Liability Insurer's Duty to Defend: American Policyholders' Ins. Co. v. Cumberland Cold Storage Co.

Liability insurance policies generally contain a standardized provision that requires the insurer to defend the insured against all suits alleging bodily injury or property damage covered by the terms of the policy, even if the claims are "groundless, false or fraudulent.” This provision is the basis for the general rule that a liability insurer's duty to defend an insured will arise when the allegations in a complaint against the insured state a claim within the terms of his policy coverage. In addition to creating a duty to defend, this clause generally affords the insurer the exclusive right to control the defense. Throughout the litigation the insured must cooperate with the insurer; reciprocally, the insurer must exercise diligence and good faith. The advantage of the general pleading rule is that it allows the insurer to determine the existence of a duty to defend well before litigation of the underlying claim. Because it does not depend upon the insurer's ultimate liability, the duty to defend is broader than the duty to indemnify. This fact has led most courts to adopt the general pleading rule whenever the allegations in the complaint and the known or ascertainable facts are the same. Where the facts and the allegations are not the same, however, courts disagree about the rule's validity. A growing number of courts question the appropriateness of relying solely on the pleadings in a third party's complaint to determine the rights created and the obligations imposed by a contract of insurance. American Policy holders' Insurance Co. v. Cumberland Cold Storage Co. presented the Maine Supreme Judicial Court an opportunity to address the pleading rule issue. Refusing to recognize any exceptions to this rule, the court stated unequivocally that "the pleading test for determination of the duty to defend is based exclusively on the facts as alleged rather than on facts as they actually are." The court's holding thus precludes an insured from receiving the benefit of a defense by his liability insurer unless policy coverage appears on the face of the complaint. This result occurs even when the insurer knows that the allegations are untrue and that proper allegations would give rise to a duty to defend. In contrast to the Maine court's restrictive holding, many courts recently have expanded protections for the insured. Analysis of the relationship between the insurer and the insured suggests that courts should not allow an insurer to avoid an obligation to defend by relying on a third-party’s allegations in his complaint. Where a possibility of insurance coverage exists, liability insurers should be required to investigate suits filed against their insureds before they may disclaim their duty to defend.