Withdrawing an insured’s defense can be perilous business for an insurer.  In my experience it is a decision that insurers take seriously.  And it is an action that they do not take frequently.  Lots of courts say that an insurer has a duty to defend its insured until there are no potentially covered claims remaining.  But there is not a lot of guidance beyond this easy to say statement of law – especially when it comes to what information the insurer can consider in determining that there are no potentially covered claims remaining. 

The paradigm withdrawal situation (and the easiest one, if there’s such a thing) is when the only potentially covered count has been dismissed from the case, such as by the plaintiff or court.  But that happens infrequently.  The more challenging scenario is when an insurer believes that it can withdraw a defense based on information revealed during discovery.  Can that information be considered by an insurer to withdraw its defense, in the face of a complaint (or a complaint and other information, in an “extrinsic evidence” state) that still triggers a defense? 

Putting aside these legal issues, there is another factor that insurers consider when it comes to withdrawing a defense.  Doing so, especially close to trial, can have bad optics.  In any subsequent coverage litigation, it will be easy for the insured to paint the insurer as having abandoned its insured.  Somerset Pacific LLC v. Tudor Insurance Company, No. 17-7099 (E.D. La. Feb. 5, 2019) demonstrates a timing factor that insurers should not overlook when considering the withdrawal of a defense. 
  
Tudor Insurance Co. defended Somerset Pacific in a personal injury action.  A two-year old child was severely burned by hot water in an apartment complex owned by Somerset.  Somerset was insured under a $1,000,000 primary liability policy issued by Tudor and a $10,000,000 excess policy issued by National Union.  

Four months before trial, Tudor settled the case, for its policy limit, but did not secure a release of Somerset’s excess exposure. At that point, Tudor’s plan was for its counsel to withdraw after the excess carrier, National Union, assumed the defense.

However, National Union did not accept the defense right away.  A dispute arose over it.  After National Union did accept Somerset’s defense, counsel retained by Tudor withdrew from the case.  Somerset was now forced to switch to new defense counsel just months before trial. 

[While this was going on, Somerset retained its own counsel, as it saw the risk of uninsured exposure.]  

Tudor maintained that, “pursuant to Louisiana law it has a right to settle for its policy limits without securing a release of Plaintiff’s uninsured exposure provided the settlement does not prejudice Plaintiff.  Tudor argues that Plaintiff cannot show that the settlement prejudiced it because Tudor continued to defend Plaintiff after its settlement until its excess carrier assumed its defense, and Plaintiff was not ultimately subject to any uninsured liability.”

Even if all that’s true – the legal principle and lack of uninsured exposure -- the court still held that Tudor could be liable for bad faith – a decision not made by the court as it concluded that it involved fact issues.  

True – the insured was never without defense counsel.  But the problem for Tudor had to do with the timing of its decision to withdraw.  The court explained: “[T]he insurer must make every effort to avoid prejudicing the insured by the timing of its withdrawal from the litigation. . . . Arguably there may be a point in ongoing litigation at which the insurance company’s withdrawal from the defense of the insured would be so prejudicial to the insured’s interests that it would constitute a breach of the company’s duty to act as a fiduciary toward the insured and to discharge its policy obligations in good faith.  Although Plaintiff was never left without a defense, a jury could find that the timing of Tudor’s withdrawal, and the dispute that accompanied it, prejudiced Plaintiff and required it to incur additional attorneys’ fees in protecting its interests.”