Depositing Policy Limits Does Not End the Duty to Defend

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An Oregon federal court revisited a common coverage question that comes up from time to time: When indemnity for a loss is reasonably clear, can an insurer limit its defense expense exposure by simply depositing the policy limits with the court? The answer, according to this court, and most other courts around the country, is no.[1]

The liability policy in U.S. Fire Ins. V. Mother Earth School contained the commonly-found insuring agreement language which provides, in relevant part, that an insurer’s right and duty to defend ends when the applicable limit of insurance is used up by the payment of judgments or settlements. Coverage for the underlying claim was undisputed, and the insurer did not dispute that it had a duty to defend and indemnify its insured. Instead, the insurer advanced the argument that the duty to defend could be extinguished by depositing the policy limits which “is tantamount to a settlement.” As aptly noted by the court, the duty to defend does not end until the applicable policy limits are exhausted by the payment of judgments and/or settlements, and, therefore, simply depositing the policy limits with the court did not extinguish the duty to defend.

Although not cited in this opinion, almost every court that has considered similar policy language has reached a similar legal conclusion: The duty to defend does not end until the limits are exhausted through the actual payment of judgments and/or settlements. Although U.S. Fire is not a landmark decision, it serves as an important reminder of the independent nature of the insurer’s duty to defend, which generally cannot be abrogated even when an insurer’s obligation to pay its policy limits for indemnity has become reasonably clear.

[1] See U.S. Fire Ins. V. Mother Earth School, 3:18-CV-01762-HZ, 2019 WL 5654986 (D. Or. Oct. 31, 2019).