California Court Upholds Insurer’s Duty to Defend After Covered Claim Is Dismissed

On April 30, 2026, the U.S. District Court for the Northern District of California issued a significant ruling in an insurance coverage dispute between a commercial general liability insurer and its policyholder. The decision addresses several critical issues in insurance law, including the scope and continuity of the duty to defend and the standard for insurer reimbursement of defense costs in mixed-claim actions. The court ruled largely in favor of the insured, SVO Building One, LLC ("SVO"), and the matter now heads toward settlement or trial on SVO's remaining counterclaims.

I. Background

Navigators Specialty Insurance Company ("Navigators") issued a commercial general liability policy to SVO for the period of July 12, 2017, to August 12, 2019. The policy provided coverage for "bodily injury" or "property damage" caused by an "occurrence" and coverage for "damages" because of "personal and advertising injury," including claims for slander, libel, or disparagement of a person's or organization's goods, products, or services.

In 2017, SVO entered into a contract with an equipment manufacturing company to design a data center in Sacramento, California. In 2018, that company sued SVO, alleging breach of contract. On July 11, 2019, it filed a fourth amended complaint asserting eighteen causes of action against SVO, including one cause of action for defamation. SVO tendered the fourth amended complaint to Navigators, which agreed to provide a defense under a reservation of rights, noting that the defamation cause of action was the only allegation that potentially qualified as a "personal or advertising injury."

On March 24, 2021, the manufacturer dismissed a number of causes of action without prejudice, including the defamation cause of action. Shortly thereafter, Navigators wrote to SVO advising that it was denying all coverage, withdrawing from SVO's defense as of April 15, 2021, and would no longer pay any legal fees or costs incurred on behalf of SVO after that date, asserting that the dismissal of the defamation claim eliminated any potential for coverage.

SVO pushed back, urging that the denial of coverage was "factually and legally unsupported," pointing to allegations of disparagement in other causes of action and of potentially covered property damage. Navigators ultimately agreed to continue providing a defense under a reservation of rights, and on January 5, 2022, the underlying action settled and the court dismissed it in its entirety with prejudice.

Navigators then filed suit against SVO seeking a declaratory judgment that it is entitled to reimbursement of defense costs. SVO filed counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, violations of California's Unfair Competition Law, and declaratory relief.

II. Key Holdings

Navigators’ Causes of Action

1. Right to Reimbursement as of March 24, 2021

Navigators sought a declaration that it had the right to reimbursement of all attorneys' fees and costs incurred in defense of the underlying action as of March 24, 2021, as it, according to Navigators, had no duty to defend SVO as of that date.

The court rejected Navigators' position, holding that the duty to defend survives unless and until the carrier can establish that there are no underlying facts or allegations suggesting potential coverage even for unarticulated causes of action. The court found that factual allegations in the remaining causes of action — specifically, that SVO caused third parties to issue false reports about the manufacturer and that SVO disparaged its work to a third-party contractor — gave rise to potential claims for defamation, such that the duty to defend continued even after the formal defamation cause of action had been dismissed.

As a matter of law, the court found that Navigators had a continuing duty to defend SVO in the underlying action after March 24, 2021, and granted SVO summary judgment on Navigators' first cause of action.

2. Right to Reimbursement of Uncovered Claims

Navigators also sought a declaration that it had the right to reimbursement of attorneys' fees and costs incurred in defense of uncovered claims. SVO disagreed and argued that Navigators failed to produce evidence establishing that any fees and costs were solely allocable to claims that were "not even potentially covered."

The court agreed with SVO, although without reaching the merits of what constitutes fees that may have been “uncovered.” To support its request for reimbursement, Navigators pointed only to its amended interrogatory responses, which incorporated and relied on an excluded expert's report the court separately held to be unreliable and unhelpful. With the court having excluded that report, Navigators had no admissible evidence to raise a triable issue of fact, and the court granted SVO summary judgment on this claim as well.

Current Posture

The court granted SVO's motion for summary judgment in full and partially granted Navigators' motion for summary judgment on SVO’s counterclaims, but allowed SVO’s claims for breach of contract, violation of Business and Professions Code § 17200, and declaratory relief to remain. The court directed the parties to meet and confer regarding settlement, which it believes will be beneficial in light of its holdings.

II. Key Implications for Insurance Coverage Disputes Governed by California Law

The Duty to Defend Survives Dismissal of the Only Formally Covered Claim

This decision reinforces the rule that an insurer cannot terminate its defense obligation simply because the cause of action formally triggering coverage has been dismissed. The insurer is not relieved of its duty to defend until it can negate all facts suggesting potential coverage — and courts will look to the underlying factual allegations across the entire complaint, not just the labeled causes of action. Insurers seeking to withdraw from a defense following a mid-litigation dismissal face a heavy burden and should conduct a careful, claim-by-claim factual analysis before doing so.

Factual Allegations Trump Cause-of-Action Labels Under California Law

The court reaffirmed that the duty to defend arises from the underlying factual allegations, not from the technical legal cause of action the third party pleads. Insurers analyzing coverage should look past the labels attached to each count and examine whether the underlying facts, if a court or jury finds them true, could give rise to a covered claim. This is particularly important in cases involving allegations of disparagement embedded within non-covered claims such as unfair competition or tortious interference.

Expert Testimony in Coverage Allocation Cases Must Precisely Apply the Buss Standard

Under California law, an insurer seeking reimbursement of defense costs in a mixed action must prove that it can allocate specific costs solely to claims that the policy does not even potentially cover. This is a demanding standard that a probabilistic approach or a reference to the relative "import" of covered versus non-covered claims cannot satisfy. Insurers pursuing reimbursement claims should ensure that any expert they retain to analyze defense cost allocation applies this precise legal standard — a failure to do so will result in exclusion of the expert and, as here, the collapse of the reimbursement claim entirely.

Insurers Should Document Coverage Decisions Carefully and Promptly

The court found a triable issue on SVO's breach of contract claim based on Navigators' letter withdrawing from the defense — even though Navigators subsequently agreed to continue the defense before the stated withdrawal date. This underscores the importance of clear, timely, and defensible coverage communications. A letter announcing a coverage withdrawal — even if the insurer rescinds it before it takes effect — can independently give rise to a breach of contract claim that will survive summary judgment.