An insurance company has two fundamental duties under a liability insurance policy: the duty to defend and the duty to indemnify. The duty to defend includes the duty to make reasonable settlement decisions in the course of the defense. An insurance company’s duty to make a settlement payment, however, falls under the duty to indemnify, which is the duty to pay amounts on behalf of the policyholder to a third party who has been injured or damaged.

Typically, the factual record relevant to the duty to defend is limited. An insurance company compares the four corners of the legal complaint against its policyholder to the four corners of the insurance policy, and if there is any potential for coverage, in whole or in part, the insurance company must defend the entire action. The duty to pay a judgment is based on a different factual record—the facts as found by the trier of fact and the liability established at trial.

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