Insurance Law | Corporate Litigation | Business

Introduction: A High-Stakes Fight Over Coverage Obligations

A major manufacturing company is taking Liberty Mutual to court, claiming the insurer breached its legal and contractual obligations by refusing to defend it in two separate property damage lawsuits filed in different states. The central issue: whether Liberty Mutual had a duty to defend the manufacturer under its commercial general liability (CGL) policy when the underlying claims alleged that the company’s products caused significant damage to completed buildings.

The lawsuit, recently filed in federal court, accuses Liberty Mutual of breach of contract, bad faith denial of coverage, and failure to provide a defense—despite the manufacturer’s assertion that the policy clearly encompassed the alleged property damage.

Legal experts say the case could have widespread implications for how insurers handle the duty to defend under CGL policies—particularly in industries where product liability and construction defect claims are common.

The Crux of the Dispute: Duty to Defend vs. Duty to Indemnify

At the heart of the case lies one of the most litigated doctrines in insurance law: the difference between the duty to defend and the duty to indemnify.

Under well-established legal principles, the duty to defend is significantly broader. An insurer must defend its policyholder in any lawsuit where the allegations, if proven true, could potentially fall within the scope of coverage—regardless of the actual facts or eventual outcome of the case.

According to the complaint, the manufacturer was named in lawsuits alleging that its products caused extensive damage to property that was not part of its own work—claims that, the manufacturer argues, clearly fall within the policy’s definition of “property damage” caused by an “occurrence.”

Despite this, Liberty Mutual allegedly declined to provide a defense, citing policy exclusions and claiming the underlying suits were not covered. The manufacturer contends that even if coverage was ultimately uncertain, the insurer was obligated to step in and provide a defense while that determination was made.

Allegations of Bad Faith: More Than a Contract Dispute

In addition to breach of contract, the lawsuit raises the stakes by asserting a bad faith claim—a charge that Liberty Mutual acted unreasonably or with reckless disregard for the manufacturer’s rights under the policy.

In many jurisdictions, a bad faith denial of a defense can lead to significant consequences for insurers, including:

• Punitive damages
• Attorneys’ fees
• Damages in excess of policy limits
• Loss of coverage defenses

“Bad faith requires more than just a wrong decision—it requires an unreasonable one,” said insurance coverage attorney Danielle Marks, a partner at Klein & Keller LLP. “If Liberty Mutual failed to investigate the claims properly or relied on overly narrow interpretations of exclusions, they could be facing significant liability.”

The complaint alleges that Liberty Mutual’s refusal to defend forced the manufacturer to hire its own legal team and bear the full cost of litigation, even as damages mounted and liability remained uncertain.

Industry Implications: A Warning Shot for Commercial Insurers

The case has sparked interest across the insurance and risk management sectors, especially among companies in the manufacturing, construction, and product supply industries.

In recent years, insurers have increasingly leaned on CGL policy exclusions to deny defense and coverage in cases involving alleged product defects or property damage. But courts have pushed back, often finding that ambiguous or broadly worded exclusions cannot override the insurer’s fundamental duty to defend.

Legal analysts expect this case to test several key doctrines, including:

• Whether the underlying lawsuits allege property damage to third-party property,
• Whether the damage resulted from an “occurrence” as defined in the policy,
• And whether policy exclusions—such as the “your work” or “impaired property” exclusions—clearly apply.

If a court finds that Liberty Mutual breached its duty to defend, it could reinforce the message that insurers must tread carefully when declining coverage at the outset of litigation.

Best Practices for Policyholders and Insurers Alike

This dispute offers a valuable reminder to both insurers and insureds:

• For policyholders: Promptly tender all potentially covered claims and document communications with insurers. If coverage is denied, consult legal counsel and consider challenging the denial—particularly when the duty to defend is at issue.
• For insurers: Ensure all claim denials, especially refusals to defend, are based on a thorough investigation, supported by policy language, and consistent with governing case law in the relevant jurisdiction. A hasty or unsupported denial can lead to serious exposure.

“The duty to defend is not a judgment on guilt or liability—it’s a safeguard designed to protect the insured during uncertain legal battles,” said Marks. “Insurers who forget that do so at their peril.”

Conclusion: A Case to Watch

As the lawsuit moves forward, it may serve as a bellwether for how courts continue to interpret and enforce the duty to defend under modern CGL policies. With manufacturers and contractors increasingly targeted in large-scale property damage claims, the need for reliable insurance protection—and for insurers to fulfill their defense obligations—has never been more pressing.

For Liberty Mutual, the outcome of this case could set an important precedent. For policyholders everywhere, it’s a reminder that what your policy says—and how your insurer responds—can make all the difference when litigation strikes.