Does an Insurer Have a Duty to Defend Fraud and Misrepresentation Claims?
Sometimes business and people make misrepresentations to their clients or during the course of a transaction. You buy a car that you were told hadn’t had any prior problems, only to determine that it has flood damage. A business owner sells his company and remembers to disclose all his assets so he can get top dollar, but fails to mention all his debts and liabilities. When these businesses have insurance, there is sometimes an exclusion carved out of the policy that disallows the insurer from defending or indemnifying its insured for intentional acts, like are alleged in fraud and misrepresentation claims.
Exclusions for fraud and misrepresentation claims
In Alabama insurer’s have a broad duty to defend their insureds against claims. Because the decision on whether to provide a defense must be made at a preliminary stage in proceedings, Alabama holds that an insurer’s duty to defend is broader than its duty to indemnify. See Armstrong, 479 So.2d at 1168; Lawler Machine & Foundry Co. v. Pacific Indem. Ins. Co., 383 So.2d 156, 157 (Ala.1980). The insurer’s duty to defend at this preliminary stage “must be determined primarily from the allegations of the complaint.” See Armstrong, 479 So.2d at 1167; Ladner, 347 So.2d at 102. “If the allegations accuse the insured of actions for which the insurance company provides protection, the insurance company is obligated to defend the insured.” American States Ins. Co. v. Cooper, 518 So.2d 708, 709 (Ala.1987).
If an exclusion is going to apply that enables the insurer to disclaim its duty to defend, the exclusion language must clearly and unambiguously apply to the claim in question. In order to invoke an exclusion in denying a defense, the insurer bears the burden of pointing to allegations of the complaint or other available evidence by which the claim was clearly excludable. See Armstrong, 479 So.2d at 1168. If the insurer fails to establish the claim should be excluded from coverage, the insurer bears a duty to defend even if subsequent developments indicate circumstances that would render the claim excludable. See Id. at 1168–69.
Where a “policy exclusion unambiguously excludes from coverage all intentional acts give rise to liability regardless of whether the insured subjective intended the resulting damages or injuries,” and “the provision clearly excludes claims flowing from dishonest, fraudulent, intentional and criminal acts,” the policy exclusion defeats coverage for all liability resulting from the insured’s intentional acts. Universal Underwriters Ins. Co. v. Stokes Chevrolet, Inc., 990 F.2d 598, 604 (11th Cir. 1993) (citing St. Paul Fire & Marine Ins. Co. v. Molton, Allen & Williams Corp., 592 So. 2d 199 (Ala. 1991). So an insurer is not required to defend insured on the counts of a suit that alleged intentional fraud or misrepresentation where the policy contains exclusions specifically stating that the insurer would not cover damages assessed against insured that resulted from fraudulent acts, intentional fraud, wantonness, or intentional wrongdoing. St. Paul Fire & Marine Ins. Co. v. Molton, Allen & Williams Corp., 592 So. 2d 199 (Ala. 1991)
A duty to defend other claims and non-intentional acts
Even where an insurance policy excludes from coverage the “intentional acts” of its insured, the insurer has an obligation under the policy to defend claims that do not allege intentional acts, including but not limited to suppression of a material fact, which is not necessarily an intentional tort for the purposes of triggering a duty to defend. Townsend Ford, Inc. v. Auto-Owners Ins. Co., 656 So. 2d 360, 363 (Ala. 1995). So there may still be coverage available against some claims made against an insured, even when an insurer does not have to defend its insured against fraud and misrepresentation claims that are alleged against it.
However, things can get tricky regarding coverage when there are claims of innocent misrepresentation and reckless misrepresentation (as opposed to claims of intentional fraud or misrepresentation), in which “an allegedly injured person alleges an ‘occurrence’ with damages not ‘expected or intended from the standpoint of the insured,’” and the insurer may owe a duty to defend its insured against such claims. Tanner v. State Farm Fire & Cas. Co., 874 So. 2d 1058, 1065 (Ala. 2003); see also Universal Underwriters Ins. Co. v. Youngblood, 549 So.2d 76 (Ala. 1989) (holding, “The negligence claims and the innocent or reckless aspects of the misrepresentation claims present a sufficient basis to support the trial court’s declaration of a duty to defend.”); American States Ins. Co. v. Cooper, 518 So.2d 708 (Ala.1987) (holding that insurer was obligated to defend a and indemnify against claimants’ misrepresentation claims).
Of course, there is no blanket analysis for claims of intentional acts, like fraud and misrepresentation claims, so each coverage analysis must be conducted on the facts of particular claims and by applying the language of the applicable policy.
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