C "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> Can Your Insurance Company Stop Defending Midstream? : California Insurance Law Observer

Can Your Insurance Company Stop Defending Midstream?

In a disturbing new trend, we have seen insurers simply withdrawing from defending their insureds in the middle of the litigation.  There is substantial case law supporting the proposition that once defending, an insurer can only withdraw if a court permits it.  However, generally an insurer cannot sue its insured while the law suit the insurer is defending is still on going because that would unfairly put an insured in a two front war.  The solution for the insurer:  Put the insured in an even worse situation by yanking the defense midstream in the lawsuit!

As the primary reason a business would purchase the liability insurance in the first place is for financial protection against law suits, it hardly seems fair that an insurer can start defending but in the middle of the suit because some claims were dismissed, the insurer can just walk out and leave the insured twisting in the wind.  There are a number of courts who agree insurers cannot do so.  For example in Goerner v Axis  the directors and officers insurer settled claims against the corporation and the plaintiff amended the complaint taking most references to the corporation away.  Axis then asserted the second amended complaint (that lacked claims against the insured's company) then only asserted claims against the insured as an individual and walked away leaving the insured defenseless against the claims.  The insurer studiously ignored that the insured was sued for acts he undertook for the benefit of his company.  The insured had to settle the claims as he could not afford to fund his own defense and sue Axis for wrongfully pulling the defense.  The Ninth Circuit court of appeals agreed with the insured and applied the standard rule that where the facts support the conclusion that there was a continuing potential for coverage (in this case that the insured was acting for his company) then Axis had to continue to defend. The insured is now entitled to damages from Axis including the cost of his defense and the settlement, and perhaps tort damages as well.

We have seen other insurers attempt the same gambit--if it happens to you, call coverage counsel for assistance, as the law is on your side!

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