or her insurer, asking the insurer to hire lawyers to defend the lawsuit. All too often the insurer’s initial response is that the claim is not covered for one reason or another. At this stage, it is critically important that the policyholder not simply give up, but consult with coverage counsel who can analyze the policy, or multiple policies, and negotiate with the insurer or insurers. Often, coverage counsel can persuade (or force) the insurers to pay for the insured’s defense, even if it is unclear or even doubtful whether the policy will ultimately cover the loss. This is because the insurer has a duty to defend its insured against even a potentially covered loss.

Insureds face an additional complication when more than one insurer is potentially responsible for the same claim. When that happens, the different insurers do not always agree on the scope of their defense and indemnity obligations, and will often point their fingers at each other. It can be very difficult for insureds to navigate this process by themselves, but coverage counsel can often persuade (or compel) at least one insurer to step up to the plate to defend—and hopefully settle—the claim. Once the claim is resolved, the paying insurer will sometimes chase the recalcitrant insurers to make sure they pay their fair share of the claim.

The California Court of Appeals recently addressed this situation in Associated Indemnity Corp. v. Argonaut Insurance Co. (July 7, 2015). In 2008, the Los Angeles Unified School District sued numerous defendants, alleging that they were liable for environmental cleanup costs that LAUSD had incurred in cleaning up various parcels of land LAUSD had acquired for construction of a new school. Among the defendants were members of the Tedesco family, who previously owned one of the parcels of land at the new school site.

The Tedescos tendered defense of the LAUSD lawsuit to Associated Indemnity (“AIC”) and Argonaut. Argonaut and AIC had issued commercial general liability policies to the Tedescos for successive policy years. Both policies contained identical language excluding pollution damages, but covering damages from the “sudden and accidental” discharge, release, or escape of pollutants.

Even though their policies had identical insuring language, AIC and Argonaut reached opposite coverage conclusions. AIC agreed to defend and indemnify the Tedescos, but Argonaut denied the claim because of the pollution exclusion and refused to participate in the Tedescos’ defense. AIC ultimately settled LAUSD’s lawsuit for $95,000, incurring approximately $300,000 in defense costs.

After settling the Tedescos’ claim, AIC sued Argonaut for equitable contribution, asking the court to require Argonaut to pay its fair share of the defense and settlement costs. The trial court granted summary judgment to AIC and the Court of Appeals affirmed. The Court of Appeals held that LAUSD’s complaint triggered the insurers’ duty to defend because the complaint alleged that the Tedescos contributed to the release of toxic chemicals on the school site. Argonaut could not rely on the pollution exclusion unless the undisputed facts showed there was no “sudden and accidental” release of chemicals. Argonaut had a duty to defend its policyholder unless the undisputed facts conclusively eliminated the potential for coverage. Based on the allegations in the complaint and the evidence in the record, Argonaut could not indisputably establish the absence of a “sudden and accidental” chemical discharge.

In reaching this decision, the Court of Appeals emphasized that an insurer’s duty to defend is more easily triggered than the duty to indemnify. The indemnification obligation is invoked only when the insured’s liability has been conclusively established (for example, after a trial). But the duty to defend applies to claims that are merely potentially covered. As a result, in many situations an insurer has a duty to defend its policyholder even for claims that might not ultimately be covered if litigated to a final verdict.

This principle has important implications for insureds. When threatened with a lawsuit, it is crucial to consult with experienced coverage counsel who can help you identify and analyze every insurance policy that could potentially cover all or part of the claim. If more than one insurer is potentially on the risk, coverage counsel may be able to persuade at least one of these insurers to pick up the defense, leaving it up to that insurer to chase the others to pick up their fair share of defense and settlement costs. And, critically, insurers will often attempt to deny potentially covered claims, leaving insureds to fight lawsuits on their own. Experienced coverage counsel can often persuade insurers that they have the obligation to defend and, if possible, settle such claims on behalf of their insureds.

Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.