Duty To Defend Stayed During Insurer’s Claim For Rescission

The logic of Certain Underwriters at Lloyd’s v. Professional Underwriters Agency, Inc., 2006 WL 1195622 (Ill. App. 2 Dist. May 3, 2006) probably only holds true in those states, like Illinois, that impose estoppel on insurers who wrongly deny the duty to defend.  The Lloyd’s syndicate sued to rescind a broker’s errors and omissions policy based on alleged material misrepresentations by the insured.  Then the insured was sued for negligence and fraud by one of its clients.  The court held that the insurer did not have a duty to defend during the declaratory action it filed against the insured, just as it would have no duty to defend during the pendency of an action in which the insurer asserted a coverage defense.  The court said this rule provided no extra incentive for insurers to file declaratory actions instead of defending, because insurers would be trading the safety of controlling the action for the insecurity of allowing the insured to direct the underlying litigation.  In addition, the court said, if the insurer was found to owe a duty to defend, it would still owe reimbursement for defense fees.

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