The right to a prompt defense of claims is perhaps the most valuable right a policyholder obtains when it purchases a liability insurance policy. A prompt defense can often mean more than merely the difference between winning and losing the underlying litigation. For individual policyholders, it can be the only bulwark against having to wipe out life savings, mortgage or lose a home, or take on crushing debt to mount the defense necessary to defeat even false or frivolous claims. For commercial or corporate policyholders, it can mean having the ability to meet the rising tide of class action lawsuits and bet-your-company litigation that can wreak havoc with a bottom line long before a claim ever comes to trial. In order to fulfill those functions, however, the funds for the defense have to be available when they are needed—payment for a defense delayed can be a defense denied.
New York law has long recognized the critical importance of the timely payment of defense costs by an insurer. In particular, New York courts have uniformly recognized that the duty to defend is "exceedingly broad" and arises if the underlying complaint "contains any facts or allegations which bring the claim even potentially within the protection purchased."1 Nonetheless, because there are circumstances under which a defense is not owed even under those broad standards—such as when the underlying claim falls "solely and entirely" within the scope of a policy exclusion2—there can be uncertainty while the underlying claim is pending as to whether the insurance company is obligated to provide a defense. In some instances, insurers have been able to utilize such uncertainty, whether real or imagined, to hold defense payments hostage while they seek to negotiate settlements that reduce or restrict amounts payable under the policy. Policyholders faced with the immediate need to fund their defense can be at a severe disadvantage in those negotiations.
