The insurer's duty to defend: what triggers it and when it ends

Under a standard commercial general liability policy, the insurer has the right and the duty to defend any "suit" that seeks damages the policy potentially covers, even when the allegations are groundless, false or fraudulent. The duty is measured mostly by comparing the complaint to the policy, it is broader than the duty to pay a judgment, and in the ISO form the legal bills are paid on top of your limits until the limits are used up by payments of judgments or settlements.

That is the rule most buyers never read until they are served with a lawsuit. This guide explains what the language says, how courts decide whether the duty exists, and what to do in the first week.

What the CGL actually promises

In the ISO commercial general liability form (CG 00 01), the Coverage A insuring agreement gives the insurer "the right and duty to defend" the insured against any suit seeking damages for bodily injury or property damage to which the insurance applies. The same paragraph says the insurer has no duty to defend a suit seeking damages the policy does not cover, and that it may, at its discretion, investigate an occurrence and settle any claim or suit. Coverage B, personal and advertising injury, works the same way. For the three coverage parts in context, see Inside the CGL policy: Coverages A, B and C. Manuscript and carrier-specific forms vary, so read the edition on your policy.

Three phrases carry most of the weight.

• "Suit." The form defines it as a civil proceeding in which covered damages are alleged, including an arbitration or other alternative dispute resolution proceeding the insured submits to with the insurer's consent. A demand letter, a regulator's subpoena or an agency charge is usually not a "suit" under this definition, although the insurer may investigate and settle the claim voluntarily.
• "Right and duty." Because the insurer has the right as well as the duty, it controls the defense: it picks defense counsel, directs strategy and decides whether to settle. That control is the trade you make for not paying the lawyers.
• Exhaustion. The insurer's right and duty to defend ends when it has used up the applicable limit of insurance paying judgments or settlements under Coverages A or B, or medical expenses under Coverage C.

The cost of the defense sits in the Supplementary Payments section. Expenses the insurer incurs, which includes defense counsel's fees, are paid in addition to the limits and, in the ISO form, do not reduce them. The same section covers reasonable expenses you incur at the insurer's request, including lost earnings up to $250 a day under the current ISO wording, according to IRMI's commentary on the clause. That is not true of every liability policy, which is the subject of defense costs inside vs outside policy limits: why it matters.

What triggers the duty: the complaint against the policy

Most states apply some version of the "eight corners" or "complaint allegation" rule. The court lays the four corners of the complaint beside the four corners of the policy and asks whether the facts alleged, read generously, could fall within coverage. The facts matter, not the labels. A plaintiff cannot create coverage by calling an intentional act "negligence," and an insurer cannot avoid a defense by pointing to a legal theory the policy does not mention if the underlying facts are covered.

Two points follow from the standard.

1. Potential is enough. The duty extends past claims that are actually covered to those that are potentially covered. The California Supreme Court put it that way in Buss v. Superior Court (1997): the duty reaches claims that are merely potentially covered, but no further. Doubts are resolved in favor of the insured.
2. The insurer's own view of the facts usually does not count. In the majority approach, an insurer cannot refuse a defense because it believes the plaintiff is wrong, or because its investigation shows the loss falls outside the policy, if the complaint as written points to coverage.

States differ on what else a court may look at. Texas treats the eight-corners rule as the starting point, and in February 2022 its Supreme Court recognized a narrow exception in Monroe Guaranty Insurance Co. v. BITCO General Insurance Corp. Extrinsic evidence may be considered only where the pleading has a gap on a coverage fact, the evidence goes solely to coverage and does not overlap with the merits of the liability case, it does not contradict the pleading, and it conclusively establishes the coverage fact, as Haynes Boone summarized. Other states permit broader inquiry. Maryland, for example, lets an insured use facts outside the complaint to show a potential for coverage, according to FC&S. If your lawsuit is in Texas or California, or anywhere with a different rule, the answer to "does my insurer have to defend?" may turn on state law that a coverage lawyer needs to apply.

Defend versus indemnify

So an insurer can owe a defense for years and then owe nothing, because the facts that come out show an exclusion applies. The reverse is rare: if the allegations show no potential for coverage, there is normally no duty to indemnify either.

Suits with covered and uncovered claims

Real complaints are mixed. A hypothetical example: a 15-employee landscaping company is sued by a neighbor. Count one alleges the crew negligently threw a rock from a mower, breaking a window and injuring the neighbor's child. Count two alleges intentional trespass and seeks punitive damages. Count three seeks a refund for work the neighbor says was never finished.

Count one is potentially covered bodily injury and property damage. Counts two and three probably are not: an intentional act and a purely contractual dispute raise exclusion and "occurrence" issues. In most states, because one claim is potentially covered, the insurer must defend the entire suit, not a third of it. The insurer will often do so while sending a reservation of rights letter saying it may later decline to pay any judgment on the uncovered counts. In California, Buss lets the insurer recoup defense costs it can show were allocable solely to claims that were never even potentially covered, and the insurer carries the burden of proving that allocation. Not every state allows reimbursement. For the letter itself, read reservation of rights letters: what they mean and how to respond; when the reservation creates a conflict between you and the insurer, see Independent counsel and Cumis counsel: when your insurer must pay for your own lawyer.

When the insurer refuses

An insurer that declines a defense takes a risk. According to FC&S, a carrier that breaches the duty to defend is generally bound by any settlement or judgment entered against the insured, and the insured may recover defense costs it paid and other damages caused by the breach, with the details varying by state. The more cautious route for the insurer is to defend under a reservation and file a declaratory judgment action, discussed in coverage litigation and declaratory judgment actions: when you and your insurer end up in court. A refusal that is unreasonable can also support a claim for insurer bad faith: what it is and the remedies.

None of that helps if you ignore the lawsuit. A defendant who does not answer risks a default judgment, so if the insurer denies, hire counsel to respond while the coverage dispute is sorted out, and keep the invoices.

When the duty ends

• Exhaustion. Payment of the limit in judgments or settlements ends the duty under the ISO wording. Courts read that language literally, but disputes arise when a limit is spent settling some claims while others remain. If a large exposure could exhaust your limit, ask your broker whether an umbrella or excess policy defends once the primary is exhausted.
• Dismissal of the covered claims. FC&S notes the duty ends if the potentially covered allegations or the covered defendants are dismissed from the case.
• A court ruling. A declaratory judgment that no potential for coverage exists lets the insurer stop defending.
• Policy period and cancellation. The duty attaches to a suit alleging injury or damage during the policy period, so cancelling a CGL later does not end a defense already owed.

Other policies work differently. Many D&O and some professional policies place the duty to defend on you and have the insurer advance or reimburse defense costs, usually inside the limit, and often with consent-to-settle terms such as the the hammer clause: what happens if you refuse a settlement.

What to do in the first week

1. Read the summons for the response deadline and calendar it. Courts set short deadlines, so a few weeks is typical, and the date differs by court.
2. Send the papers to your broker and your insurer the same day, in writing, and keep proof of delivery. The policy requires notice as soon as practicable, and late notice is one of the most common ways a defense is lost; see notice of claim and late notice: why timing matters.
3. Tender to every policy that might respond: the CGL, the umbrella, any professional or employment policy, and the insurers of other parties whose contracts name you as an additional insured. tendering a claim to another party's insurer explains the sequence.
4. Do not pay, admit fault or settle without consent. The conditions say you may not voluntarily make a payment, assume an obligation or incur expense without the insurer's consent, except at your own cost. Fees you run up before you tender are commonly disputed.
5. Cooperate with appointed counsel, and read the insurer's first response carefully: acceptance, acceptance with a reservation, or denial.
6. Escalate a denial in writing, ask for the specific policy language relied on, and consult a coverage attorney. A complaint to the state insurance department is another option, covered in how to complain to your state insurance department; the broader sequence is in when your business is sued: working with your insurer.

This guide is general information, not legal advice. The duty to defend is a creature of state law and policy wording, and the details matter in a live lawsuit.

Key takeaways

• The ISO CGL gives the insurer the right and the duty to defend suits that are potentially covered, and the potential is judged mainly from the complaint, so allegations drive the outcome.
• The duty to defend is broader than the duty to indemnify, and it usually continues across the whole suit if any one claim is potentially covered.
• Defense costs are paid outside the limits in the ISO CGL, but the duty ends when the limit is exhausted by judgments or settlements, and many other liability policies work differently.
• Tender every suit immediately to every policy that might apply, and do not pay or settle on your own.
• The trigger, extrinsic evidence rules, reimbursement and the penalties for wrongful refusal vary by state.