When a claim arrives, the first question is whether an insurer must defend, and that question is answered differently from whether it must ultimately pay.
Duty to defend is broader. It is generally triggered where the allegations, compared with the policy, raise the potential for coverage — the eight corners of the complaint and the policy in many states, with some permitting extrinsic evidence. Ambiguity is resolved in favour of a defence.
Reservation of rights. An insurer defending while disputing coverage must reserve rights specifically. Where the reservation creates a conflict, the insured may be entitled to independent counsel at the insurer’s expense in many states.
Duty to indemnify depends on the facts ultimately established, and may be resolved in a declaratory action, sometimes stayed pending the underlying case.
Notice. Occurrence policies generally require notice as soon as practicable, with late notice a defence only on a showing of prejudice in most states. Claims-made policies require notice within the policy period or an extended reporting period, and there late notice is usually fatal without any prejudice requirement.
Allocation among policies and periods for long-tail claims, and exhaustion of underlying layers before excess coverage responds.
Bad faith. An insurer’s unreasonable refusal to defend, or failure to settle within limits when it should, exposes it beyond the policy limits.