The duties to defend and indemnify arise out of an insurer’s contract with its insured. It is a commonly accepted principle under Alabama law that an insurer’s duties to defend and indemnify are separate and distinct. Indeed, a finding by a court that an insurer is obligated to defend its insured against the allegations in an underlying complaint does not mean that it must also indemnify its insured, as an insurer’s duty to defend is broader than its duty to indemnify. In Alabama, the duty to defend arises either when (1) the underlying plaintiff “alleges a covered accident or occurrence . . . even though the evidence may eventually prove that the gravamen of the complaint was not a covered accident or occurrence” or when (2) “the complaint against the insured does not, on its face, allege a covered accident or occurrence, but the evidence proves one.”1
Recently, the Northern District of Alabama, in a diversity action applying Alabama law, found that the failure to disclose a defect in a home did not trigger the duty to defend. Nationwide Mutual Fire Insurance Company v. Carmichael, 2023 WL 5439766, Case No.: 77-22-cv-00689 (N.D. Ala. Aug. 23, 2023). In the underlying action, the buyers alleged that the insured seller caused damage to the property by failing to disclose a termite infestation, which he knew existed. Nationwide appointed defense counsel and filed a separate declaratory judgment action to establish it had no duty to defend or indemnify the insured.
In the declaratory judgment action, Nationwide filed a motion for summary judgment on the duties to defend and indemnify. The court did not rule on the duty to indemnify, instead finding it unripe because no judgment had been entered. Nationwide argued that there was no duty to defend because neither the underlying complaint nor other evidence showed an “occurrence.” The court found that there was no dispute that the insured’s failure to disclose did not cause bodily injury or property damage, and that there were no allegations and no evidence of bodily injury. Nationwide did not argue that the Complaint failed to allege property damage; rather, it argued that any property damage was not “due”2 to the insured’s failure to disclose. The court agreed.
Ultimately, the court found there were no allegations or evidence of an “occurrence,” as defined under the policy. Notably, the court emphasized that Nationwide may still be liable for any fees and expenses that its insured incurred in defending against the underlying state court action if the evidence ultimately shows that the plaintiffs’ claims are covered under the policy.
Although the Carmichael opinion is merely persuasive authority, it may support insurers’ motions for summary judgment in declaratory judgment actions where an insured’s failure to disclose defects in the sale of residential property allegedly causes property damage. Nevertheless, insurers should take heed that obtaining summary judgment on the duty to defend will not protect them from obligations that may arise based on the developing evidence in the underlying dispute.
1 Tanner v. State Farm Fire & Cas. Co., 874 So. 2d 1058, 1065 (Ala. 2003).
2 The policy language at issue provided the following: “[i]f a claim is made or a suit is brought against an ‘insured’ for damages due to an ‘occurrence’ resulting from negligent personal acts or negligence arising out of the ownership, maintenance or use of real or personal property,” Nationwide would “[p]rovide a defense at our expense.” (emphasis added). Further, the policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in” either “[b]odily injury” or “[p]roperty damage.”