Border Disputes

Hardly any border exists without some sort of dispute. Take the border between the U.S. and Canada, a paradigm of a peaceful, long-established existence. While there may not be many arguments over where Detroit ends and Windsor begins, disputes still exist. For example, both the U.S. and Canada lay claim to Machias Seal Island, which is essentially 20 acres of rocks resting between the Gulf of Maine and the Bay of Fundy. The dispute has gone unresolved for nearly 200 years.

In insurance law, if there is a border as long-established as the one between the U.S. and Canada, it is the border between the two types of coverage provided by liability policies: defense coverage and indemnity coverage. But even along this well-established border, disputes have recently begun to develop.

The Defense-Indemnity Border

In general, the consequences of being on one side or the other of the defense-indemnity border are clearly defined. In nearly every jurisdiction, the defense coverage is the broader of the two, and is established by reference solely to allegations in the underlying pleadings, which, if true, would obligate the insurer to indemnify the policyholder. Generally, this is called the pleadings test. Indemnity coverage, in contrast, is established by the outcome of the underlying litigation, either by adjudication or settlement.

For decades, excess insurers treated their obligation to pay defense costs as within the defense coverage territory ' that is, either by judgment or agreement, these insurers have paid these costs based on some version of the pleadings test. Relatively recently, though, some excess insurers have attempted to redraw the map, arguing that their duty to pay defense costs falls on the indemnity side of the border, or in some cases, does not exist at all.

The novelty of these arguments is one of many reasons they should be discounted. The dispute over the defense-indemnity border, after all, is not nearly of the same vintage as the 200-year debate over Machias Seal Island. Rather, this recent spate of arguments is more akin to Canada suddenly claiming ownership over all of Maine.

Nonetheless, at least some courts have adopted the excess insurers' new interpretations of old boundaries, often without the benefit of policyholder arguments to the contrary. These courts have held that an excess insurer has no obligation to pay defense costs unless it also has an obligation to indemnify the policyholder, effectively conflating or collapsing the two types of coverage. Going even further, other courts have held that the defense obligation exists at the sole option of the excess insurer where its defense coverage is subject to a consent provision.

These holdings lead to odd results. For one, treating an obligation to pay defense costs as coextensive with the indemnity obligation creates a perverse incentive for policyholders to lose their case, whether by conceding liability or otherwise. Under the excess insurers' interpretation of their defense obligation, the only way to get payment for defense costs is to be found ultimately liable in the underlying litigation. And since excess insurers would only pay for unsuccessful defenses, policyholders would be encouraged to defend unsuccessfully, lest they forfeit their coverage for defense costs. This type of result turns fundamental tenets of insurance on their head, destroying the congruency of interest that ought to exist between a policyholder and its insurer and incentivizing insurers to deny otherwise valid claims for a defense if the insurer believes that the policyholder is likely to succeed on the merits.

Further, if conflating the defense and indemnity obligations encourages policyholders to mount only feeble defenses, then treating the defense obligation as purely optional encourages them to mount no defense at all. If the insurer can just refuse to pay defense costs for any reason whatsoever, why would a policyholder ever incur expenses to defend against liability that the insurer is ultimately going to have to pay anyway?

Given the perverse incentives created by re-drawing the defense-indemnity borders for excess insurers, it is best to leave them where they are. And, indeed, many courts have done just that, treating every defense obligation, no matter how it is expressed, as subject to the relevant jurisdiction's pleadings test. This is the better approach, since, as discussed below, it aligns the incentives of policyholders and excess insurers to reach the same goal ' to reduce the policyholder's ultimate liability.

Excess Policies That Pay Ultimate Net Loss

Many excess policies define “ultimate net loss” to include defense costs that are “paid as a consequence of any occurrence covered hereunder.” This definition was first introduced in the 1950s, and for years, excess insurers did not dispute that their obligation to pay defense costs was governed, in general, by the pleadings test. Starting in the 1990s, however, and with more force recently, excess insurers began arguing that they had no obligation to pay defense costs unless there was an “occurrence covered hereunder.” That is, the excess insurers argued that they only had an obligation to pay defense costs if they also had an obligation to indemnify the policyholder.

This argument was adopted by the court in Celotex Corp. v. AIU Ins. Co., 152 B.R. 661, 666 (Bankr.M.D.Fla.1993). In Celotex , the court held that the “clear and unambiguous” language of the policy required the excess insurer to indemnify the insured for any “covered occurrence or covered hazard.” Id. The court reasoned that if the insured “is not liable on the underlying claim, there has been no occurrence covered under the policy” and therefore the excess insurer was not required to indemnify the insured for anything ' including defense costs. Id. See also Northland Cas. Co. v. HBE Corp., 160 F.Supp.2d 1348, 1364 (M.D.Fla.2001) (“Northland is under no obligation to pay HBE's defense costs until such time as HBE demonstrates that the resolution of the underlying lawsuits brings those matters within the scope of coverage under the policy.”); Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1219 (2d Cir. 1995) (“The policies do not contemplate unconditional payment of defense costs for potentially covered claims, but only payment of costs if indemnification is required.”); Sterling Heights v. United Natl. Ins. Co., No. 03-72773, 2004 U.S. Dist. LEXIS 1869, 42-43 (E.D.Mich. Feb. 11, 2004) (“[B]ecause United's policy provides for indemnification of defense costs paid as a consequence of a covered occurrence, the duty to indemnify is triggered once coverage is established.”).

The Celotex court recognized, though, that its holding created an “incongruous result.” Specifically, the court noted that, if the defense and indemnity obligations are coextensive, “it would be more cost effective for [the policyholder] to lose or settle all underlying litigation because defense costs would be included as part of ultimate net loss, whereas if [the policyholder] prevailed on the underlying claim, defense costs would not be covered by the ultimate net loss provision.” Id.

This result is not just “incongruous,” as the Celotex court observed; it is absurd, as it would give policyholders incentive to lose underlying cases filed against them, even completely meritless cases, to preserve their defense-cost coverage. Such a result would not benefit anyone ' policyholders, their insurers, or the justice system.

The better approach, accordingly, is to preserve the distinction between defense and indemnity coverage by applying the pleadings test to the insurer's obligation to pay defense costs, no matter how it is phrased. This is the approach adopted by the court in Am. Chem. Soc. v. Leadscope, Inc., 10th Dist. Franklin No. 04AP-305, 2005-Ohio-2557.

In Leadscope , the court held that insurers' defense obligations are the same, no matter how those obligations are expressed in their policies. The insurer in Leadscope did not have a duty to “assume the defense” of its policyholder under the terms of the relevant insurance contract. 2005-Ohio-2557, at ' 10. Nonetheless, the insurer did have a duty to pay defense costs. Id. at ' 11. At issue in Leadscope , among other things, was whether the duty to pay defense costs was governed by the “pleadings test.” The court held that the pleadings test did apply, finding no relevant distinction between the duty to assume the defense of the policyholder and the duty to pay for defense costs. Id. at ” 15-16.

The rule expressed in Leadscope ' that differing policy expressions of the defense obligation are treated as practically equivalent ' has been adopted by other courts as well. See Fed. Ins. Co. v. Sammons Fin. Group, Inc., 595 F.Supp.2d 962, 976 (S.D.Iowa 2009) (stating with approval that courts that have addressed the issue conclude “that the duty [to pay defense costs] arises if the allegations in the complaint could, if proven, give rise to a duty to indemnify”); Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161, 1170 (8th Cir.2011) (holding that, under Iowa law, even where a policy expressly disclaims a duty to defend, the insurer's duty to reimburse defense costs is determined by reference to the underlying allegations); Hurley v. Columbia Cas. Co., 976 F.Supp. 268, 275 (D.Del.1997) (noting that the insurer's “agreement to advance defense costs must be similarly interpreted” to breadth of duty to defend, as “it would be an anomaly to require [insurer] to advance defense costs only for meritorious claims.”); Basic Energy Servs. v. Liberty Mut. Ins. Co., 655 F.Supp.2d 666, 673 (W.D.Tex.2009) (holding that, under Texas law, a duty to pay defense costs was determined by examining the underlying pleadings because a “reimbursement of defense costs obligation is most analogous to a duty to defend, even when the duty to defend is explicitly disclaimed”).

These cases take the better approach to an excess insurer's defense obligation, since they create a congruency of interest between the parties. When the excess insurer's obligation to pay defense costs is governed by the pleadings test, the policyholder has an incentive to mount a vigorous defense, increasing the likelihood that it will avoid or reduce ultimate liability. This is the best result for both policyholder and insurer.

Excess Policies with Consent and Allocation Provisions

Since the 1970s, some excess insurers have included provisions in their policies relating to insurer “consent” and the allocation of defense costs between the insurer and policyholder. A typical provision provides as follows:

Expenses. Loss and legal expenses incurred by the insured with the consent of the company in the investigation or defense of claims, including court costs and interest, shall be borne by both the company and the insured in the proportion that each party's share of the loss bears to the total amount of such loss. ' Expenses thus paid by the company shall be paid in addition to the limit of liability. '

Like the excess policies discussed herein, these policies generally obligate the insurers to pay “ultimate net loss,” or its functional equivalent, which is often defined in such a way to include the payment of defense costs ' i.e., the policy expressly defines “ultimate net loss” to include defense costs, or the definition of “ultimate net loss” excludes defense costs only where they are likewise not covered by the underlying policy. Thus, the analysis of whether the insurers pay defense costs is the same as the policies discussed in Section II. Policies with consent and allocation terms, however, also contain provisions like the one set forth above which describe how defense costs shall be paid ' i.e. , costs incurred with the insurer's consent will be allocated between the insurer and policyholder as described by the specific terms of the applicable policy.

Experienced coverage practitioners know that insurers have been paying and settling claims for defense cost coverage under policies with consent and allocation provisions for decades. More recently, certain insurers have asserted that their defense obligations are conditioned upon the policyholder having sought and obtained the insurers' consent to the defense costs the policyholder incurred. These insurers argue that the pleadings test, adopted by virtually every jurisdiction in the nation, is inapplicable to policies which contain consent and allocation language, relying on cases such as AstenJohnson, Inc. v. Columbia Cas. Co., 562 F.3d 213 (3d Cir.2009), among others. Other courts, however, have held that the pleadings test applies to the insurers' obligations to pay defense costs, regardless of how they are phrased, and regardless of whether they contain consent and allocation provisions. See, e.g., Leadscope, 2005-Ohio-2557, at ' 19.

The better approach holds that consent provisions cannot reasonably be construed to mean that the policies give the insurers the right, but not the obligation, to participate in the payment of a policyholder's defense. This is apparent from the express language of provision itself which describes not only insurer consent, but also allocation. If the insurers could, at their sole election, consent or refuse to consent to the policyholder's defense costs, why would a provision allocating those defense costs between the policyholder and the insurer even be necessary? A party to an agreement always has the ability to voluntarily benefit the other party. It need not expressly reserve in the contract the right to act gratuitously. Further, if the payment of defense costs were truly discretionary, no allocation mechanism would be needed because the insurer could simply pay the portion of the defense costs it wanted to pay in the first instance.

The consent and allocation provisions are illogical if they are read to describe whether a defense obligation exists. They can be reasonably construed only to describe how the insurer will perform its obligation to pay defense costs once that obligation arises under applicable state law. Specifically, once the insurer has acknowledged its obligation to pay defense costs, the consent provisions permit the insurer to object (i.e., withhold consent) to particular costs as they are incurred. Consent provisions, however, can only be reasonably interpreted to permit an insurer to object to certain expenses, not to permit the insurer to categorically object to all expenses.

Conclusion

The border dispute between the U.S. and Canada is little noticed by the local population of Machias Seal Island, which consists of two Canadian lighthouse keepers, a number of seals, and flocks of sea birds, including the Atlantic Puffin, whose bright colored beak, white front, and black back make it look like the shared ancestor of penguins and toucans. But, while it may make little difference to an Atlantic Puffin whether it roosts on rocks belonging to the U.S. or Canada, being on one side or the other of the defense-indemnity border is of real consequence.

For decades, this border remained largely undisputed, at least tacitly. It should remain undisturbed. The defense obligations of excess insurers should not be treated as coextensive with their indemnity obligations, nor should they be treated as purely optional. Rather, courts should continue to treat every defense obligation, no matter how phrased, as subject to the relevant jurisdiction's version of the pleadings test. This approach encourages policyholders to mount a vigorous defense to reduce their ultimate liability, which is the best result for both policyholders and excess insurers.

Good borders, like fences, make for good neighbors. And the best way to make good neighbors of policyholders and excess insurers is to leave the defense-indemnity border where it is.

Amanda M. Leffler, an OSBA Certified Specialist in Insurance Coverage Law, and Lucas M. Blower are shareholders in the Akron, OH, office of Brouse McDowell, where they regularly represent policyholders in connection with insurance coverage disputes.

Hardly any border exists without some sort of dispute. Take the border between the U.S. and Canada, a paradigm of a peaceful, long-established existence. While there may not be many arguments over where Detroit ends and Windsor begins, disputes still exist. For example, both the U.S. and Canada lay claim to Machias Seal Island, which is essentially 20 acres of rocks resting between the Gulf of Maine and the Bay of Fundy. The dispute has gone unresolved for nearly 200 years.

In insurance law, if there is a border as long-established as the one between the U.S. and Canada, it is the border between the two types of coverage provided by liability policies: defense coverage and indemnity coverage. But even along this well-established border, disputes have recently begun to develop.

The Defense-Indemnity Border

In general, the consequences of being on one side or the other of the defense-indemnity border are clearly defined. In nearly every jurisdiction, the defense coverage is the broader of the two, and is established by reference solely to allegations in the underlying pleadings, which, if true, would obligate the insurer to indemnify the policyholder. Generally, this is called the pleadings test. Indemnity coverage, in contrast, is established by the outcome of the underlying litigation, either by adjudication or settlement.

For decades, excess insurers treated their obligation to pay defense costs as within the defense coverage territory ' that is, either by judgment or agreement, these insurers have paid these costs based on some version of the pleadings test. Relatively recently, though, some excess insurers have attempted to redraw the map, arguing that their duty to pay defense costs falls on the indemnity side of the border, or in some cases, does not exist at all.

The novelty of these arguments is one of many reasons they should be discounted. The dispute over the defense-indemnity border, after all, is not nearly of the same vintage as the 200-year debate over Machias Seal Island. Rather, this recent spate of arguments is more akin to Canada suddenly claiming ownership over all of Maine.

Nonetheless, at least some courts have adopted the excess insurers' new interpretations of old boundaries, often without the benefit of policyholder arguments to the contrary. These courts have held that an excess insurer has no obligation to pay defense costs unless it also has an obligation to indemnify the policyholder, effectively conflating or collapsing the two types of coverage. Going even further, other courts have held that the defense obligation exists at the sole option of the excess insurer where its defense coverage is subject to a consent provision.

These holdings lead to odd results. For one, treating an obligation to pay defense costs as coextensive with the indemnity obligation creates a perverse incentive for policyholders to lose their case, whether by conceding liability or otherwise. Under the excess insurers' interpretation of their defense obligation, the only way to get payment for defense costs is to be found ultimately liable in the underlying litigation. And since excess insurers would only pay for unsuccessful defenses, policyholders would be encouraged to defend unsuccessfully, lest they forfeit their coverage for defense costs. This type of result turns fundamental tenets of insurance on their head, destroying the congruency of interest that ought to exist between a policyholder and its insurer and incentivizing insurers to deny otherwise valid claims for a defense if the insurer believes that the policyholder is likely to succeed on the merits.

Further, if conflating the defense and indemnity obligations encourages policyholders to mount only feeble defenses, then treating the defense obligation as purely optional encourages them to mount no defense at all. If the insurer can just refuse to pay defense costs for any reason whatsoever, why would a policyholder ever incur expenses to defend against liability that the insurer is ultimately going to have to pay anyway?

Given the perverse incentives created by re-drawing the defense-indemnity borders for excess insurers, it is best to leave them where they are. And, indeed, many courts have done just that, treating every defense obligation, no matter how it is expressed, as subject to the relevant jurisdiction's pleadings test. This is the better approach, since, as discussed below, it aligns the incentives of policyholders and excess insurers to reach the same goal ' to reduce the policyholder's ultimate liability.

Excess Policies That Pay Ultimate Net Loss

Many excess policies define “ultimate net loss” to include defense costs that are “paid as a consequence of any occurrence covered hereunder.” This definition was first introduced in the 1950s, and for years, excess insurers did not dispute that their obligation to pay defense costs was governed, in general, by the pleadings test. Starting in the 1990s, however, and with more force recently, excess insurers began arguing that they had no obligation to pay defense costs unless there was an “occurrence covered hereunder.” That is, the excess insurers argued that they only had an obligation to pay defense costs if they also had an obligation to indemnify the policyholder.

This argument was adopted by the court in Celotex Corp. v. AIU Ins. Co. , 152 B.R. 661, 666 (Bankr.M.D.Fla.1993). In Celotex , the court held that the “clear and unambiguous” language of the policy required the excess insurer to indemnify the insured for any “covered occurrence or covered hazard.” Id. The court reasoned that if the insured “is not liable on the underlying claim, there has been no occurrence covered under the policy” and therefore the excess insurer was not required to indemnify the insured for anything ' including defense costs. Id. See also Northland Cas. Co. v. HBE Corp. , 160 F.Supp.2d 1348, 1364 (M.D.Fla.2001) (“Northland is under no obligation to pay HBE's defense costs until such time as HBE demonstrates that the resolution of the underlying lawsuits brings those matters within the scope of coverage under the policy.”); Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp. , 73 F.3d 1178, 1219 (2d Cir. 1995) (“The policies do not contemplate unconditional payment of defense costs for potentially covered claims, but only payment of costs if indemnification is required.”); Sterling Heights v. United Natl. Ins. Co., No. 03-72773, 2004 U.S. Dist. LEXIS 1869, 42-43 (E.D.Mich. Feb. 11, 2004) (“[B]ecause United's policy provides for indemnification of defense costs paid as a consequence of a covered occurrence, the duty to indemnify is triggered once coverage is established.”).

The Celotex court recognized, though, that its holding created an “incongruous result.” Specifically, the court noted that, if the defense and indemnity obligations are coextensive, “it would be more cost effective for [the policyholder] to lose or settle all underlying litigation because defense costs would be included as part of ultimate net loss, whereas if [the policyholder] prevailed on the underlying claim, defense costs would not be covered by the ultimate net loss provision.” Id.

This result is not just “incongruous,” as the Celotex court observed; it is absurd, as it would give policyholders incentive to lose underlying cases filed against them, even completely meritless cases, to preserve their defense-cost coverage. Such a result would not benefit anyone ' policyholders, their insurers, or the justice system.

The better approach, accordingly, is to preserve the distinction between defense and indemnity coverage by applying the pleadings test to the insurer's obligation to pay defense costs, no matter how it is phrased. This is the approach adopted by the court in Am. Chem. Soc. v. Leadscope, Inc., 10th Dist. Franklin No. 04AP-305, 2005-Ohio-2557.

In Leadscope , the court held that insurers' defense obligations are the same, no matter how those obligations are expressed in their policies. The insurer in Leadscope did not have a duty to “assume the defense” of its policyholder under the terms of the relevant insurance contract. 2005-Ohio-2557, at ' 10. Nonetheless, the insurer did have a duty to pay defense costs. Id. at ' 11. At issue in Leadscope , among other things, was whether the duty to pay defense costs was governed by the “pleadings test.” The court held that the pleadings test did apply, finding no relevant distinction between the duty to assume the defense of the policyholder and the duty to pay for defense costs. Id. at ” 15-16.

The rule expressed in Leadscope ' that differing policy expressions of the defense obligation are treated as practically equivalent ' has been adopted by other courts as well. See Fed. Ins. Co. v. Sammons Fin. Group, Inc. , 595 F.Supp.2d 962, 976 (S.D.Iowa 2009) (stating with approval that courts that have addressed the issue conclude “that the duty [to pay defense costs] arises if the allegations in the complaint could, if proven, give rise to a duty to indemnify”); Liberty Mut. Ins. Co. v. Pella Corp. , 650 F.3d 1161, 1170 (8th Cir.2011) (holding that, under Iowa law, even where a policy expressly disclaims a duty to defend, the insurer's duty to reimburse defense costs is determined by reference to the underlying allegations); Hurley v. Columbia Cas. Co. , 976 F.Supp. 268, 275 (D.Del.1997) (noting that the insurer's “agreement to advance defense costs must be similarly interpreted” to breadth of duty to defend, as “it would be an anomaly to require [insurer] to advance defense costs only for meritorious claims.”); Basic Energy Servs. v. Liberty Mut. Ins. Co. , 655 F.Supp.2d 666, 673 (W.D.Tex.2009) (holding that, under Texas law, a duty to pay defense costs was determined by examining the underlying pleadings because a “reimbursement of defense costs obligation is most analogous to a duty to defend, even when the duty to defend is explicitly disclaimed”).

These cases take the better approach to an excess insurer's defense obligation, since they create a congruency of interest between the parties. When the excess insurer's obligation to pay defense costs is governed by the pleadings test, the policyholder has an incentive to mount a vigorous defense, increasing the likelihood that it will avoid or reduce ultimate liability. This is the best result for both policyholder and insurer.

Excess Policies with Consent and Allocation Provisions

Since the 1970s, some excess insurers have included provisions in their policies relating to insurer “consent” and the allocation of defense costs between the insurer and policyholder. A typical provision provides as follows:

Expenses. Loss and legal expenses incurred by the insured with the consent of the company in the investigation or defense of claims, including court costs and interest, shall be borne by both the company and the insured in the proportion that each party's share of the loss bears to the total amount of such loss. ' Expenses thus paid by the company shall be paid in addition to the limit of liability. '

Like the excess policies discussed herein, these policies generally obligate the insurers to pay “ultimate net loss,” or its functional equivalent, which is often defined in such a way to include the payment of defense costs ' i.e., the policy expressly defines “ultimate net loss” to include defense costs, or the definition of “ultimate net loss” excludes defense costs only where they are likewise not covered by the underlying policy. Thus, the analysis of whether the insurers pay defense costs is the same as the policies discussed in Section II. Policies with consent and allocation terms, however, also contain provisions like the one set forth above which describe how defense costs shall be paid ' i.e. , costs incurred with the insurer's consent will be allocated between the insurer and policyholder as described by the specific terms of the applicable policy.

Experienced coverage practitioners know that insurers have been paying and settling claims for defense cost coverage under policies with consent and allocation provisions for decades. More recently, certain insurers have asserted that their defense obligations are conditioned upon the policyholder having sought and obtained the insurers' consent to the defense costs the policyholder incurred. These insurers argue that the pleadings test, adopted by virtually every jurisdiction in the nation, is inapplicable to policies which contain consent and allocation language, relying on cases such as AstenJohnson, Inc. v. Columbia Cas. Co. , 562 F.3d 213 (3d Cir.2009), among others. Other courts, however, have held that the pleadings test applies to the insurers' obligations to pay defense costs, regardless of how they are phrased, and regardless of whether they contain consent and allocation provisions. See, e.g., Leadscope, 2005-Ohio-2557, at ' 19.

The better approach holds that consent provisions cannot reasonably be construed to mean that the policies give the insurers the right, but not the obligation, to participate in the payment of a policyholder's defense. This is apparent from the express language of provision itself which describes not only insurer consent, but also allocation. If the insurers could, at their sole election, consent or refuse to consent to the policyholder's defense costs, why would a provision allocating those defense costs between the policyholder and the insurer even be necessary? A party to an agreement always has the ability to voluntarily benefit the other party. It need not expressly reserve in the contract the right to act gratuitously. Further, if the payment of defense costs were truly discretionary, no allocation mechanism would be needed because the insurer could simply pay the portion of the defense costs it wanted to pay in the first instance.

The consent and allocation provisions are illogical if they are read to describe whether a defense obligation exists. They can be reasonably construed only to describe how the insurer will perform its obligation to pay defense costs once that obligation arises under applicable state law. Specifically, once the insurer has acknowledged its obligation to pay defense costs, the consent provisions permit the insurer to object (i.e., withhold consent) to particular costs as they are incurred. Consent provisions, however, can only be reasonably interpreted to permit an insurer to object to certain expenses, not to permit the insurer to categorically object to all expenses.

Conclusion

The border dispute between the U.S. and Canada is little noticed by the local population of Machias Seal Island, which consists of two Canadian lighthouse keepers, a number of seals, and flocks of sea birds, including the Atlantic Puffin, whose bright colored beak, white front, and black back make it look like the shared ancestor of penguins and toucans. But, while it may make little difference to an Atlantic Puffin whether it roosts on rocks belonging to the U.S. or Canada, being on one side or the other of the defense-indemnity border is of real consequence.

For decades, this border remained largely undisputed, at least tacitly. It should remain undisturbed. The defense obligations of excess insurers should not be treated as coextensive with their indemnity obligations, nor should they be treated as purely optional. Rather, courts should continue to treat every defense obligation, no matter how phrased, as subject to the relevant jurisdiction's version of the pleadings test. This approach encourages policyholders to mount a vigorous defense to reduce their ultimate liability, which is the best result for both policyholders and excess insurers.

Good borders, like fences, make for good neighbors. And the best way to make good neighbors of policyholders and excess insurers is to leave the defense-indemnity border where it is.

Amanda M. Leffler, an OSBA Certified Specialist in Insurance Coverage Law, and Lucas M. Blower are shareholders in the Akron, OH, office of Brouse McDowell, where they regularly represent policyholders in connection with insurance coverage disputes.