Does An Insurance Company Have the Right Not to Defend Any Action Commenced After Full Payment Has Been Made ?
In American Employers Insurance Co. v. Goble Aircraft Specialties, Inc. (205 Misc 1066, 131 N.Y.S.2d 393 [Sup Ct New York Cty 1954]), the court stated in dicta, that an insurance company could reserve the right to cease defending claims pending after payment of the total amount for which it indemnified its insured, or could refuse to defend any action commenced after such payments, "if it is so stated clearly and unambiguously in the policy as would be clear and comprehensible to the average businessman without legal assistance."
While the court, in Royal Insurance Co. of America v. Lexington Insurance Co. (2004 U.S. Dist [SDNY 2004], citing Maryland Cas. Co. v. W.R. Grace & Co., 794 F. Supp. 1206, 1222 [SDNY 1991]), states as a general proposition that "under New York law... the duty to defend survives the exhaustion of the policy limits," the court in that case, honored the "clear and unambiguous policy" language of that insurance contract (which required the defendant to pay defense costs until it exhausted its policy limit through either settlement or judgment), when it ordered the insurance company to "pay all defense costs and expert fees incurred with the case "up until...the date of settlement."
Other jurisdictions allow an insurance carrier to do what Lincoln seeks here.
In Pennsylvania, the US District Court for the Eastern District of Pennsylvania, citing Maguire v. Ohio Cas. Co. (412 Pa Super 59, 602 A.2d 893 ), has found that where the insurance policy language clearly states that the duty to defend terminates at the exhaustion of the policy limit, the insurer is no longer required to defend additional claims (NIA Learning Center, Inc. v. Empire Fire & Marine Ins. Co., 2009 U.S. Dist [E.D.Pa. 2009]).
One of the bases for the court's holding in Maguire was that the insurer obtained a release against any and all further claims stemming from the lawsuit. (Id.).
These courts emphasize that for the insurer to be relieved of this duty to defend, based upon full payment of the insurance proceeds in settlement, the insurer has to have acted in "good faith" (NIA Learning Center, Inc. v. Empire Fire & Marine Ins. Co [ED Pa 2009] ; Maguire v. Ohio Can Co., 412 Pa Super 59, 602 A.2d 893 )-an issue more fully addressed below on the question of the reasonableness of the Rite Aid settlement.