A recent Utah Supreme Court decision could result in significant benefits to some policyholders in Utah’s construction industry. The case, Ohio Casualty Insurance Co. v. Unigard Insurance Co., 2012 UT 1, concerned a fight between two insurers about how to split the costs of defending a lawsuit brought against their policyholder, Cloud Nine. For policyholders, the most notable aspect of the decision centers on the fact that Cloud Nine was uninsured for about six months between the end of Ohio Casualty’s policy and the beginning of Unigard’s policy.

Ohio Casualty argued that Cloud Nine should have paid a portion of its defense costs based on the length of time it was uninsured. The court disagreed, noting that because both insurers reserved the right to control all aspects of the defense, “it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit,” and therefore “it would be inequitable to hold the insured responsible for the share of defense costs attributable to the time period during which it was uninsured.”

The Ohio Casualty decision is significant because it effectively overrules part of the influential case of Sharon Steel Corp. v. Aetna Casualty & Surety Co., 931 P.2d 127 (Utah 1997), in which the court held that defense costs should be apportioned to an insured for those periods when it was without coverage.

For policyholders who have had a gap in liability coverage, the Ohio Casualty decision could provide a lifeline. Virtually all liability policies that obligate an insurer to defend its insured—including CGL, professional liability, employers’ liability, and pollution coverage policies—contain language that gives the insurer the right to control significant aspects of the defense. Thus, Ohio Casualty could apply in many coverage gap situations. Moreover, the complexity of many construction disputes makes an insurer’s duty to defend an extremely valuable aspect of coverage. Insurance industry statistics show that the cost of defending a complex commercial case can range as high as 77 cents for every 23 cents paid out to claimants. Scott C. Turner, Insurance Coverage of Construction Disputes § 7:1 (Nov. 2009). Depending on the complexity of the dispute and the length of the coverage gap at issue, the Ohio Casualty decision could spare construction industry policyholders from paying defense costs that could easily tally hundreds of thousands of dollars.