In Minnesota, what threshold must an underlying complaint meet to implicate an insurer’s duty to defend an insured defendant? Under what circumstances must an insurer defend a successor of its named insured? The 8th Circuit Court of Appeals recently confronted these questions in Continental Insurance Company v. Daikin Applied Americas Inc.2
Continental Insurance Co. (Continental) provided comprehensive general liability insurance to McQuay Inc. from 1967 to 1982. Id. at *1. In 1984, McQuay was acquired and went through several reorganizations and mergers. Today, Daikin Applied Americas Inc., owns McQuay’s former rights and liabilities. Id. McQuay allegedly sold asbestos-containing material, and Daikin has since become a defendant on its behalf in many lawsuits. The issue in the case was twofold:
(1) whether Continental had a duty to defend Daikin as the survivor company not named on the McQuay policy, and
(2) what standard the court should apply to reach its decision. Id.
The court reaffirmed that the “arguably” covered duty-to-defend standard—frequently used to determine whether a claim is covered—likewise applies to whether the named defendant in the underlying lawsuit qualifies as an insured. Meaning, the insurer’s duty to defend is triggered so long as the allegations in the underlying complaint make it “arguable” that an insured liability is at issue. Id. at *3. In so ruling, the court rejected the notion that the “after-acquired liability” rule regarding liability of a survivor company prevents the survivor company from claiming coverage under the policy. See Id. at *3–*4.
To trigger an insurer’s duty to defend under the “arguably” standard, the insured entity must meet the threshold burden of showing either:
(1) that at least one claim in the underlying complaint is arguably within the scope of the insurance policy, or
(2) there exists “extrinsic facts ‘within the insurer’s knowledge [that] clearly establish’” that a claim is covered. Id. at *2.
If the alleged insured triggers the duty to defend under the “arguably” standard, the insurer must defend unless they show that the underlying lawsuit is “clearly” not based on the original insured’s liabilities. Id. at *3. If the duty is triggered through the “extrinsic facts” threshold, the insurer must defend until the claims are “dismissed with finality.” Id. at *3. Therefore, the court reasoned, if Daikin meets one of the two burdens, and Continental has no cogent defenses, then Continental owes Daikin a duty to defend.
What takeaways exist from Continental and the application of the “arguably covered claims” standard to successor companies?
- Namely, for a duty to defend to exist, the underlying complaint “must at least ‘implicate’” the allegedly insured entity “in its insured capacity.” Id. at *4.
- In other words, where an entity could be sued in either a noninsured or an insured capacity, simply naming the party as a defendant is insufficient to trigger the duty to defend. Id.
- Therefore, under Continental’s holding, there must be enough specificity in the underlying complaint referring to the defendant in its insured capacity that it is arguable that the claim implicates the insured’s liabilities.