As noted by the California Supreme Court, “[t]he insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.” Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 295-96 (1993).

When the insurer wrongfully fails to defend, the insurer has denied its insured one of the most valuable promises under the policy. It forces the insured to expend valuable resources to fund its own defense, sums that are necessarily diverted from other useful purposes. When an insured sues to recover those expenses, the first step is for a court to find that the insurer breached its duty to defend. When the insured then seeks to recover its defense costs as damages, insurers typically advance similar arguments, but courts have provided jilted insureds with various evidentiary presumptions that should be used to respond to many of these arguments.

When an insurer is found to have breached the duty to defend, some courts hold that the insured's defense costs are presumed to be reasonable and necessary. Other courts assume that market incentives can be used to demonstrate the reasonableness of the defense costs incurred. Still other courts hold that a breaching insurer waives the right to challenge the reasonableness or necessity of defense costs or second-guess the insured's defense strategy. This article will examine the standard contentions advanced by breaching insurers to avoid or minimize the payment of past defense costs and the arguments that insureds can use to maximize their recovery.

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