The Supreme Judicial Court of Maine just handed down Harlor v. Amica Mutual Ins. Co., No. Kno-15-282 (Nov. 3, 2016), addressing whether Amica was obligated to defend its insured, under a homeowner’s policy, for a dispute over the right to use a dock according to an easement. Amica denied a defense. Its insured settled the action and filed an action seeking a declaratory judgment that a defense was owed.

For various reasons the court concluded that Amica breached its duty to defend. The specific coverage issues, and reasons why a defense was owed, are not the subject here. Rather, the issue here -- the one with the more wide-reaching consequences -- is the damages for which Amica was liable on account of its breach.

Amica acknowledged that it was liable for the attorney’s fees that its insured incurred in the underlying action and the declaratory judgment action. However, it argued that it was not liable for its insured’s payment to the underlying plaintiffs, because that payment did not establish that the plaintiffs actually sustained an injury covered by the policy.

The court concluded that “[a]n award of damages to the insured for breach of an insurer’s duty to defend should . . . place the insured in a position equally as good as the insured would have occupied had the insurance contract been fully and properly performed from the beginning.”

But what does that really mean?

In general, the court determined that the insurer did not lose the right to contest coverage for the settlement. The rationale for this being that there is a distinction between the duty to defend and the narrower duty to indemnify. “To award to the insured the entire settlement as consequential damages after a breach of the duty to defend, when some claims against the insured were for covered damages and others were for uncovered damages, would improperly enlarge the bargained-for coverage.”

However – and the however is often where the real meaning lies – while the breaching insurer does not lose the right to assert non-coverage, it assumes the burden of proving non-coverage. And, as the court observed, “it is not uncommon for a lawsuit against an insured to assert some claims that are covered by the insurance policy and others that are not.”

Therein lies the rub. If the insurer cannot meet its burden to establish a distinction between covered and uncovered claims, then, as a practical matter, it has been subject to estoppel – in whole or in part -- on account of its breach of the duty to defend.