In Idaho, the general rule of law is that a liability insurer owes a duty to defend its insured against claims that create a potential for indemnity. As such, the insurer must defend a lawsuit that potentially seeks damages within the coverage of the insurance policy held by the insured. Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify because the insurer may be obligated to defend its insured in a lawsuit in which no settlement occurs or no damages are ultimately awarded. The determination whether the insurer owes a duty to defend is usually made by comparing the allegations of the complaint with the terms of the insurance policy. Facts from outside sources – extrinsic to the complaint – may also give rise to a duty to defend when those facts reveal a possibility that the claim may be covered by the policy. Further, the duty to defend is a continuing one, arising upon the tender of defense by the insurer and lasting until the underlying lawsuit is concluded, or until the insurer has determined that there is no potential for coverage. If the insurer determines at the outset of the suit that, based on the facts known to it at that time, there is no potential for coverage, the insurer does not have a continuing duty to investigate the initial claim or monitor the lawsuit.
Either the insured or the insurance company may bring a declaratory judgment action, which is separate and distinct from the underlying lawsuit, for the purposes of determining whether coverage exists under the policy in relation to the underlying suit, and therefore, whether the insurer has a duty to defend and indemnify its insured. During a declaratory judgment action, the presiding judge is bound by state statutes and common law principles of contract interpretation in determining the applicability of the insurance policy.
Since insurance policies are generally considered a type of adhesion contract, where the insured has little to no input as to the terms of the policy, they are normally liberally construed infavor of the insured. Where a term contained in the policy is not ambiguous, it will be interpreted according to its plain language. Where ambiguities do exist in a policy, the court will often consider circumstances or evidence outside of the terms and conditions of the insurance policy, such as what type of coverage had been requested by the insured, or what the insured’s understanding of the terms of the policy were based on discussions with an authorized insurance representative. And, any ambiguity in the language of the insurance contract will be construed against the insurer.