Membership to a tanning spa required providing a fingerprint scan. However, that was the only requirement made of customers in providing personal information. One customer, upon learning that the spa sold the fingerprint information to a third party, headed up a class action lawsuit. The suit alleged that the sales was in violation of a biometric information privacy law. After the spa filed a claim, its insurer eventually refused to respond to the lawsuit. The insurance company argued that the claim did not qualify as a covered event.

Click here to see the court's opinion on whether the insurer could avoid defending a claim involving how its insured handled personally identifying information.

One might perceive things just like the insurance company mentioned above. You may believe that, once it can be shown that a given loss is ineligible for protection under a given policy, any obligation to handle a claim is terminated. However, often there are questions concerning eligibility and making a clear determination regarding coverage may take time.

The fact that effort is needed to clarify whether protection exists, it has long become established that an insurance company's duty to provide a legal defense to a policyholder is a separate one. Therefore, an insurer may be considered derelict of its duty if it dismisses a claim without taking time to consider its merits.

Click here for an excerpt of wording on supplementary payments found in the ISO Commercial General Liability's coverage analysis in PF&M.

One issue that complicates matters is a real problem for insurers. If an insurer spends significant time investigating a loss for eligibility, that effort lends credence that a loss is legitimate. In order to avoid this danger and to serve a policyholder or claimant, an insurer may investigate a claim with a special stipulation called a Reservation of Rights (ROR).

An ROR is, usually, a separate letter or statement to a party filing a claim that the insurer needs to investigate the circumstances before it can determine whether a loss is eligible for a loss or legal defense. It warns that the steps and time taken to investigate matters does not create an obligation on the insurer's part since the result of their efforts may be to deny coverage. In other words, while reviewing a claim, the insurer still preserves its legal right to, later, make a denial if it determines that is justified.

Click here for an article discussing RORs found in Emarketing section of Advantage Plus.

An insurer's requirement to legally defend a policyholder facing a loss is not unlimited. Situations that block the defense requirement include a policy not being active at the time at a loss because of policy non-payment. Naturally, no obligation exists for a policy that has been cancelled or nonrenewed before the date of a loss. Another reason is when a loss, for various reasons, does not qualify for coverage under a given policy. For instance, one may be sued, legitimately, for violating a professional duty to render a service. However, if the only coverage carried is a Commercial General Liability policy, a loss involving a professional level of service would not be a covered instance.

Note, even when a given loss is eligible for coverage, there's another circumstance that either bars or ends coverage: the availability of a policy limit to respond. Limit exhaustion can be an important consideration.

Click here to see an article on whether exhausted policy limits affect the duty to defend. It's from the March 2019 issue of Rough Notes Magazine.