Sued after a crash: how your insurer's duty to defend works

If someone sues you over a crash and the claim could fall under your auto liability coverage, your insurer must provide and pay for a lawyer to defend you, and in the standard policy those defense costs do not reduce your coverage limit. That duty is broader than the duty to pay a judgment, it begins when you are served, and it depends on you getting the suit papers to the insurer immediately. Everything else in this article, from the deadline to answer to who controls a settlement, follows from those facts.

Two duties: defend and indemnify

Liability policies make two different promises.

The duty to defend is the promise to provide a lawyer and pay for the defense of a suit that seeks damages the policy may cover. The duty to indemnify is the promise to pay a settlement or judgment, up to the limit, for damages the policy does cover. The first is decided early, from the lawsuit's allegations. The second is decided at the end, from what was actually proved and what the policy covers.

Because they are judged at different times, the duty to defend is the wider one. Many states hold that an insurer must defend whenever the complaint alleges facts that, if true, might fall within coverage, even when the claim is weak or partly outside coverage. That means an insurer can owe you a defense and, at the end of the case, owe nothing in indemnity. The reverse can also happen: a refusal to defend that turns out to be wrong exposes the insurer to the costs and sometimes the judgment.

How the duty is measured varies by state. In Texas, courts generally use the "eight-corners" rule: the duty is decided by comparing the allegations in the lawsuit with the policy's terms, without looking at outside evidence, as the Texas Supreme Court held in GuideOne Elite Insurance Co. v. Fielder Road Baptist Church (2006). Courts in other states, including California, look at the complaint and also at facts the insurer knows that show a potential for coverage. Check the rule with a lawyer in your state if the question is close.

What the policy says

The standard personal auto policy form published by the Insurance Services Office (ISO) is the model for many insurers' wording, although every company's policy is its own contract. A sample ISO personal auto policy form hosted by the Virginia State Corporation Commission shows the shape of the language. In substance:

• The insurer will pay damages for bodily injury or property damage for which an insured is legally responsible because of an auto accident.
• The insurer will settle or defend, as it considers appropriate, any claim or suit asking for those damages.
• In addition to the limit of liability, the insurer pays defense costs it incurs.
• The duty to settle or defend ends when the limit has been exhausted by payment of judgments or settlements.
• The insurer has no duty to defend or settle claims that the policy does not cover.
• After a loss, the insured must promptly send the insurer copies of any notices or legal papers received in connection with it, and cooperate in the investigation, settlement or defense.

Two practical points follow. First, defense costs are usually "outside the limits." If you have a $50,000 limit and the insurer spends $40,000 on lawyers, you still have $50,000 of coverage for settlement or judgment. Not every policy works this way, particularly policies on commercial vehicles or some nonstandard forms, so read yours. Second, "as it considers appropriate" gives the insurer the choice of whether to settle or fight and the right to pick the lawyer. That is why the question of whose interests the lawyer serves comes up later in this article.

The first days after you are served

A lawsuit starts with a summons and a complaint delivered to you, often by a process server. The summons states how long you have to respond. Ignoring it is the single worst thing you can do, because the plaintiff can then ask the court for a default judgment, which means winning without a trial. Your insurer cannot protect you if it does not know about the suit.

Time limits depend on the court and state. In federal court, a defendant generally must answer within 21 days of being served with the summons and complaint, under Federal Rule of Civil Procedure 12(a). State courts differ. A response is typically due in 30 days in California, 20 or 30 days in New York depending on how and where you were served, and Texas uses its own formula based on a Monday after a set period. Small claims and justice courts often run shorter. The date on your summons controls.

What to do, in this order:

1. Note the date and time you were served. Photograph the papers. The deadline runs from service.
2. Read the summons for the deadline and the court. Mark the answer date on a calendar with a reminder a week before.
3. Call your insurer's claims line the same day, give your policy and claim numbers, and say you have been served with a lawsuit. If you already have an open claim from the crash, use that claim number.
4. Send the papers in writing as well. Email or upload the whole package, summons, complaint and any attachments, and keep the confirmation. The policy's duty to forward suit papers promptly is a condition insurers can invoke if you wait.
5. Ask for the name of the defense lawyer and the date they will answer. Get it in writing. If days pass with no assignment and the deadline is close, call again, and tell the adjuster the date in plain words.
6. Do not talk to the plaintiff or the plaintiff's lawyer. Anything you say can be used against you.
7. Do not sign anything or pay anything. Do not send money to the plaintiff.
8. Preserve evidence. Keep photos, texts, repair bills, dashcam footage and anything about the crash. Deleting material after a suit is filed can lead to court sanctions.
9. Tell your umbrella insurer, if you have one. Late notice to an excess carrier can cause trouble. See umbrella insurance: liability protection above your auto policy.

If the deadline is close and you have no lawyer from the insurer, you may need to contact a lawyer yourself that day. Courts differ on how forgiving they are of a missed answer date, and a default can be hard to undo.

If you wait

Holding the papers back puts your coverage at risk as well as your defense. The insurer can deny for late notice, although many states require it to show it was prejudiced by the delay. A default judgment entered because nobody answered can be for the full amount the plaintiff asks, and the insurer may say it was never given the chance to defend. Do not rely on winning that fight. Forward the suit the day you get it.

The defense lawyer: who they work for

Insurers usually provide a defense through either in-house staff attorneys or an outside law firm they hire. Either way, a defense lawyer assigned by your insurer owes you professional duties. In most states the lawyer's client is you, the insured, and in many states the insurer is also treated as a client. This is often called the tripartite relationship, and it works fine in the common case where you and the insurer want the same outcome: a win, or a settlement for a fair amount within the limit.

What the lawyer should do:

• File the answer on time and handle court deadlines.
• Investigate fault and damages, take or defend depositions, and gather your records.
• Tell you about settlement offers and developments, and consult you.
• Keep your confidences. In most states what you tell your defense lawyer is protected by attorney-client privilege.

What the lawyer should not do: put the insurer's interest in saving money ahead of your interest in avoiding a judgment above your limits, or use what you reveal to build a coverage defense for the insurer. If you think that is happening, say so to the lawyer in writing, and consult a lawyer of your own. Our article on what happens in a car accident lawsuit, from complaint to verdict describes the phases of the case your defense lawyer will handle.

Reservation of rights: defended, but not guaranteed

Sometimes the insurer agrees to defend but sends a letter saying it is reserving the right to deny coverage later. The letter usually gives reasons, such as a claim that you were not a covered driver, an exclusion that may apply, or a doubt about whether the damages sought are covered. A reservation of rights is not a denial. It tells you the insurer is paying for your defense while it keeps open the possibility of refusing to pay the judgment, and in some cases of seeking reimbursement of defense costs.

The problem is the conflict of interest. If the coverage question depends on facts that will be decided in the lawsuit itself, say whether you were using the car for business, or whether an act was intentional, the insurer's lawyer could steer the case toward facts that favor its coverage position. Some states respond by giving the insured a right to independent counsel, chosen by the insured, at the insurer's expense. California's version is Civil Code section 2860, which grew out of the 1984 San Diego Navy Federal Credit Union v. Cumis Insurance Society decision, and the lawyer is commonly called Cumis counsel. A Claims Journal overview of independent counsel in California explains that a reservation of rights by itself does not always create the right, and that the statute includes limits on qualifications and fees. Other states have different rules; in some, the insurer can control the defense under a reservation.

If you receive a reservation of rights, read it twice, note which issues it cites, reply in writing if you disagree, and consult a lawyer of your own. Our article on reservation of rights letters: what your insurer is really telling you covers these letters in depth.

When the insurer refuses to defend

An insurer may decline to defend because it says the suit is outside coverage. Typical reasons are:

A refusal is not the end. Ask for the reason in writing, with the policy provisions cited. State rules on claim handling require insurers to explain denials (see how fast an insurer must respond to your claim: state time limits). If you believe the refusal is wrong, you can hire your own lawyer, file a complaint with the state insurance department, and, with a lawyer, ask a court to declare that the insurer owed a defense. Courts in many states hold that an insurer that wrongly refuses to defend loses control of the case and can be bound by a reasonable settlement or judgment, and can owe the legal fees. Because the rule differs, speak to a licensed attorney promptly. The state insurance department is the place to file a complaint about the process.

Damages above the limit and damages the policy never covers

The defense is paid outside the limit, but the settlement or judgment is not. If the plaintiff asks for more than your limit, you are personally exposed for the difference. That is why the insurer may send an "excess letter" (see excess letters and time-limit demands: what to do as the insured), and why you may want your own attorney in addition to the one the insurer provides. Their job is to protect you from the part of the case the insurer is not paying for.

Insurance generally does not cover every kind of damages. Many states bar or limit insurance for punitive damages, and some policies exclude them. If the complaint seeks punitive damages, your insurer will usually defend the suit but may say it will not pay that part, and may send a reservation of rights. Ask your lawyer which parts of the demanded damages are covered in your state.

A related situation is a refusal to settle within limits, where a reasonable offer is made and the insurer rejects it. That can create exposure for the insurer, and our article refused settlements and excess judgments: the insurer's duty to settle follows such a case from demand to verdict.

Who controls settlement

Under the standard wording, the insurer decides whether to settle. Unlike some professional liability policies, a typical personal auto policy does not require your consent to settle a claim, and you generally cannot block a settlement within the limits. Your agreement is not required.

You do have influence:

• You can tell the insurer you want it to settle, and put that in writing, particularly when a demand within the limit arrives.
• You can supply facts that affect value, such as witnesses and photos.
• You can contribute your own money if a gap between the limit and the demand is small enough to close.
• You can refuse to cooperate in wrongdoing. Your duty to cooperate does not require false statements.

The insurer's right to control is tempered by its duty to treat your interests fairly when settling. If it refuses a reasonable offer within limits and a judgment exceeds them, the law of many states allows a claim against it. See insurance bad faith explained.

Where the duty ends

Under the standard wording, the duty to settle or defend ends when the limit is exhausted by payment of judgments or settlements. This matters in two situations.

A settlement that uses up the limit. If the insurer pays its limit to settle your case, the claim ends and so does the duty to defend that claim. If a single accident produced several claims, paying one claimant can reduce what remains for others. When the insurer wants to exhaust the limit by paying one claimant while other claims remain, that raises questions about the remaining defense; see multiple claimants, one policy limit: interpleader and pro rata splits. States and policies differ, and some courts restrict an insurer from tendering its limit and stepping away from the defense of remaining claims. This is a question for counsel.

A judgment. If a judgment is entered, your insurer pays its limit toward it. Appeals are a separate question. Many policies treat the cost of an appeal bond and the defense of an appeal differently, so ask whether the insurer will appeal and who pays.

A worked example

Say a driver with a 50/100/50 policy rolls through a stop sign and hits a cyclist. The cyclist sues for $400,000 for injuries, including a claim for lost earnings. These are made-up figures.

• Day 0. The driver is served on a Tuesday. The summons says to respond within 30 days. The driver calls the insurer that day and emails the papers.
• Day 3. The insurer assigns a defense firm and sends a letter confirming it will defend, subject to a reservation of rights on one point: the driver was making a delivery for a friend's bakery that morning, and the insurer wants to look at a business-use exclusion.
• Day 6. The driver, concerned that the reservation could leave a judgment unpaid, hires a personal lawyer for a few hours of advice. The lawyer reads the policy and the letter and writes to the insurer asking it to state exactly what coverage issue it is reserving on.
• Day 20. The defense firm files the answer, three days before the deadline it had set for itself. Discovery begins.
• Month 14. The case is mediated. The cyclist offers to settle for the $50,000 per-person limit if the driver is released. The driver writes to the insurer, urging acceptance. The insurer settles for the limit, and the cyclist signs a release.
• Result. The duty to defend ends with payment. The driver paid the personal lawyer's fee out of pocket, nothing toward the settlement, and the coverage question over the delivery was never decided because the insurer paid.

In a worse version, the cyclist refuses $50,000, the case is tried, and a jury awards $400,000. The insurer pays its $50,000 limit, the driver owes $350,000 unless an umbrella or other coverage applies, and the question becomes whether a refusal to settle was reasonable. The driver's personal lawyer and any umbrella carrier matter most there.

Common questions

Do I have to pay anything for the lawyer the insurer provides?

Not under the standard wording. The insurer pays the defense costs it incurs, in addition to your limit. If you hire your own lawyer for a coverage dispute, an excess-exposure question, or because you want a second opinion, you pay that lawyer unless a law or the insurer's reservation gives you independent counsel at its expense.

Can I choose the lawyer?

Generally the insurer chooses. Exceptions include states and situations where a conflict triggers a right to independent counsel, as in California's Civil Code section 2860. You can always hire an additional lawyer at your own cost.

What if the plaintiff also sues my employer or the car's owner?

Other people sued over the same crash may have their own coverage and their own right to a defense, and the insurer may owe a defense to permissive drivers and owners as insureds. Tell the insurer who else has been named. Conflicts among co-defendants can mean separate lawyers.

I got served, and my insurer says the claim is closed. Is the duty to defend over?

A closed claim file does not end the duty to defend a lawsuit that arrives afterward, if the suit seeks damages that are covered and the policy was in force. Call the adjuster, give the new papers and the case number, and ask them to reopen the file.

Key takeaways

• A liability insurer must defend a suit that alleges facts potentially covered by the policy, and under the standard form pays defense costs in addition to your limit.
• The duty to defend is wider than the duty to indemnify; the first is judged from the complaint and policy, the second from what is proved.
• Forward the suit papers to your insurer the day you are served, because the deadline to answer is short and default judgments are hard to undo.
• A reservation of rights means you are defended while coverage is in doubt; some states, such as California, may give you independent counsel when it creates a conflict.
• The insurer usually controls settlement and pays only up to the limit, so exposure above it is yours to manage with a personal lawyer and any umbrella coverage.