Understanding Duty to Defend and Duty to Indemnify

The letter arrived from the insurer 3 weeks after the property management company had tendered a claim for defence. It confirmed that the insurer would provide legal counsel to defend the lawsuit filed against the company, but it also stated that the insurer reserved all rights under the policy, specifically citing the pollution exclusion as a potential ground for denying indemnity. The property management company, a mid-sized commercial operator managing 14 multi-unit residential buildings across a metropolitan area, had never received such a letter before and was uncertain what it meant for the claim or for the company's exposure.

The underlying lawsuit had been filed by a former tenant of one of the managed properties. The tenant alleged that prolonged exposure to mould in their rental unit had caused respiratory illness and other health effects. The statement of claim asserted that the property management company had been negligent in failing to address moisture infiltration and visible mould growth despite repeated complaints over a period of approximately 8 months. The tenant sought damages for personal injury, medical expenses, and loss of income.

When the property management company notified its commercial general liability insurer, the insurer acknowledged that the claim potentially engaged the policy's coverage for bodily injury arising from an occurrence. The insurer assigned defence counsel and confirmed it would fund the defence. However, the reservation of rights letter noted that the policy contained a pollution exclusion and that mould might constitute a pollutant or contaminant within the meaning of that exclusion. If the facts as ultimately determined established that the tenant's injuries resulted from exposure to a pollutant, the insurer might have no obligation to pay any judgment or settlement, regardless of having provided the defence.

The property management company now faced parallel uncertainties. On one track, the liability question: whether the company was legally responsible for the tenant's alleged injuries and, if so, in what amount. On a second track, the coverage question: whether the policy would respond to pay that liability or whether the pollution exclusion would apply. The insurer's defence counsel would handle the first question. The second question remained open, and the company was advised to consider retaining independent counsel to monitor and protect its coverage interests. The defence would proceed for the next 16 months under this arrangement, with the property management company cooperating fully while awaiting resolution of both the claim and the coverage dispute.