{"id":904730,"date":"2025-08-28T14:33:38","date_gmt":"2025-08-28T20:33:38","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=904730"},"modified":"2025-08-28T14:33:38","modified_gmt":"2025-08-28T20:33:38","slug":"duty-to-indemnify-contingent","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/duty-to-indemnify-contingent\/","title":{"rendered":"The Contingent Duty to\u00a0Indemnify"},"content":{"rendered":"\n<p>Timothy P. Law | <a href=\"https:\/\/www.policyholderperspective.com\/2025\/08\/articles\/insurance-coverage\/the-contingent-duty-to-indemnify\/\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">Reed Smith<\/a><\/p>\n\n\n\n<p>An insurance company\u2019s defense obligation carries with it a conditional obligation to indemnify in the event the policyholder is held liable for a claim covered by the policy. When a case is resolved by settlement, prior to findings of fact on which an analysis of coverage could be based, under that conditional obligation to indemnify, an insurance company must pay any reasonable settlement. The underlying case should not be collaterally tried, and facts found, in a subsequent declaratory judgment or insurance recovery action.<\/p>\n\n\n\n<p>When considering the \u201cright and duty to defend\u201d contained in liability insurance policies, most states say an insurance company should consider the complaint and the insurance policy and decide if there is any potential for insurance coverage for any part of the claim. An insurance company is obligated to defend its policyholder in a lawsuit if the complaint alleges liability for injury or damage that is actually and wholly, or even potentially and partially, within the scope of coverage. It is the potentiality, rather than the certainty, of a claim falling within the insurance policy that triggers an insurance company\u2019s duty to defend.<\/p>\n\n\n\n<p>When considering the \u201c<a href=\"https:\/\/www.myconstructionexpert.com\/blog\/notice-prejudice-rule-does-not-remove-duty-to-indemnify\/\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">duty to indemnify<\/a>\u201d a judgment, a different factual record governs: the facts as ultimately proven and found by the judge or jury. Thus, it is the actuality, not the potentiality, that governs an insurance company\u2019s obligation to pay a judgment.<\/p>\n\n\n\n<p>Settlements are in an odd limbo. What factual record should courts consider when deciding if a settlement is covered by an insurance policy? After all, few if any facts may have been conclusively established when a settlement is consummated.<\/p>\n\n\n\n<p>As Sections 24 and 25 of the Restatement of the Law of Liability Insurance confirm, the duty to defend carries with it the duty to make reasonable settlement decisions. In fact, an insurance company\u2019s failure to settle reasonably and in good faith can lead to verdicts in excess of policy limits\u2014a common cause of lawsuits for insurance company bad faith. &nbsp;<\/p>\n\n\n\n<p>With regard to settlements, particularly those reached prior to trial, an insurance company\u2019s liability for a settlement should follow its duty to defend. In other words, if the insurance carrier owes a duty to defend, and the settlement resolves that potentially covered liability, the settlement should be deemed covered.<\/p>\n\n\n\n<p>A reservation of rights does not lessen or eliminate the insurance company\u2019s duty to settle reasonably and in good faith, and if settlement can be and is achieved by the insurance company, any such settlement must be paid by the carrier. Depending on the applicable state law, when an insurance company is defending under a reservation of rights and refuses to settle, a policyholder should be free to settle a lawsuit so long as the settlement is fair and reasonable from the perspective of a reasonably prudent person in the same position of the policyholder and in light of the totality of the circumstances. When an insurance company is defending under a reservation of rights, the insurance company has warned that coverage for a judgment is uncertain. A policyholder must be permitted to enter into a reasonable settlement over the insurance company\u2019s objection, rather than risk a substantial adverse verdict at trial that the insurance company might refuse to pay.&nbsp;<\/p>\n\n\n\n<p>When a policyholder seeks coverage for a settlement, that should not require collateral proceedings about what the facts of the underlying case actually are (or what they would have been determined to be if the case had proceeded to trial). The federal Court of Appeals for the Third Circuit, for example, has declined to determine the facts in a declaratory judgment action after an underlying liability action has settled because it would force the policyholder and its insurance company \u201cto try the underlying action before then trying the coverage case, all without the participation of a principal party-in-interest in the underlying action,\u201d i.e., the plaintiff in the underlying action.<a href=\"https:\/\/www.policyholderperspective.com\/2025\/08\/articles\/insurance-coverage\/the-contingent-duty-to-indemnify\/#_ftn1\">[1]<\/a><\/p>\n\n\n\n<p>Therefore, if an insurance company has a duty to defend, it has a duty to settle reasonably and in good faith and&nbsp;<em>to pay<\/em>&nbsp;such a settlement. If an insurance company defends under a reservation of rights and declines to settle reasonably, a policyholder should be permitted to settle the underlying case, and in seeking payment from the carrier, should need only prove that the settlement was reasonable under the totality of the circumstances. There should not be a shadow trial of the underlying case in the subsequent insurance coverage action.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><a href=\"https:\/\/www.policyholderperspective.com\/2025\/08\/articles\/insurance-coverage\/the-contingent-duty-to-indemnify\/#_ftnref1\">[1]<\/a>&nbsp;Sapa Extrusions v. Liberty Mutual Insurance, 939 F.3d 243, 252 (3d Cir. 2019).<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes &#8211; please call Advise &amp; Consult, Inc. at 888.684.8305, or email <a href=\"mailto:experts@adviseandconsult.net\">experts@adviseandconsult.net<\/a>.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Timothy P. Law | Reed Smith An insurance company\u2019s defense obligation carries with it a conditional obligation to indemnify in the event the policyholder is held liable for a claim covered by the policy. When a case is resolved by settlement, prior to findings of fact on which an analysis of coverage could be based,&hellip; <a class=\"more-link\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/duty-to-indemnify-contingent\/\">Continue reading <span class=\"screen-reader-text\">The Contingent Duty to\u00a0Indemnify<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[10721],"tags":[9895,8881,22],"class_list":["post-904730","post","type-post","status-publish","format-standard","hentry","category-insurance","tag-advise-consult","tag-indemnity","tag-insurance","entry"],"jetpack_publicize_connections":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Contingent Duty to\u00a0Indemnify - Advise &amp; Consult, Inc.<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/duty-to-indemnify-contingent\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Contingent Duty to\u00a0Indemnify - Advise &amp; Consult, Inc.\" \/>\n<meta property=\"og:description\" content=\"Timothy P. 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