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Rights of Policyholders

THE INSURER'S DUTY TO DEFEND YOU

      The primary purpose of insurance is to give you peace of mind. You buy automobile insurance, homeowner's insurance, or business liability insurance. In case a claim or lawsuit is filed against you arising from ownership of your properties, the insurance coverage is meant to protect you.

      Part of the insurer's duty under such policies is to defend you in any lawsuit resulting from accidents within your properties. This means that the insurer will pay for an attorney to represent you in the lawsuit, and attempt to settle the claim against you.

      The insurer has a duty to defend you as long as there is any potential coverage for the loss under your policy, even if there is only partial coverage. The insurer has a duty to defend you even if the case against you is completely false. When a lawsuit is filed against you, the insurer may defend you under a "reservation of rights." This means that the insurer is not necessarily agreeing that the loss is covered under your policy.

      If the insurer later proves that there is no potential coverage for the loss, then it may terminate the defense. The insurer may also terminate defense once it pays out the policy limit as part of a settlement or judgment. Once the insurer terminates the defense, you are responsible for your own attorney fees and for any portion of the judgment or settlement above the policy limit.

      However, the insurer has a duty to settle the lawsuit within your policy limits, if it can. In a case in Utah, an insured named Curtis Campbell was involved in an auto accident that killed one person and injured another. When Mr. Campbell was sued, his insurer State Farm refused to settle the case for $50,000, his policy limit, even though State Farm knew he caused the accident. At trial, the jury found Mr. Campbell liable and awarded $136,000 in damages against him.

      At that point, State Farm offered to pay the $50,000 policy limit, and advised Mr. Campbell to sell his house to make up the difference. Mr. Campbell and his wife suffered horrible emotional distress until State Farm agreed to pay all of the $136,000 judgment, a year and a half later.

      The Campbells then sued State Farm for violating its duty to settle the case. They won a judgment of $2.6 million in compensatory damages for their emotional distress, which the judge reduced to $1 million. They also won $145 million in punitive damages against State Farm.

      Although the Supreme Court reversed the punitive damage award on appeal, the Campbell case demonstrates the importance of the duty to defend. It is an essential part of the peace of mind that you pay for when you buy an insurance policy. If you are sued and your insurer refuses to defend your case, you should consult an experienced attorney as soon as possible to protect your rights.

© Law Offices C. Joe Sayas, Jr.