In indemnity policies, an insured’s cause of action against an insurer arises when the insured suffers a money loss in order to discharge his liability (e.g., he pays a judgment). Thus, a no-action clause that states that a judgment must have been paid by the insured prior to reimbursement usually indicates that the contract provides indemnity coverage. Even if the policy provides that the insurer will defend all actions against the insured, it will be considered an indemnity policy if it also states that no action will lie against the insurer except for losses actually sustained and paid in money.
In liability policies, an insured’s cause of action against an insurer accrues when the insured’s liability attaches.
Certain provisions, including those that require notice of accidents and claims, require defense of suits by the insurer, and prohibit settlements by the insured, indicate that a policy is one of liability rather than indemnity. In addition, a no-action clause that makes an insurer’s liability conditional upon a judicial determination of liability indicates that the policy is a liability policy.
Some courts hold that a policy against liability for injuries is a liability policy even if certain provisions limit the insurer’s liability to losses paid by the insured to satisfy judgments.
In determining whether an insurance contract is a liability policy or an indemnity policy, the intent of the insured and the insurer, as evidenced by the language used, is paramount. Courts will consider the terms of the entire policy to determine its type. If the policy is ambiguous, it is usually construed as a liability policy.