Opinion ID: 520665
Heading Depth: 3
Heading Rank: 1

Heading: Duty to Defend v. Duty to Pay Legal Expenses

Text: 22 First State contends that a requirement of payment of all legal costs as incurred amounts to the imposition of a duty to defend. The district court did, in the first order, conclude that First State had a duty to defend. We disagree with that conclusion, and believe there is no duty to defend under the terms of the First State policy. There is no language in the policy stating that First State will defend any claims. A policy with a duty to defend typically contains a clause that provides that the insurer chooses the attorney and controls the strategy of the litigation, a valuable right to protect the insurer's own interests. This clause is not present in the First State policy. Instead, the First State policy covers legal expenses as a loss item. Directors and officers liability policies generally do not contain a duty to defend. See Comment, Practical Aspects of Directors' and Officers' Liability Insurance--Allocating and Advancing Legal Fees and the Duty to Defend, 32 UCLA L.Rev. 690, 701-12 (1985). 23 The absence of a duty to defend, however, is crucial neither to the district court's decision nor to ours. The obligation actually enforced by the district court's decision was a duty, under the policy, to pay defense expenses as incurred. That ruling is clearly supportable, and we agree with it. 24 In Okada v. MGIC Indem. Corp., 823 F.2d 276 (9th Cir.1986), we concluded that a policy with pertinent language identical to First State's required payment of legal expenses as incurred. Because the policy provided coverage for loss that the insureds became legally obligated to pay, rather than loss paid out by the insureds, it was a liability policy. 2 Id. at 280. The insurer was required to pay legal expenses as they were incurred by the directors, because that is when the directors were legally obligated to pay. Id. 25 The language of this policy is parallel, and Okada controls. The insuring agreement under the Directors and Officers Liability portion of the policy provides that First State will pay 95% of all loss which the insureds shall become legally obligated  to pay. (Emphasis added). Loss is defined to include damages, judgments, settlement and costs, cost of investigation ... and defense of legal actions, claims or proceedings and appeals therefrom.... This language alone supports the district court's ruling that First State must pay legal expenses as they are incurred, because an insured becomes legally obligated to pay legal expenses as soon as the services are rendered. Okada, 823 F.2d at 280. This case is easier than Okada, however, because the policy in Okada also had a provision which sought to exclude legal expenses from expenses that were to be paid as incurred. There is no such provision in the First State policy. As a result, we agree that First State, under the terms of the policy, had a duty to pay legal expenses as they are incurred.