Is an Insurer Obligated to Defend the Prosecution of Affirmative Claims on Behalf of Its Insured?

Insurers Are Not Required to 'Defend' Affirmative Claims

A leading case for the proposition that an insurer's defense obligation does not include the prosecution of the insured's affirmative claims is 3250 Wilshire Boulevard Bldg. v. Employers Ins. of Wausau, 39 Cal. App. 4th 1277, 1279 (Cal. App. 2 Dist. 1995). In Wilshire, the owner of an office building sued its tenant for breach of a lease agreement and sought recovery for damages. The tenant filed a counterclaim against the owner. The owner's insurer accepted the defense of the tenant's counterclaim and settled the tenant's counterclaim against the owner.

After the tenant's counterclaim settled, the only remaining claim was the owner's original claim in the main demand against its tenant. The owner requested its insurer to pay the attorneys' fees incurred in prosecuting the owner's claim and in attempting to overcome the tenant's defenses to the main demand as “defense costs.” Relying on the plain language of the policy, the court held that the insurer had no duty to represent the insured in the prosecution of its own claims “because neither the prosecution of plaintiff's prima facie case nor the defeat of [the tenant's] defenses thereto could be considered the defense of a suit seeking damages.” Id. at 1280.

Another court, also applying the CGL policy's plain language, held that an insurer was not required to prosecute its insured's counterclaims even if those claims were asserted as a strategic part of the insured's “defense.” See Towne Realty, Inc. v. Zurich Ins. Co., 584 N.W.2d 64 (Wis. 1996). Under the policy, the insurer was required “to defend 'any suit seeking ' damages' against the Insureds.” The court held that the insurer was not obligated to fund its insured's counterclaims against parties who had sued for breach of contract because “[a]t the risk of stating the obvious, a countersuit initiated by the insured cannot logically be a suit seeking damages from the insured.” Id. at 68-69.

The Towne Realty court rejected the insured's argument that the counterclaim was necessary to fully defend the claims against it, recognizing that “although '[i]t may be true that a good defense is a good offense ' that does not create an obligation beyond the terms of the insurance policy.'” Id. at 69 (citing Towne Realty, 1933 Wis.2d at 569-70, 534 N.W.2d 886). Applying this common-sense rule, the court declined to extend the insurer's defense obligation beyond the clear language of the policy despite invitation to do so. Id. at 825. Other courts have adopted similar reasoning. See also Morgan, Lewis & Bockius LLP v. Hanover Ins. Co., 929 F.Supp. 764, 773 (D.N.J. 1996) (policies did “not cover affirmative claims asserted by the insured”); Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510, 517 (Wyo. 2000) (“no matter how factually intertwined the claims may be, the insurer is not obligated to fund counterclaims”); Moore v. State Farm Mutual Insurance Co., 520 F.Supp.2d 815 (E.D.La. 2007) (the insured was not entitled to a “defense” in pursuing affirmative claims under plain policy language providing “coverage only for 'sums which the Insured shall become legally obligated to pay as damages'”).

'Defense' of Affirmative Claims May Be Covered if Factually Related to and Necessary to Defense

Other courts, glossing over the plain policy language, require insurers to defend the prosecution of insureds' affirmative claims that are closely related to and necessary to defend a suit for damages against the insured. Several courts have found coverage for an insured's affirmative claim under this analysis. Even so, most (if not all) courts that find coverage under this theory do so only where the insurer previously breached a duty to defend a suit against its insured for damages.

In Safeguard Scientifics v. Liberty Mut. Ins. Co., after an insurer breached its duty to defend breach of contract and defamation claims against its insured, the insured sought a declaration that the insurer was obligated to defend it in the underlying action as well as to reimburse the insured for the costs incurred in connection with its counterclaim (also for breach of contract). 766 F.Supp. 324 (E.D.Pa. 1992) (rev'd in part by Safeguard Scientifics, Inc. v. Liberty Mutual Ins. Co., 961 F.2d 209 (3rd Cir. 1992)). The Safeguard court concluded that the insured's costs incurred in advancing counterclaims could be recovered as “defense” costs because “the pursuit of the counterclaims was inextricably intertwined with the defense of [claims against the insured] and was necessary to the defense of the litigation as a strategic matter.” Id. at 334 (emphasis added).

The threshold question of whether the insured's affirmative claims are “intertwined with” and “necessary to the defense” has been applied by several other courts. Such was the case in Aerosafe Intern., Inc. v. ITT Hartford of Midwest, wherein the court required an insurer to pay the cost of preparing counterclaims that were never even filed but that could have been used to further the insured's defense in claims asserted against it. No. C-92-1532, 1993 WL 299372 (N.D. Cal., July 23, 1993). In Aerosafe, the insurer refused to defend its insured in a suit for misappropriation of trade secrets. The insured then hired its own counsel, who prepared but never filed a federal antitrust action and a state cross-complaint. Relying on Safeguard, the court first concluded that the insurer had wrongfully declined to defend the suit. The court then ruled that the insurer's duty to defend included a duty to pay the insured's costs of preparing those pleadings, which were so related to the claims against the insured as to become “part of an overall litigation strategy.” The court also noted that the “insurer gave up the right to control the litigation” by breaching the duty to defend. Id. at *5.

This penalty-driven analysis extends to the entire spectrum of coverage disputes, including the environmental arena. See, e.g., Oscar D. Larson Co. v. United Capitol Ins. Co., 845 F.Supp. 458, 461 (W.D.Mich 1993). The Larson court held that an insured that was sued for pollution damage could recover costs incurred in its affirmative claims against other alleged polluters as “defense” costs. The court deemed these affirmative claims to be “defensive in nature” and “reasonable and necessary to limit or defeat liability.” Id. at 461. Again, the insurer in Larson had also breached its duty to defend.

Nevertheless, not all courts applying the “factually intertwined with” and “necessary to the defense” test have required the insurer to fund the insured's affirmative claims. For example, one court has suggested that the “intertwined with” and “necessary to the defense” test should never apply unless the insurer has breached its duty to defend. In James 3 Corp. v. Truck Ins. Exchange, the insured, a beverage syrup manufacturer, was sued by Coca-Cola for trademark infringement. 91 Cal. App. 4th 1093, 1094 (Cal. 2001). The insurer accepted tender of its insured's defense and retained an attorney, who advised the insured that it might be in its interest to assert affirmative counterclaims under antitrust laws. Id. at 1098. However, the insurer declined to fund the defense of the proposed counterclaims.

The court rejected the insured's argument that its insurer owed a duty to defend the proposed counterclaim that was “factually intertwined with the affirmative defenses being asserted.” Id. at 1104. The court distinguished Safeguard Scientifics and Aerosafe International as bad faith cases in which “the insurers wrongfully refused to defend their insureds in the underlying action.” In contrast, in James 3, “[the insurer] has not breached its duty to defend and has not given up its right to control the litigation.” While the James 3 court reached the correct result, courts should not resort to nomenclature exercises to circumvent their jurisdiction's penal laws.

Some courts conclude that the insured owed no duty to defend the insured's claims because those claims are not sufficiently related and necessary to the defense of a suit for damages against the insured. For example, in one case involving employment discrimination claims against an insured, the insured argued that its counterclaim against the former employee to prevent use or disclosure of trade secrets “was integral to its complete defense of the [employee's] lawsuit.” Int'l Ins. Co. v. Rollprint Packaging Prods., Inc., 728 N.E.2d 680, 693-94 (Ill. App. Ct. 2000).

The court held that the insured had no duty to fund the counterclaim because the insured's affirmative claim was “offensive,” not defensive, reasoning that the insured's counterclaim was distinguishable from “defensive counterclaims such as third-party contribution and indemnity actions.” In contrast, the insured's counterclaim, seeking to prevent the adverse party from using trade secrets whose ownership was contested, would not limit the insured's liability in the underlying discrimination suit. Id. at 694.

This test continues to become more complicated, adding to the risk of unpredictable results. In order to satisfy the “inextricably intertwined” and “necessary to the defense” rule so that the insurer's duty to defend potentially applies, the affirmative claim should be both factually intertwined and necessary to the defense. The presence of one or the other element is not sufficient. See Bennett v. St. Paul Fire and Marine Ins. Co., 2006 WL 1313059 (D. Me. May 12, 2006). The Bennett court held that even if counterclaims or third-party claims “could reduce or offset [the insured's] liability and will put pressure on [the defendant] to dismiss or settle his claims” affirmative claims are not covered if they are not “inextricably intertwined” with his defense.

As another variable to the “inextricably intertwined” and “necessary to the defense” rule, the insurer may be obligated to defend counterclaims asserted only while claims for damages are pending against the insured. In TIG Ins. Co. v. Nobel Learning Comm., Inc., the court held that the insurer was liable for all legal fees incurred in its insured's affirmative suit, and the defendant's related counterclaim, but only after the counterclaim against the insured was filed. 2002 WL 1340332, at *1 (E.D.Pa. 2002). The court reasoned that “the courts that have found liability have done so where the claims were 'part of the same dispute' and could 'defeat or offset liability.'” Id. at *14. Obviously, the insured would have no potential liability until after a damages claim was asserted against it.

Setoff and CERCLA Claims: Special Cases?

Some courts, viewing setoff defenses and insureds' CERCLA claims as special cases, allow insureds to recover costs of “defending” setoff defenses to the insured's affirmative claims or affirmative CERCLA claims as “suits for damages.” However, adding to the unpredictability of the “factually intertwined with” and “necessary to the defense” test, the courts are in disagreement on whether special status is warranted.

In one case, the defendant raised the affirmative defense of setoff to an insured/plaintiff's affirmative claim for breach of contract. Construction Protective Services, Inc. v. TIG Specialty Ins. Co., 29 Cal.4th 189, 193 (Cal. 2002). The insured tendered the setoff to its insurer, which denied a defense. Id. Although the state law did not permit the defendant to obtain affirmative relief through a setoff defense, the court held that the insured was entitled to coverage for the costs of responding to that defense. The court reasoned that setoff is the equivalent, for accounting purposes, of a claim for damages against the insured and that, but for the defendant's setoff defense there “would have unquestionably have been a suit for damages” against the insured. Id. at 198-99.

In contrast, another court rejected a request for special treatment of setoff claims. Moore v. State Farm Mutual Insurance Co., 520 F.Supp.2d 815 (E.D.La. 2007). Relying on the plain language of the policy, the court found that the defendant's setoff defense raised as an affirmative defense in a lawsuit initiated by the insured was not covered because it could not cause the insured to become legally obligated to pay damages. “At most,” the affirmative defense would merely reduce the amount of damages recoverable by the insured. Id. at 825.

An insured's CERCLA claims may present another special case where an insurer is obligated to fund affirmative claims in the absence of a suit for damages against the insured. For example, in Emhart Industries, Inc. v. Home Ins. Co., the court concluded that in light of CERCLA's “unique” liability/contribution scheme, the insured's pursuit of potentially responsible parties for alleged contamination is defensive in nature and the costs may be covered under the insured's duty to defend. 2006 WL 246908, at *2 (D.R.I. 2006). However, in CDM Investors v. Travelers Cas. And Sur. Co., the court determined that the insurer had “no duty to defend an affirmative defense asserted against the insured in an insured-initiated action” under CERCLA for response costs incurred after the insured was ordered to test for pollutants. 139 Cal.App.4th 1251, 1268 (Cal. App. 6 Dist. 2006).

Conclusion

The plain language and purpose of CGL policies obligates an insurer to defend only suits for damages against the insured. Applying the unambiguous policy language, many courts hold that the duty to defend simply does not include a duty to fund the insured's affirmative claims. This approach is also the view of several leading commentators. See Lee R. Russ and Thomas F. Segalla, Couch on Insurance, ' 205:84 (The “duty to defend has been deemed not to include responsibility for costs incurred by the insured in pursuing a counterclaim in the underlying litigation”); Barry R. Ostrager, Handbook on Insurance Coverage Disputes, ' 5.02[e] (“[I]nsurers are sometimes requested by their insureds to pay the cost of prosecuting cross-claims or counterclaims ' insurers are not required to prosecute such claims.”)

Courts holding that an insurer is obligated to “defend” an insured's affirmative claim on grounds that it is “factually intertwined with” a suit against the insured and “reasonable and necessary to limit or defeat liability,” have produced unpredictable results. Often, courts do not fully explain how the insured's claims are factually intertwined with and necessary to the defense. Sometimes, the court's decision turns on whether the insurer breached a duty to defend in the underlying litigation, which should not be part of the analysis. Applying the plain language of a policy to preclude coverage for affirmative claims is the better approach and will yield more consistent results.

Anne E. Briard is an Associate and Seth A. Schmeeckle is a Shareholder with Lugenbuhl, Wheaton, Peck, Rankin and Hubbard, in New Orleans. The views presented in this article are not necessarily the views of the firm or its clients.

The typical commercial general liability (“CGL”) policy requires insurers “to defend any suit against the insured seeking damages on account of ' bodily injury or property damage to which this insurance applies.” This plain, unambiguous language restricts the insurer's duty to defend suits for damages “against” the insured. Courts undertaking a thorough review of the policy language consistently rule that an insurer has no duty to defend an insured's affirmative claims (e.g., counterclaims, cross-claims, or third-party demands). Nevertheless, over the past two decades, some courts have abdicated their judicial obligation to enforce this plain, unambiguous policy language.

Instead, some jurisdictions apply a manufactured legal analysis of whether the insured's affirmative claims are “intertwined with” and “necessary to” the insured's defense. If they are, then the courts hold the insurer responsible for the costs associated with the affirmative claims. This test is unsupported by any policy language. Also, as discussed below, this test produces wildly varying results, leaving both the policyholder and insurer in an unpredictable forum. Parties to a contract are better served if the courts base their rulings on the unambiguous policy language, thereby eliminating unexpected results for both parties.

Moreover, a review of the line of cases finding that prosecution of affirmative claims is within the universe of “defense costs” reveals a common theme. In these cases, the courts are first called on to rule on whether or not the insurer correctly refused to provide a defense. Upon finding that the insurer wrongfully denied the defense, the courts ask whether the affirmative claims of the insured are “intertwined with” and/or “necessary to” the insured's defense. Almost as if to penalize the insurer for the incorrect denial of a defense, some courts find that the insured's affirmative claims fall within the defense obligation of an insurer that has breached its duty to defend. Thus, these decisions improperly circumvent laws establishing penalties for wrongful denial of a defense. Below, we compare the two lines of cases delineating the results when the policy language is applied and curiously unique outcomes when it is not.

Insurers Are Not Required to 'Defend' Affirmative Claims

A leading case for the proposition that an insurer's defense obligation does not include the prosecution of the insured's affirmative claims is 3250 Wilshire Boulevard Bldg. v. Employers Ins. of Wausau , 39 Cal. App. 4th 1277, 1279 (Cal. App. 2 Dist. 1995). In Wilshire, the owner of an office building sued its tenant for breach of a lease agreement and sought recovery for damages. The tenant filed a counterclaim against the owner. The owner's insurer accepted the defense of the tenant's counterclaim and settled the tenant's counterclaim against the owner.

After the tenant's counterclaim settled, the only remaining claim was the owner's original claim in the main demand against its tenant. The owner requested its insurer to pay the attorneys' fees incurred in prosecuting the owner's claim and in attempting to overcome the tenant's defenses to the main demand as “defense costs.” Relying on the plain language of the policy, the court held that the insurer had no duty to represent the insured in the prosecution of its own claims “because neither the prosecution of plaintiff's prima facie case nor the defeat of [the tenant's] defenses thereto could be considered the defense of a suit seeking damages.” Id. at 1280.

Another court, also applying the CGL policy's plain language, held that an insurer was not required to prosecute its insured's counterclaims even if those claims were asserted as a strategic part of the insured's “defense.” See Towne Realty, Inc. v. Zurich Ins. Co. , 584 N.W.2d 64 (Wis. 1996). Under the policy, the insurer was required “to defend 'any suit seeking ' damages' against the Insureds.” The court held that the insurer was not obligated to fund its insured's counterclaims against parties who had sued for breach of contract because “[a]t the risk of stating the obvious, a countersuit initiated by the insured cannot logically be a suit seeking damages from the insured.” Id. at 68-69.

The Towne Realty court rejected the insured's argument that the counterclaim was necessary to fully defend the claims against it, recognizing that “although '[i]t may be true that a good defense is a good offense ' that does not create an obligation beyond the terms of the insurance policy.'” Id. at 69 (citing Towne Realty, 1933 Wis.2d at 569-70, 534 N.W.2d 886). Applying this common-sense rule, the court declined to extend the insurer's defense obligation beyond the clear language of the policy despite invitation to do so. Id. at 825. Other courts have adopted similar reasoning. See also Morgan, Lewis & Bockius LLP v. Hanover Ins. Co. , 929 F.Supp. 764, 773 (D.N.J. 1996) (policies did “not cover affirmative claims asserted by the insured”); Shoshone First Bank v. Pacific Employers Ins. Co. , 2 P.3d 510, 517 (Wyo. 2000) (“no matter how factually intertwined the claims may be, the insurer is not obligated to fund counterclaims”); Moore v. State Farm Mutual Insurance Co. , 520 F.Supp.2d 815 (E.D.La. 2007) (the insured was not entitled to a “defense” in pursuing affirmative claims under plain policy language providing “coverage only for 'sums which the Insured shall become legally obligated to pay as damages'”).

'Defense' of Affirmative Claims May Be Covered if Factually Related to and Necessary to Defense

Other courts, glossing over the plain policy language, require insurers to defend the prosecution of insureds' affirmative claims that are closely related to and necessary to defend a suit for damages against the insured. Several courts have found coverage for an insured's affirmative claim under this analysis. Even so, most (if not all) courts that find coverage under this theory do so only where the insurer previously breached a duty to defend a suit against its insured for damages.

In Safeguard Scientifics v. Liberty Mut. Ins. Co. , after an insurer breached its duty to defend breach of contract and defamation claims against its insured, the insured sought a declaration that the insurer was obligated to defend it in the underlying action as well as to reimburse the insured for the costs incurred in connection with its counterclaim (also for breach of contract). 766 F.Supp. 324 (E.D.Pa. 1992) (rev'd in part by Safeguard Scientifics, Inc. v. Liberty Mutual Ins. Co. , 961 F.2d 209 (3rd Cir. 1992)). The Safeguard court concluded that the insured's costs incurred in advancing counterclaims could be recovered as “defense” costs because “the pursuit of the counterclaims was inextricably intertwined with the defense of [claims against the insured] and was necessary to the defense of the litigation as a strategic matter.” Id. at 334 (emphasis added).

The threshold question of whether the insured's affirmative claims are “intertwined with” and “necessary to the defense” has been applied by several other courts. Such was the case in Aerosafe Intern., Inc. v. ITT Hartford of Midwest, wherein the court required an insurer to pay the cost of preparing counterclaims that were never even filed but that could have been used to further the insured's defense in claims asserted against it. No. C-92-1532, 1993 WL 299372 (N.D. Cal., July 23, 1993). In Aerosafe, the insurer refused to defend its insured in a suit for misappropriation of trade secrets. The insured then hired its own counsel, who prepared but never filed a federal antitrust action and a state cross-complaint. Relying on Safeguard, the court first concluded that the insurer had wrongfully declined to defend the suit. The court then ruled that the insurer's duty to defend included a duty to pay the insured's costs of preparing those pleadings, which were so related to the claims against the insured as to become “part of an overall litigation strategy.” The court also noted that the “insurer gave up the right to control the litigation” by breaching the duty to defend. Id. at *5.

This penalty-driven analysis extends to the entire spectrum of coverage disputes, including the environmental arena. See, e.g., Oscar D. Larson Co. v. United Capitol Ins. Co. , 845 F.Supp. 458, 461 (W.D.Mich 1993). The Larson court held that an insured that was sued for pollution damage could recover costs incurred in its affirmative claims against other alleged polluters as “defense” costs. The court deemed these affirmative claims to be “defensive in nature” and “reasonable and necessary to limit or defeat liability.” Id. at 461. Again, the insurer in Larson had also breached its duty to defend.

Nevertheless, not all courts applying the “factually intertwined with” and “necessary to the defense” test have required the insurer to fund the insured's affirmative claims. For example, one court has suggested that the “intertwined with” and “necessary to the defense” test should never apply unless the insurer has breached its duty to defend. In James 3 Corp. v. Truck Ins. Exchange, the insured, a beverage syrup manufacturer, was sued by Coca-Cola for trademark infringement. 91 Cal. App. 4th 1093, 1094 (Cal. 2001). The insurer accepted tender of its insured's defense and retained an attorney, who advised the insured that it might be in its interest to assert affirmative counterclaims under antitrust laws. Id. at 1098. However, the insurer declined to fund the defense of the proposed counterclaims.

The court rejected the insured's argument that its insurer owed a duty to defend the proposed counterclaim that was “factually intertwined with the affirmative defenses being asserted.” Id. at 1104. The court distinguished Safeguard Scientifics and Aerosafe International as bad faith cases in which “the insurers wrongfully refused to defend their insureds in the underlying action.” In contrast, in James 3, “[the insurer] has not breached its duty to defend and has not given up its right to control the litigation.” While the James 3 court reached the correct result, courts should not resort to nomenclature exercises to circumvent their jurisdiction's penal laws.

Some courts conclude that the insured owed no duty to defend the insured's claims because those claims are not sufficiently related and necessary to the defense of a suit for damages against the insured. For example, in one case involving employment discrimination claims against an insured, the insured argued that its counterclaim against the former employee to prevent use or disclosure of trade secrets “was integral to its complete defense of the [employee's] lawsuit.” Int'l Ins. Co. v. Rollprint Packaging Prods., Inc. , 728 N.E.2d 680, 693-94 (Ill. App. Ct. 2000).

The court held that the insured had no duty to fund the counterclaim because the insured's affirmative claim was “offensive,” not defensive, reasoning that the insured's counterclaim was distinguishable from “defensive counterclaims such as third-party contribution and indemnity actions.” In contrast, the insured's counterclaim, seeking to prevent the adverse party from using trade secrets whose ownership was contested, would not limit the insured's liability in the underlying discrimination suit. Id. at 694.

This test continues to become more complicated, adding to the risk of unpredictable results. In order to satisfy the “inextricably intertwined” and “necessary to the defense” rule so that the insurer's duty to defend potentially applies, the affirmative claim should be both factually intertwined and necessary to the defense. The presence of one or the other element is not sufficient. See Bennett v. St. Paul Fire and Marine Ins. Co., 2006 WL 1313059 (D. Me. May 12, 2006). The Bennett court held that even if counterclaims or third-party claims “could reduce or offset [the insured's] liability and will put pressure on [the defendant] to dismiss or settle his claims” affirmative claims are not covered if they are not “inextricably intertwined” with his defense.

As another variable to the “inextricably intertwined” and “necessary to the defense” rule, the insurer may be obligated to defend counterclaims asserted only while claims for damages are pending against the insured. In TIG Ins. Co. v. Nobel Learning Comm., Inc., the court held that the insurer was liable for all legal fees incurred in its insured's affirmative suit, and the defendant's related counterclaim, but only after the counterclaim against the insured was filed. 2002 WL 1340332, at *1 (E.D.Pa. 2002). The court reasoned that “the courts that have found liability have done so where the claims were 'part of the same dispute' and could 'defeat or offset liability.'” Id. at *14. Obviously, the insured would have no potential liability until after a damages claim was asserted against it.

Setoff and CERCLA Claims: Special Cases?

Some courts, viewing setoff defenses and insureds' CERCLA claims as special cases, allow insureds to recover costs of “defending” setoff defenses to the insured's affirmative claims or affirmative CERCLA claims as “suits for damages.” However, adding to the unpredictability of the “factually intertwined with” and “necessary to the defense” test, the courts are in disagreement on whether special status is warranted.

In one case, the defendant raised the affirmative defense of setoff to an insured/plaintiff's affirmative claim for breach of contract. Construction Protective Services, Inc. v. TIG Specialty Ins. Co. , 29 Cal.4th 189, 193 (Cal. 2002). The insured tendered the setoff to its insurer, which denied a defense. Id. Although the state law did not permit the defendant to obtain affirmative relief through a setoff defense, the court held that the insured was entitled to coverage for the costs of responding to that defense. The court reasoned that setoff is the equivalent, for accounting purposes, of a claim for damages against the insured and that, but for the defendant's setoff defense there “would have unquestionably have been a suit for damages” against the insured. Id. at 198-99.

In contrast, another court rejected a request for special treatment of setoff claims. Moore v. State Farm Mutual Insurance Co. , 520 F.Supp.2d 815 (E.D.La. 2007). Relying on the plain language of the policy, the court found that the defendant's setoff defense raised as an affirmative defense in a lawsuit initiated by the insured was not covered because it could not cause the insured to become legally obligated to pay damages. “At most,” the affirmative defense would merely reduce the amount of damages recoverable by the insured. Id. at 825.

An insured's CERCLA claims may present another special case where an insurer is obligated to fund affirmative claims in the absence of a suit for damages against the insured. For example, in Emhart Industries, Inc. v. Home Ins. Co., the court concluded that in light of CERCLA's “unique” liability/contribution scheme, the insured's pursuit of potentially responsible parties for alleged contamination is defensive in nature and the costs may be covered under the insured's duty to defend. 2006 WL 246908, at *2 (D.R.I. 2006). However, in CDM Investors v. Travelers Cas. And Sur. Co., the court determined that the insurer had “no duty to defend an affirmative defense asserted against the insured in an insured-initiated action” under CERCLA for response costs incurred after the insured was ordered to test for pollutants. 139 Cal.App.4th 1251, 1268 (Cal. App. 6 Dist. 2006).

Conclusion

The plain language and purpose of CGL policies obligates an insurer to defend only suits for damages against the insured. Applying the unambiguous policy language, many courts hold that the duty to defend simply does not include a duty to fund the insured's affirmative claims. This approach is also the view of several leading commentators. See Lee R. Russ and Thomas F. Segalla, Couch on Insurance, ' 205:84 (The “duty to defend has been deemed not to include responsibility for costs incurred by the insured in pursuing a counterclaim in the underlying litigation”); Barry R. Ostrager, Handbook on Insurance Coverage Disputes, ' 5.02[e] (“[I]nsurers are sometimes requested by their insureds to pay the cost of prosecuting cross-claims or counterclaims ' insurers are not required to prosecute such claims.”)

Courts holding that an insurer is obligated to “defend” an insured's affirmative claim on grounds that it is “factually intertwined with” a suit against the insured and “reasonable and necessary to limit or defeat liability,” have produced unpredictable results. Often, courts do not fully explain how the insured's claims are factually intertwined with and necessary to the defense. Sometimes, the court's decision turns on whether the insurer breached a duty to defend in the underlying litigation, which should not be part of the analysis. Applying the plain language of a policy to preclude coverage for affirmative claims is the better approach and will yield more consistent results.

Anne E. Briard is an Associate and Seth A. Schmeeckle is a Shareholder with Lugenbuhl, Wheaton, Peck, Rankin and Hubbard, in New Orleans. The views presented in this article are not necessarily the views of the firm or its clients.