Duty To Defend – Trigger: 6th Cir. Finds Wrongful Refusal Of Primary Insurer To Defend Claim Triggers Excess Insurer’s Duty To Defend

The Sixth Circuit, applying Ohio law, held that excess insurer Westchester Fire Insurance Company (Westchester) had a duty to defend IMG Worldwide Inc. (IMG) in litigation stemming from a failed real estate project, finding Westchester’s duty to defend was triggered when primary insurer Great Divide Insurance Company (Great Divide) denied coverage.

IMG was sued for millions of dollars for its role in a failed real estate venture in Orlando, Florida.  Great Divide, its primary insurer, issued $1 million in coverage.  Westchester, its excess insurer, issued $25 million in coverage.  IMG tendered the lawsuit to its primary and excess insurers.  Both insurers denied any coverage obligation.  IMG ultimately settled the underlying case for $5 million and incurred approximately $8 million in defense costs.

IMG settled its dispute with Great Divide, whereby Great Divide tendered its $1 million in limits, as well as $250,000 towards defense costs.  IMG subsequently filed suit against Westchester, claiming Westchester had a duty to defend and indemnify IMG.  The issue of indemnity was tried to a jury, who ruled in IMG’s favor and entered a verdict for $3.9 million.  IMG then filed a motion for judgment that Westchester was responsible for IMG’s defense costs that were in excess of the $250,000 IMG received from Great Divide.  The district court denied IMG’s motion, finding that Westchester’s obligations expired when IMG settled with Great Divide.  IMG appealed.

The Sixth Circuit reversed the trial court and determined that Westchester had a duty to defend IMG in the underlying action.  The policy provides that Westchester has a “duty to defend the insured against any ‘suit’ seeking damages for… ‘property damage’ when the underlying insurance [Great Divide] does not provide coverage….”  The court held that whether Westchester had a duty to defend depended upon what it means to “provide coverage.”  “The term ’provides’ could reasonably mean either ‘provide for’ or ‘undertakes to deliver’.”  Under the latter reading, the Court held Westchester was responsible for defending IMG in the underlying action when Great Divide wrongfully denied coverage.   The Court rejected Westchester’s argument that the duty to defend expired when IMG settled with Great Divide:  “The district court’s conclusion that Westchester’s promise ‘expired’ when Great Divide and IMG settled is incorrect, since the [Westchester] breach occurred several  years prior to the settlement.”

Westchester also argued that, even assuming it had a duty to defend, any resulting damages should be set off entirely, since Great Divide was contractually obligated to pay the full amount of IMG’s defense costs, and IMG released Great Divide from that obligation.  The appellate court disagreed:  “IMG negotiated and paid for CGL policies from Great Divide and Westchester to cover itself from liability in precisely this type of situation.  Certainly, as the non-breaching party, IMG must not be left holding the bag.”  Thus, Westchester was held liable to pay nearly $8 million in defense costs.  The Court, however, noted that Westchester may have a contribution claim against Great Divide for any amounts Westchester believed should have been paid by Great Divide.  IMG Worldwide, Inc. v. Westchester Fire Ins. Co., 13-3832, 12-3837 (6th Cir. July 15, 2014).

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