Insurer’s Duty to Defend Ends at Tender of Policy Limits

The United States District Court for the Eastern District of Kentucky, applying Kentucky law, has held that an insurer’s duty to defend under a medical professional liability policy ended when the insurer tendered policy limits to the insured, despite the ongoing lawsuit against the insured.  Mt. Hawley Ins. Co. v. MESA Med. Grp., PLLC, 2017 WL 3082662 (E.D. Ky. July 19, 2017).

The insureds, a group of medical professionals, were sued for alleged medical malpractice.  Their medical professional liability insurer initially paid for defense counsel for the lawsuit, but the insurer subsequently tendered the policy limits to the insureds during the lawsuit and discontinued the defense.  The insureds rejected the tender, arguing that the insurer could not “dump” its policy limits and avoid its duty to defend.  The insureds also argued that the insurer’s ability to tender policy limits would render two policy endorsements illusory and would significantly reduce the policy’s value.  Specifically, one endorsement provided that claims expenses, including defense costs, would not erode the limit of liability.  The endorsement also provided that “[n]othing contained in this endorsement shall operate to prevent the Company from tendering its limits of liability . . . and by such action eliminating its responsibility for future Claims Expenses.”  A second endorsement provided that the insured had the right to reject settlement, but claims expenses incurred after the rejection would erode the limit of liability.

The district court held that the policy language permitted the insurer to tender its limit and end its defense obligation.  Specifically, the court held that the endorsement providing that claims expenses would not erode the limit of liability also gave the insurer the option to “absolve itself of future claims expenses by tendering the full policy amount.”  The court further explained that “[w]hether agreeing to reduce the value of the policy’s liability limit is sensible or a bad idea or even something that the insured would have wanted with twenty-twenty hindsight is of no matter to this Court . . . . The parties agreed to it.  Clearly, [the insurer] felt it was important to set a cap on its possible obligation under the Agreement and, presumably, bargained for that.”  Thus, the court held that the insurer had neither breached the policy nor violated the duty of good faith and fair dealing by tendering the policy limits.