Opinion ID: 1250563
Heading Depth: 1
Heading Rank: 6

Heading: Duty to Defend and Pay Defense Costs Under the American Excess Policy

Text: In response to Asten's request for a declaratory judgment regarding American's duty to defend or pay defense costs under its 1982 excess policy, the District Court pointed to the following provisions of that policy: The Company shall not ... be called upon to assume charge of the settlement or defense of any claims made or suits brought, or proceedings instituted against the Insured, but shall have the right and opportunity to be associated with the Insured in the defense and trial of any such claims, suits or proceedings relative to any occurrence which, in the opinion of the Company may create liability on the part of the Company under the terms of the policy. If the Company avails itself of such right and opportunity, the Insured and the Company shall cooperate in all respects so as to effect a final determination of the claim or claims.    Loss expenses and legal expenses, including court costs and interest, if any, which may be incurred by the Insured with the consent of the Company in the adjustment or defense of claims, suits or proceedings shall be borne by the Company and the Insured in the proportion that each party's share of loss bears to the total amount of said loss. Loss expense hereunder shall not include salaries and expense of the Insured's employees incurred in investigation, adjustment and litigation. AVI0002. Based on these provisions, the District Court concluded as follows: According to the unambiguous terms of [the] 1982 American Express [ sic ] Policy, American is not obligated to provide or fund a defense for Asten. American is only required to reimburse Asten for any defense expenses it incurs with American's consent. AI0156 (emphasis in original). Asten does not maintain that the above quoted language is ambiguous. Rather, it insists (1) that a follow form clause of the policy incorporates a duty to defend clause from an underlying policy, and (2) that implied by law in every consent to defend clause of this kind is a prohibition against unreasonable refusals to defend. Accordingly, Asten agrees with the District Court that this issue is to be resolved as a matter of law from the face of the documents. Thus, while Asten would have a right to have a jury determine this issue if there were material issues of fact to be resolved, the absence of a jury presents no problem in this context. [9] Asten insists that the 1982 American Excess Policy follows form to the 1982 American Umbrella Policy, and that it accordingly creates a duty to defend identical to that contained in the Umbrella Policy. The follow-form clause states in relevant part: The insurance afforded by this policy is subject to the same warranties, terms (including the terms used to describe the application of the limits of liability), conditions and exclusions as are contained in the underlying insurance ... except, unless otherwise specifically provided in this policy, any such warranties, terms, conditions or exclusions relating to premium, the obligation to investigate and defend, the amount and limits of liability, and any renewal agreement. AVI0002 (emphasis added). Interpreting the above language, the District Court determined that any `obligation to investigate or defend' which may be contained in the underlying 1982 American Umbrella Policy, to which the 1982 American Excess Policy follows form, [is] not incorporated into the 1982 American Excess Policy. AI107. The District Court's determination was based on a plain reading of the contractual language, which clearly carves out any obligation to defend. We find no error in the District Court's analysis and, accordingly, affirm its holding that no obligation to defend arises from the follow-form clause. We are likewise unconvinced by Asten's argument that every consent to defend clause contains by implication a prohibition against the unreasonable refusals to defend. The District Court noted that the American Excess Policy requires American to indemnify Asten for its ultimate net loss in excess of its underlying insurance, and that the policy defines ultimate net loss to include all sums actually paid or which the Insured is legally obligated to pay as damages in settlement of satisfaction of claims or suits for which insurance is afforded by this policy.... AI0105. Notably, defense costs are not included within this language. In determining that American had no obligation to defend, the District Court stated the unremarkable proposition that the duty to defend is contractual and if there is no contract to defend than [ sic ] there is no duty to defend. AI156 (citing 7C Appleman, Insurance Law and Practice § 4682 (1979 & Supp.1995); City of Burlington v. Arthur J. Gallagher & Co., 944 F.Supp. 333, 335-36 (D.Vt.1996)). We agree with the District Court's determination that American has no obligation to defend Asten in the absence of contractual language creating such an obligation. See also Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1219 (2d Cir. 1995) ([T]he insurer has no duty to defend or pay costs, but only has the right to do so at its own election. The insurer can permit the insured's defense to proceed and take the chance that the insured might exceed the limits of other liability coverage, or participate in the defense and agree to pay all or part of the defense costs incurred.); City of Burlington, 944 F.Supp. at 337 (Courts across the country have construed policy language requiring the consent of the insurer as creating an option, but not a duty, to defend.); Crown Ctr. Redev. Corp. v. Occidental Fire & Casualty Co., 716 S.W.2d 348, 357 (Mo.Ct. App.1986) (interpreting the same language at issue here and holding the obligation of American to pay defense costs is neither fixed nor absolute ... the entire obligation is conditioned on the consent of American and not simply the procedure by which the obligation is carried out.). In asserting that the consent to defend clause contains an implied prohibition against unreasonable refusals, Asten cites to consent to settlement cases. Courts have generally required insurers to consent to reasonable settlements because of the potential for a conflict of interest between the insured party and the insurer, which could result in insurers wrongfully denying insured parties access to coverage they have paid for and are entitled to receive. See 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 203.13 (3d ed.2005) (While the insured may prefer to settle within policy limits and avoid the risk of trial, the insurer may have an incentive to reject offers at or close to policy limits and proceed to trial with the hope of a lower judgement or a verdict in its favor.); Nationwide Mut. Ins. Co. v. Lehman, 743 A.2d 933, 941 (1999) (an insured party is legitimately entitled to claim benefits from the insurer unless the insurer comes forward and proves that the settlement prejudiced its interests). We find no similar conflict of interest in the context of defending insurance claims, and we decline to read into the contractual language a prohibition against unreasonable refusals where none exists.