Affirmative Duty to Defend: How the Four Corners Approach Is Modified

In the field of insurance law, most liability policies are designed to cover two primary and qualified contractual obligations assumed by the insurer—a defense expense obligation and an indemnification expense obligation. How the defense expense obligation is actually implemented through policy language can vary greatly between types of liability policies. The most frequently encountered liability policies—home, auto, commercial—implement the defense expense component through what is known as a duty to defend provision, in which the insurer assumes control of the defense of a claim and appoints defense counsel to represent the policyholder. However, there is another category of liability policies that do not contain a duty to defend provision but instead contain a duty to advance defense costs provision. These are typically found in higher exposure liability policies such as directors and officers (D&O), employment practices liability (EPL), or individual and organization (I&O) policies, where the policyholder, not the insurer, controls selection of counsel and exercises primary control over litigation, albeit with some limitations. Often, policies containing a duty to advance defense costs explicitly state at the outset that the insurer disclaims any duty to defend. This disclaimer, however, does not end the inquiry. Since policies containing a duty to advance defense costs are less frequently encountered by courts there is limited legal authority interpreting duty to advance provisions. We examine the differences between these two types of polices and how courts applying Pennsylvania law have addressed the topic. As discussed below, despite a duty to defend disclaimer, policies that contain a duty to advance defense costs provision most often are examined under the traditional duty to defend analysis.

Basic Duty to Defend Primer

A brief review of the basics of a duty to defend liability policy provides a foundation from which the issue has evolved. A typical liability policy containing a duty to defend will state the insurer’s defense obligation, with some variation, as follows: “the Insurer will have the right and duty to duty to defend the policyholder against any claim seeking damages for bodily injury or property damage; however, the insurer will have no duty to defend the policyholder against any claim for which this insurance does not apply.” The majority of courts, including those in Pennsylvania, have interpreted liability policies containing a duty to defend provision to create a broad obligation of the insurer to defend not only covered claims but also those claims which may potentially come within the coverage under the policy. See American & Foreign Insurance v. Jerry’s Sport Center, 2 A3d 526 (Pa. 2010). This is sometimes referred to as the “potentiality standard” in which the defense obligation is triggered by the mere potential, rather than the certainty, that a claim will be covered by the liability policy. This is also why the duty to defend is commonly referred to as being broader that of the duty to indemnify.