Insurance Carrier Duty to Defend Under Maryland Insurance Policies

In David Litz v. State Farm Fire and Casualty Co., the Maryland Court of Appeals imposed such a duty upon State Farm despite a policy exclusion which appeared to release this insurer from any obligation to indemnify its insured. There, the plaintiffs sued David Litz on behalf of a child injured while his wife, Pamela, offered babysitting services in the insured home. Because the couple's homeowners insurance policy expressly excluded coverage for damages arising out of such "business pursuits," State Farm refused to defend Mr. Litz in this lawsuit.

Despite the fact that his wife was not entitled to a defense under this exclusion, the Court still required State Farm to defend the husband. According to the Court, the severability clause in the policy providing that the insurance "applies separately to each insured" raised the possibility of coverage, and this possibility alone was enough to trigger State Farm's duty to defend. While this possibility may be quite remote, "the mere possibility that the insurer will have to indemnify triggers the duty to defend."

Although it is well-settled in Maryland that an insurer's duty to defend is broader than its duty to indemnify, the Litz Court has set a relatively low standard by which an insurer's duty to defend is triggered. Even in cases where policy provisions make coverage highly unlikely, an insurer may nevertheless have to defend its insured if the relevant facts raise the slightest chance of coverage. While there remain many factors to consider when determining whether to offer a defense to an insured, this ruling requires all insurers to exercise extreme caution when making this decision. Therefore, you should refer questionable cases to defense counsel for representation or, at the very least, seek a legal opinion on the extent of this obligation in specific cases.