In addition to insurance companies' broad duty to defend all claims arising from complaints seeking damages potentially covered by their policies,
The magic words are "inextricably intertwined"
Policyholders may seek defense costs for related litigation if those claims are made as: (1) counterclaims in suits the insurance company is already defending, or (2) separate, independent lawsuits with facts or defense work that overlap with a suit the insurance company is defending. The insurance company's duty to defend such related claims is not automatic, however.
Counterclaims
While several
- Covered counterclaims should be so wrapped up in the defense of the underlying suit that the two are virtually inseparable, and;
- Counterclaims used as a strategic defense to avoid liability are potentially covered under a policyholder's liability insurance.
The rationale behind the second point is explained in a 2003 case from the
Thus, when policyholders are faced with an underlying lawsuit, they should be mindful of the fact that, in certain circumstances, costs associated with prosecuting counterclaims that help defeat alleged liability may be covered under their general liability insurance policies.
Separate, reciprocal lawsuits
It is also possible, in appropriate circumstances, to obtain coverage for separate lawsuits that are related to the defense of an underlying lawsuit. In Post v. St. Paul Travelers Ins. Co., Post (an attorney) was sued by a former client (a plaintiff in the underlying case) for malpractice and by the plaintiff's attorney in the underlying suit for sanctions. Post responded by filing two actions independent of the malpractice and sanctions suits: an abuse of process action against the client and a defamation suit against the attorney. Travelers, Post's malpractice carrier, agreed to defend Post in both suits against him, but denied coverage for costs related to his reciprocal suits against the client and attorney.
The court ultimately decided that the defamation suit was not "necessary to the defense of the litigation as a strategic matter" and, therefore, not covered. Nevertheless, the court held that the abuse of process action was covered, reasoning that the work done to defend Post in the malpractice and sanctions claims was "part of the same dispute" as the abuse of process claim Post made against his client.
The holding in Post should prompt policyholders to be mindful of potential coverage for related suits when litigating an underlying case.
The takeaways
Policyholders should be mindful of the potential coverage available for offensive claims and suits related to underlying suits they are defending. Although this option is limited, it is appropriate in the right circumstances, namely where an offensive suit or claim is "inextricably intertwined" with the underlying suit being defended. Policyholders and defense counsel should be on the lookout for opportunities to exercise this coverage.
This article is presented for informational purposes only and is not intended to constitute legal advice.
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