A recent court decision created a substantial loophole for insurance companies, which can hurt contractors. Although the court decision suggests that it does nothing more than interpret an insurance policy, it doesn’t make a great deal of sense from a logical standpoint.
The case involved deciding when an insurance company has the duty to defend and when an insurance company has the duty to indemnify its insured, in this case, a contractor. The duty to defend requires that the insurance company pay for the defense of a claim. The duty to indemnify requires the insurance company pay for the covered damages found to be caused by its insured.
Most professions in the state of California are subject to a great deal of regulation. Regulations are passed by an administrative body such as the Contractors’ State License Board. Although regulations don’t carry the same weight as legislation, they’re very much part of the law governing the regulated profession. With respect to contractors, the Contractors’ State License Board has a number of regulations concerning the classification system, discipline, etc.
Hearings pertaining to violations of those regulations are handled through the Office of Administrative Hearings. This is an administrative court that makes a proposed decision that the Registrar will adopt or not adopt. Quite often, the matter being complained of is poor workmanship or deviations from accepted trade practices.
We have always argued that if the violation of the License Law also triggers an insurable event, then the insurance company should both defend and indemnify the contractor, because that is the harm that was covered by the insurance policy.
This is what the contractor purchased insurance to cover. The most recent case now holds that the insurance company has neither a duty to defend nor the duty to indemnify the contractor in a situation pending in an administrative tribunal.
There is an axiom in the field of law that the duty to defend is greater than the duty to indemnify. Simply stated, if any part of a claim is covered, then the insurance company has a duty to defend the entire claim (lawsuit) even though the result may be that a portion of the lawsuit was not covered. Based on this theory, we have quite often asked an insurer to help in the defense of a disciplinary matter stating that the discipline would be imposed as a result of an insurable offense.
We have also argued that restitution ordered by the tribunal for “property damage” is covered. However, this recent case held otherwise, based on the language in the insuring policy. Typically, those policies discuss “a suit seeking damages” and “all sums that the insured becomes legally obligated to pay as damages.”
The court interpreted that language to mean only as a result of a civil action would an insurance company be required to either defend or indemnify.
In other words, there would have to be a lawsuit filed in court only.
As said previously, this doesn’t make a great deal of sense, but probably is an accurate analysis in interpreting the language.
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