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Elliott v. Hanover Insurance Co.6/4/1998
asserting noncoverage as a defense in a subsequent action brought by the insured or an assignee of the insured. See generally 14 Ronald A. Anderson, Couch on Insurance 2d Section 51:73 (2d ed. 1982 & Supp. 1997); 7C J.A. Appleman, Insurance Law & Practice Section 4689 (Walter F. Berdal ed., 1979 & Supp. 1997). Some courts have precluded an insurer from denying policy coverage in a subsequent lawsuit when the insurer has breached its duty to defend. See, e.g., Fidelity & Cas. Co. of N.Y. v. Envirodyne Eng'rs, Inc., 461 N.E.2d 471, 474 (Ill. App. Ct. 1983) (insurer estopped from asserting noncoverage defense if it fails to defend under a reservation of rights and to file a declaratory judgment action to determine the scope of coverage). Other courts have held that an insurer is not estopped from asserting noncoverage as a defense if it fails to defend the insured. See, e.g., Polaroid Corp. v. Travelers Indem. Co., 610 N.E.2d 912, 922 (Mass. 1993) ("The statement made by some courts that the insurer is estopped to deny liability is simply a Conclusion and fails to recognize that no estoppel is involved in any traditional sense because, in refusing to defend a claim, an insurer makes no misrepresentation on which the insured relies to its detriment.").
We agree with the court's reasoning in Polaroid that an unjustified refusal to defend should be treated as a breach of the insurance contract and that normal contract damage principles apply. Id. at 921. "By finding the insurer has a duty to indemnify as a penalty for refusing to defend, even if no coverage exists, the court [would] improperly enlarge the bargained-for coverage." Servants of Paraclete, Inc. v. Great American Ins. Co., 857 F. Supp. 822, 833 (D.N.M. 1994). Moreover, if an insurer who refuses to defend were estopped from asserting the lack of coverage as a defense in a subsequent action, then the insurer's duty to indemnify would be coextensive with its duty to defend. We, however, have repeatedly stated that an insurer's duty to indemnify is independent from its duty to defend and that its duty to defend is broader than its duty to indemnify. See, e.g., Travelers Indem. Co. v. Dingwell, 414 A.2d at 224. An insurer that breaches its duty to defend therefore is not estopped from asserting noncoverage as a defense in a subsequent action brought by the insured or the insured's assignee. The insurer, however, has the burden of proving that the claim was not within the policy's coverage when it wrongfully declines to defend a claim. Polaroid, Inc., 610 N.E.2d at 922. Hanover is also bound by the default judgment as to any factual issues that might have been litigated in the underlying negligence action. Marston v. Merchants Mut. Ins. Co., 319 A.2d at 114. Moreover, nothing in this opinion should be construed to prohibit an insured from protecting his interests once an insurer breaches its duty to defend. Cambridge Mut. Fire Ins. Co. v. Perry, 1997 ME 94, 10, 692 A.2d 1388, 1391. Because we conclude that the matter must be remanded to the trial court for a determination whether Elliott's injury was covered by the policy, it is premature to address Elliott's and Hanover's challenge to the court's damage award and Hanover's appeal of the court's order awarding Elliott pre- and post-judgment interest.
The entry is:
Judgment affirmed in part and vacated in part. Remanded for further proceedings consistent with this opinion.
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