Merely Reciting Policy Exclusions Is Insufficient to Avoid a Defense Obligation

The Ninth Circuit affirmed the District Court decision that Scottsdale Insurance Co. breached the duty to defend its policyholder, a home builder, in an underlying construction defect lawsuit brought by a Montana couple. The insurer’s denial letter, relying on a supposed policy homebuilding exclusion, was ineffective because, while quoting a number of policy provisions and exclusions, the letter did not explain how any of them applied to the facts of the case.

Another insurer paid the underlying settlement, and the policyholder sued Scottsdale for reimbursement of both defense costs and settlement. Scottsdale maintained that no defense was owed. The policy included an “owned property” exclusion stating that damage to “property you own, rent or occupy” was not covered. Scottsdale claimed the exclusion applied because its insured owned the home during construction. But their denial letter merely denied coverage by quoting eight pages worth of policy provisions verbatim, without any explanation for how or why they supposedly applied.

The insurer has a duty to defend absent an unequivocal demonstration that a claim does not fall within a policy’s coverage. Scottsdale did not meet that burden because its letters “merely quoted various policy provisions and exclusions restricting the scope of coverage. The letters did not explain why any of the exclusions might apply to the facts alleged.”

Under Montana law, when an insurer refuses to defend a claim without justification, that insurer becomes liable for defense costs and judgment. The federal judge also awarded $36,000 in attorneys’ fees.

The case is Angela Dowson as representative for Montana Pride Builders v. Scottsdale Insurance Co., 13-36087, in the U.S. Court of Appeals for the Ninth Circuit.



Mar 29, 2016
Michael V. Pepe

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