Whether an insurer’s duty to defend attaches arises in every liability claim. In the November 5, 2014 issue of Coverage Opinions I addressed the less-frequent issue -- when an insurer’s duty to defend un-attaches.

The rule in the great majority of states is that the duty to defend ends after all potentially covered claims have been dismissed. However, in a few states, an insurer can’t leave so fast. For example, in Well’s Dairy, Inc. v. Travelers Indemnity Co., 336 F. Supp. 2d 906 (N.D. Iowa 2004), the Iowa federal court addressed whether an insurer was obligated to continue to defend an insured where summary judgment on a breach of contract claim was denied -- but granted on a negligence claim. So with only a non-covered breach of contract claim at issue in the case, the insurer maintained that it no longer owed a defense. With no Iowa decisions on point, the court adopted the rule from the Minnesota and Hawaii Supreme Courts: “An insurer is not relieved of its duty to defend as a result of the granting of a partial summary judgment until no further rights to appeal arguably covered claims exist.”

Given that almost all cases settle, a rule that the duty to defend continues on, until no further rights to appeal potentially covered claims exist, is, in essence, a rule that the duty to defend goes to the end of the case, despite what happens along the way.

After writing this article I was contacted by a CO reader who told me about an on-going case involving this issue – Southern Snow Mfg. Co. v. SnoWizard Holdings, Inc. Interestingly, the case is currently before the United States Court of Appeals for the Federal Circuit. This is not the same as the U.S. Court of Appeals for the District of Columbia Circuit. I read a lot of coverage cases and I have never come across one from the Court of Appeals for the Federal Circuit.

The Federal Court of Appeals was formed on October 1, 1982, as the merger of the United States Court of Customs and Patent Appeals and the appellate division of the United States Court of Claims. The Federal Circuit has nationwide jurisdiction in a variety of subject areas, including international trade, government contracts, patents, certain money claims against the United States government, federal personnel, veterans’ benefits, and public safety officers’ benefits claims. [Believe me. I had to look that up.]

SnoWizard involves coverage issues arising out of litigation between competitors in the business of manufacturing and selling snowball ice-shaving machines and snowball flavor concentrates. The case involves an intellectual property dispute. Some patent issues got an appeal to the Federal Circuit. I read a lot of coverage cases and I have never come across one involving snow cones.

SnoWizard is complex and protracted. And some of the duty to defend issues in SnoWizard are unique to it. My objective is to discuss the when the duty to defend ends issue in terms that make it relevant beyond the dispute here.

Hanover Insurance agreed to provide a defense to SnoWizard, under a reservations of rights, pursuant to the terms of its policy and with a settlement agreement memorializing it. In the settlement agreement, SnoWizard released Hanover from all claims asserted in a third-party complaint for Hanover’s refusal to defend. Subsequent discovery showed that Southern Snow could not support a claim covered by Hanover’s policy. The judge in the Louisiana District Court concluded: “It is now undisputed that Southern Snow lacks evidence to sustain any type of defamation tort claim, whether in slander, libel, or disparagement” and that Hanover’s policy “does not afford coverage for the claims” asserted against SnoWizard.

That it was judicially determined that Hanover’s policy did not afford coverage was still not enough to terminate its defense obligation. It would have been, except the court held that the settlement agreement prohibited Hanover from withdrawing its defense. The settlement agreement is an aspect of the case that may make it different from many situations where an insurer agrees to defend and then seeks to end its defense. But the District Court’s decision (February 16, 2013; there are several of them) still offers a take-away.

In reaching its decision that a defense was still owed, despite the absence of any type of defamation tort claim, the court noted that the settlement agreement stated: “Hanover’s agreement to defend SnoWizard in the Consolidated Suits subject to Hanover’s three July 12, 2010, Reservation of Rights letters to SnoWizard concerning SnoWizard’s tender of defense and indemnification in the Consolidated Suits...and subject to Hanover’s stipulations and affirmative defenses set forth by Hanover in its response to the Third-Party Complaint.”

The court examined the rights reserved by Hanover and concluded that they “all relate to Hanover’s position on the issue of coverage, which is a separate and distinct issue from the obligation to furnish a defense. … [T]he Settlement Agreement clearly expresses that Hanover will furnish SnoWizard with a defense in recognition of the vague allegations of ‘disparagement’ in the Second Amended Complaint. However, Hanover unambiguously reserves all of its coverage defenses set forth in the policy itself, the answer to the third party complaint, and the Reservation of Rights letters, and it reserves the right to alter its position on coverage if circumstances change.”

I disagree with the court that the use of the term “coverage” here was limited to an indemnity obligation and did not also include a defense. Hanover’s reservation of rights letter stated: “Hanover Insurance Company’s position on coverage in this matter and its undertaking to defend SnoWizard, Inc. does not waive any other policy defense or legal rights available to Hanover Insurance Company, and Hanover Insurance Company reserves the right to amend or alter its position on coverage at any time should additional information come to light, should circumstances change.” To me, that’s pretty clearly: If circumstances change – and they sure did here when the court found the absence of any type of defamation tort claim – then Hanover was entitled to cease defending.

But the court held the way it did. Given that withdrawing a defense, after it has attached, can have significant implications, the lesson here, if there is even one, is for an insurer to draw a distinction between defense and indemnity when agreeing to undertake a defense, subject to a reservation of the right to amend or alter its position at any time should additional information come to light or circumstances change.