Duty to Defend. An insurance carrier's duty to defend is much broader than their indemnity obligations. Depending on the claim, the carrier may readily agree to defend the association but may not agree to pay any judgment against the association. Generally, once a claim has been submitted by the association to its insurance carrier, the carrier will evaluate the claim to determine if the policy covers the the claim. Once that is done, the carrier will issue one of the following letters:
1. Covered Claim. The claim is covered under the policy. The carrier then appoints a law firm to defend the association. If the claim ultimately goes to trial and a judgment is entered against the association, the carrier will pay the judgment (up to its policy limits).
2. Denial of Coverage. The claim is not covered by the policy. An example is where the insurance policy covers claims for negligence but the association is sued for breach of contract.
3. Reservation of Rights. The carrier may agree to defend the association but may refuse to pay any judgments against the association if the matter goes to trial and the association loses. This happens most often when coverage of the underlying claim is questionable under the association's insurance policy.
Negative Letter: If the carrier issues a "denial of coverage" or a "reservation of rights" letter, the board of directors should have the association's legal counsel review the letter and the association's insurance policy to determine if the he/she agrees with the carrier's position. If legal counsel disagrees, the board may want to dispute the carrier's position and make further demands for coverage. This may cause the insurance carrier to revise its position.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.