The insurer’s duty to defend is exceedingly broad, but the duty is not interminable. As long as there are allegations of covered claims the duty includes an obligation to defend allegations not covered by the insurance policy. Professional liability policies—the Errors & Omissions (E&O) and analogous Directors and Officers (D&O) policies—permit the insurer to “clawback” defense costs if a judicial finding is made that the alleged acts are excluded from coverage or are otherwise not covered. The insurer’s success depends upon the wording of the policy, a finding by a court and the insurer’s explicit reservation of rights letter explaining its coverage position including that it would seek recoupment of defense costs if coverage were found inapplicable or excluded.
The Duty to Defend
The insurer must provide a defense to the action if the complaint, liberally construed, sets forth any claim which can reasonably be said to fall within the coverage provided by the insurance policy, or if the carrier has actual knowledge of facts which tend to establish the reasonable possibility of coverage. In New York, insurers may not look beyond the “four corners of the complaint” to avoid the obligation to defend. Even if extensive facts suggest the claim may ultimately prove meritless or outside the policy’s coverage the insurer must initially provide a defense.
