In a recent decision, the Maryland Court of Special Appeals reiterated that the duty to defend broadly requires a liability insurer to defend an entire lawsuit against its insured, even where only some of the allegations are potentially covered.  The court further held that the insured has no obligation to apportion defense costs among multiple implicated policies.  The decision, Selective Way Insurance Company v. Nationwide Property and Casualty Insurance Company, et al., can be found here.

The coverage litigation arose out of a construction defect case against a general contractor.  The general contractor tendered the action to its insurer, Nationwide, which, in turn, filed a declaratory judgment action against the various insurers of construction project subcontractors that had named the general contractor as an additional insured.  Ultimately, the court granted a summary judgment motion declaring that all of the subcontractors’ insurers had a duty to defend the general contractor “because the allegations in the underlying lawsuit raised claims that potentially arose from the [s]ubcontractors’ work at the [construction site].”  All of the subcontractors’ insurers settled with Nationwide except for one, Selective Way; and the parties proceeded to a jury trial on various issues.  The jury found for Nationwide on all issues.  Selective Way appealed.

Selective Way argued on appeal that even if some of the allegations were covered under its policy, it had no obligation to defend the general contractor because its insureds, the subcontractors, could not have been responsible for all of the losses given the nature of their work.  Further, Selective Way contended that if it was responsible for defending the general contractor, it was not responsible for the entire defense, and the general contractor was responsible for apportioning the costs among the various subcontractors.  The panel disagreed on both points.

With respect to Selective Way’s duty to defend, the panel stated that under Maryland law, an insurer is required to defend an insured in any suit “where some allegations are potentially covered by a policy even though other allegations are not.”  The panel rejected its argument that this rule is limited to situations where an underlying plaintiff pleads alternative legal theories arising out of the same incident.  The panel held that no such limitation exists under Maryland law.

The panel also rejected Selective Way’s theory that an insurer’s duty to defend may be limited where defense costs can be readily apportioned between covered and non-covered claims and that it is the insured’s obligation to apportion the defense costs among the various policies under which it qualifies as an insured.  The panel found that such a theory was contrary to established Maryland law and aptly noted that Selective Way was misconceiving “its promise to defend suits against its insured as a more limited promise to pay a portion of the defense costs attributable to covered allegations.”  The panel repeated that where there is a potentiality of coverage with respect to some allegations, then the insurer must defend the entire action.

The panel’s decision is a welcome reminder that an insurer’s duty to defend applies broadly to an entire action whenever there is a potential for coverage under the policy and that any apportionment based on covered and non-covered allegations is inappropriate.  The decision should therefore serve as a reminder for policyholders to challenge any insurers’ attempt to limit or apportion their defense and insist that they receive the full benefit of their broad defense coverage.