Insurer Has Duty to Defend Even Though Court Holds No Duty to Indemnify

A Pennsylvania federal court has held that while an insurer does not have a duty to indemnify an insured accounting firm, it must nevertheless continue to defend the insured because of a disputed issue of fact regarding the insured’s knowledge of a potential claim prior to the policy's inception date.  Navigators Ins. Co. v. Resnick Amsterdam Leshner, P.C., 2015 U.S. Dist. LEXIS 64385 (E.D. Pa. May 18, 2015).

An accounting firm was sued for allegedly emailing derogatory and damaging information about one of its clients for posting on a website.  The accounting firm sought coverage under its professional liability insurance policy, and the insurer agreed to defend the accounting firm under a reservation of rights.  Over a year later, the insurer filed a declaratory judgment action seeking to be relieved of any duty to defend or indemnify the accounting firm.  According to the insurer, the policy’s condition that coverage was unavailable for any facts or circumstances that the "insured had a basis to believe . . . might reasonably be expected to be the basis of a claim" prior to the inception date was not satisfied because the alleged conduct happened prior to the policy’s effective date, and the insured had to have known that it would result in a claim.

The court agreed with the insurer on the duty to indemnify but not the duty to defend.  The court first pointed out that the insurer has a duty to defend even if any of the allegations of the claim are groundless false or fraudulent and even if the claim accrued prior to the policy period.  The court determined that the facts upon which the insurer based its denial – that the accounting firm knew or had reason to know prior to policy inception that sending the subject emails might result in a claim – had not been proven.  The court therefore held that the insurer was not relieved of its duty to defend.

Yet, as to indemnification, the court found the insurer will have no duty to indemnify any final judgment in the underlying case.  The court explained that the accounting firm could only be found liable if a fact-finder determined the accounting firm disseminated the alleged confidential information, which would mean that they would have known that a claim was likely to be made.  On the other hand, the court explained, if they are not found liable, there will be nothing to indemnify.