The Duck Test And An Insurer's Duty To Defend

The Duck Test, most commonly stated, is: "if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." Insurers put this logic to the test with one of the oldest concepts in insurance, the duty to defend. Established duty to defend law strongly favors coverage, and insurers have fought for decades to change the established standards to no avail. Then, someone came up with a diabolical idea - change the name from "duty to defend" to "duty to pay," and argue to the courts that we now have a completely different animal - or at least, something other than a duck. To most, it still looked like a duck, swam like a duck, and quacked like a duck. Not surprisingly, it turns out, even with its new name, it is still a duck.

Given the importance of the duty to defend, and the fact that the duty is absolute, it is understandable why insurers might plot a revolt. Every kind of liability policy, whether D&O, General Liability, or Errors and Omissions, contains a duty to defend. When sued, if any of the factual allegations potentially trigger coverage, an insurer must provide coverage for the entire defense of a matter. If a complaint alleges facts and causes of action, some potentially within coverage, and others not, the insurer is obligated to defend the entire lawsuit.

The law developed this way for good reason - to counteract the tendency of an insurance carrier to leverage an underlying claim against a policyholder. Courts understood that an insurance company's leverage is greatest when a policyholder needs them most, and nowhere does a policyholder need their insurer more than just after they are sued. Some insurers tried to take advantage of this dynamic, using their leverage to work deals with policyholders, and, in some cases, forcing policyholders to waive bad faith claims against them. The only thing getting in their way was the courts, which refused to follow their lead.

Eventually, carriers recognized that they could not change the law, so they tried a different approach; they coined a new concept. What they came up with was the "duty to advance" or "duty to pay" defense costs, rather than the "duty to defend." They rapidly adopted minor policy language changes to support their new ideas. Typical duty to pay policy language provides that the insurer "shall advance, excess of any applicable Retention, covered Defense Costs on a current basis . . ." Similarly, duty to advance language may state, "the Insurer...