An insurer’s duty to defend is triggered by comparing the allegations of the plaintiff’s complaint with the policy’s coverages to see if there is any overlap. Todd v. Vermont Mutual Insurance Co., 168 N.H. 754, 759 (2016) (“An insurer’s obligation to defend its insured is determined by whether ‘the cause of action against the insured alleges sufficient facts in the pleadings to bring it within the express terms of the policy.’”)(quotation omitted). If there is overlap, the insurer must defend the lawsuit in its entirety, even though repair of the defective work itself is not a covered loss. Titan Holdings Syndicate, Inc. v. City of Keene, 898 F.2d 265, 269 (1st Cir. 1990) (applying New Hampshire law) (“If some of the claims against the insured fall within the terms of coverage, and some without, the insured must still defend the entire claim (at least until it is apparent that no recovery under the covered theory can be had) . . .”) Parsing of claims and theories, and furnishing a defense to only the covered ones, is not allowed.
But settling them is. As long as the policy language reserves settlement authority to the insurer – which is typically the case – the insurer can settle with the plaintiff on just the covered claims. At that point, is its duty to defend at an end, leaving the defendant to hire his own attorney to defend the non-covered claims going forward?
No New Hampshire court has yet tackled this question, but the Restatement of the Law of Liability Insurance (2018) § 18 takes a stand on it: “An insurer’s duty to defend a legal action terminates only upon the occurrence of one or more of the following events: . . . (3) Final adjudication or dismissal of parts of the action that eliminates any basis for coverage of any remaining parts of the action . . . (5) Partial settlement of the action, entered into with the consent of the insured, that eliminates any basis for coverage of any remaining parts of the action . . .” Either one of these subsections might apply to our question, although subsection (5) is the more specific, addressing settlement directly. At least one court, however, has interpreted subsection (3), which is silent on consent of the insured, to embrace dismissals by settlement. Burka v. Garrison Property and Casualty Ins. Co., 521 F. Supp. 3d 97, 108 (D. Me. 2021) (“a duty to defend terminates upon final adjudication or settlement of the insurable part of the underlying lawsuit or settlement”).
The argument that the insured’s consent to a partial settlement should be required is in tension with the principle that the parties’ contract should determine their rights. Some policies do contain “consent to settle” clauses, giving the insured a voice in the settlement decision but providing that such consent shall not be unreasonably withheld. (Many professional liability policies have them. Few commercial general liability policies do.) But if the policy is silent on consent to settlement, implying such a right is problematic – particularly if the insured were to have unfettered discretion to withhold it, regardless of reasonableness. Withholding consent to a partial settlement solely to keep the insurer on the hook for defense costs might well be deemed unreasonable. And if the policy provides for reimbursement of an insurer’s defense costs incurred where there was no duty to defend, the contractor may end up paying anyway.
In the end, an insurer-provided defense for uncovered claims in a mixed covered-and-uncovered claim case is likely to survive to the end of the case only if the damages to other property are substantial as a percentage of the total.