Under California Law, An Insurer’s Duty To Defend Is Based On Facts Alleged In The Complaint And Facts Otherwise Known By The Insurer; Speculation And Arguments Are Not Relevant To The Duty To Defend Analysis

A common dispute between carriers and insureds involves the scope of information that may be considered when determining whether a duty to defend exists. Under California law, an insurer's duty to defend is determined by facts - both facts alleged in the underlying complaint and facts known or available to the insurer from any source. It is no surprise that the insured and its counsel may supply facts outside of the complaint when seeking coverage. This leaves the insurer to determine whether the information it receives, be it facts, argument or speculation, should bear on the duty to defend analysis. As explained below, California case law demonstrates that the duty to defend cannot be based on unfounded attempts to manufacture coverage by "connecting the dots" between allegations and coverage. Rather, the duty to defend should be determined based only on supported facts.

The Duty to Defend May Be Triggered by Facts Outside of the Tendered Complaint

In the most basic analysis, an insurer's duty to defend is triggered when the facts alleged in the complaint create a potential for coverage. See Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (2005). Although an insurer must consider extrinsic facts in evaluating the duty to defend, this does not open the floodgates for coverage - an insurer does not need to accept speculation regarding the allegations in the underlying action as facts. As the court in Gunderson v. Fire Insurance Exchange, 37 Cal. App. 4th 1106, 1116 (1995) explained, "[a]n insured may not trigger the duty to defend by speculating about extraneous 'facts' regarding potential liability or ways in which the third party claimant might amend its complaint at some future date." Likewise, in the case of Hurley Construction Co. v. State Farm Fire and Casualty Co., 10 Cal. App. 4th 533, 538 (1992), the court found that speculation from an insured's counsel regarding how a claimant might amend its complaint could not trigger coverage. See also Friedman Prof. Mgmt. Co., Inc. v. Norcal Mut. Ins. Co., 120 Cal. App. 4th 17, 34-35 (2004) ("[T]he universe of facts bearing on whether a claim is potentially covered . . . does not include made up facts, just because those facts might naturally be supposed to exist along with the known facts.") (emphasis original).

Against this backdrop - where the duty to defend may be triggered by facts not stated in the complaint, but where speculation regarding "facts" is not enough - the insurer must weigh what information may bear on coverage. This can be...