Opinion ID: 2610859
Heading Depth: 2
Heading Rank: 2

Heading: progressive's independent duty to defend.

Text: The duty of an insurer to defend arises from the allegations on the face of the complaint or from the known but unpleaded factual basis of the claim that brings it arguably within the scope of coverage. Albuquerque Gravel Prods. Co. v. American Employers Ins. Co., 282 F.2d 218 (10th Cir.1960). The duty may arise at the beginning of litigation or at some later stage if the issues are changed so as to bring the dispute within the scope of policy coverage. Pendleton v. Pan Am. Fire & Casualty Co., 317 F.2d 96 (10th Cir.), cert. denied, 375 U.S. 905, 84 S.Ct. 196, 11 L.Ed.2d 145 (1963). It appears, therefore, that at some point in the litigation, because the alleged injuries to Michael fell within the scope of Wade's automobile insurance coverage, Progressive was obligated to defend the suit. Progressive, however, presents several alternative grounds upon which it argues that the district court's ruling should be upheld.
An insurer's duty to defend arises out of the nature of the allegations in the complaint. See Foundation Reserve Ins. Co. v. Mullenix, 97 N.M. 618, 642 P.2d 604 (1982). On its face, the Michael's complaint appeared to implicate the American General homeowner's coverage, and American General was obligated to defend. Progressive contends that, once American General discovered the true nature of the underlying allegations, it knew that it was not obligated to defend and continued in this matter as a volunteer. See Fireman's Fund Am. Ins. Cos. v. Phillips, Carter, Reister and Assocs., 89 N.M. 7, 546 P.2d 72 (Ct.App.) (subrogation generally not allowed when another's debts officiously paid), cert. denied, 89 N.M. 5, 546 P.2d 70 (1976). However, American General was obligated to deal with Wade as a fiduciary and was under a duty to pursue the case or settle in good faith. See Chavez v. Chenoweth, 89 N.M. 423, 553 P.2d 703 (Ct.App. 1976); Allstate Ins. Co. v. Auto Driveaway Co., 87 N.M. 77, 529 P.2d 303 (Ct.App. 1974). Even if American General had developed a belief that the injury was beyond the scope of its coverage, its duty to Wade and its status as already having begun representation precludes classification of the insurer as a volunteer. See Mullenix, 97 N.M. at 620, 642 P.2d at 606; Auto Driveaway, 87 N.M. at 78, 529 P.2d at 304; see also State Farm Fire & Casualty Co. v. Cooperative of Am. Physicians, Inc., 163 Cal. App.3d 199, 209 Cal. Rptr. 251 (1984) (defending insurer claiming noncoverage not a volunteer in settling because under duty to defend and settle based on allegations on face of complaint); Rooney v. Township of W. Orange, 200 N.J. Super. 201, 491 A.2d 23 (1985) (once demand made, insurer had duty to defend and was not volunteer). Progressive's own inaction in failing to provide a defense forced American General to continue its representation, and it cannot now hide behind its own misdeeds to force American General to bear the burden of the defense. We hold that American General was not acting as a volunteer. Its defense was required by law and its fiduciary obligations to the insured, and it is entitled to subrogation for the costs of defense and good faith, reasonable settlement.
Progressive maintains that American General failed to obtain a reservation of rights that would have notified Wade that the insurer was undertaking the defense yet reserving the right to deny coverage. This omission, Progressive maintains, is fatal to American General's subsequent attempt to deny coverage. It is true that a liability insurance carrier that assumes the defense in an action against its insured with knowledge of possible grounds for noncoverage and that does not reserve its right to later deny coverage is precluded from later asserting that no coverage exists. Pendleton, 317 F.2d at 99. [T]he insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert the defense of noncoverage. Id. American General undoubtedly lost its right to assert noncoverage against Wade by its failure to expressly reserve its rights. It is not, however, precluded from asserting subrogation against Progressive. The reason for the rule estopping the insurer from denying coverage without the reservation of rights is the presumptive potential of prejudice to the insured caused by the insurer's total control of the litigation, the insured's reliance on the insurer, and the insurer's fiduciary duty vis-a-vis the insured. Id. The rule does not operate to preclude a suit such as this whereby one insurer attempts to assert that another insurer provided primary coverage. Progressive simply was not, and could not have been, a party to a reservation of rights agreement between American General and Wade. Any omission on the part of American General in no way implicates Progressive; American General had no duty in this regard toward Progressive, and the reasons for the rule as articulated above indicate that a dispute between two insurers over coverage is not within the scope of the rule. [3]