October 3rd, 2011 | 
Author: Liability insurance protects the purchaser by providing coverage in the event that the policyholder is sued, and is designed to give specific protection against third party claims of damage or injury.
A liability insurer has certain duties and obligations to the insured, namely to defend, to indemnify, and to resolve reasonable claims. Breaching any of these three duties means the insurer can be held liable for a tort of insurance bad faith in addition to being held in breach of contract.
Duty to Defend
When the insured party is sued, the liability insurer has three options: they can seek a declaratory judgement of no coverage, meaning that the claim is not coverable under the purchased policy; they can defend the insured party against the suit; or they can elect to refuse either to defend or to seek a declaratory judgement.
Insurers often defend rather than do nothing. If nothing is done and it is later determined that the duty to defend applied to the situation, the insurer could risk a suit themselves on the basis of bad faith.
Duty to Indemnify
The insurer has the duty to pay all cost for which the policyholder is deemed to be liable for up to the agreed policy limit.
Duty to Settle Reasonable Claims
If the claim is reasonably clear, the insurance company is obligated to settle the claim and not risk endangering the insured party in an attempt to avoid having to pay on the policy.
Posted in Liability Insurance