Under certain circumstances, it is prudent for an insurer to provide a “gratuitous defense” to its insured, even though the insurer may be confident in its position that it is under no duty to provide a defense.  Although this type of good faith action provides a benefit to the insured and helps the insurer guard against a default, it does open the insurer to “estopell” claims.

Recently, the Appellate Division, First Department, addressed this issue in Castlepoint Insurance Company v. Hilmand Realty, LLC.  The insured argued that the insurer was not permitted to take “factually inconsistent positions” by retaining counsel to vacate a default against the insureds in the underlying action, while at the same time commencing an action seeking a declaration that there is no coverage due to late notice.

The Court rejected this argument, finding that where “coverage may be arguable” it was better practice for the insurer to defend an insured and commence a declaratory judgment action” rather than simply disclaim coverage in order to avoid the risk that the injured party obtains a judgment against the insured.

Thanks to Steve Kaye for his contribution to this post and please write to Mike Bono for more information.