An insurer's duty to defend in connection with liability insurance policies is well-established and reasonably well understood. The consequences for the breach of that duty, however, are much less clear. On one hand, one might argue that this duty is a contractual duty giving rise to contractual remedies. The insured provides its own defense and, if the insurer wrongfully failed to provide a defense, the insured is entitled to reimbursement of its defense costs. On the other hand, this remedy seems insufficient; the value on an insurer's participation in the defense of a case goes beyond well merely paying the legal fees. It includes advice, strategy, and a greater likelihood that the insurer will participate in a settlement. In an attempt to account for the intangible benefits of a defense, another approach to the consequence of an insurer's breach of the duty to defend is like a forfeiture; an insurer which wrongfully refuses to defend may give up its policy defenses.
Jeffery E. Thomas,
Consequences of an Insurer's Breach of the Duty to Defend: Columbia Casualty Co. v. HIAR Holdings, LLC in the Context of the ALI Restatement of the Law of Liability Insurance,
Available at: https://irlaw.umkc.edu/faculty_works/803