## Facts

- Vernon Dartmouth Gray held a personal liability policy endorsement providing that the insurer would pay covered damages for bodily injury or property damage and would defend any suit seeking such damages, even if allegations were groundless, false, or fraudulent.
- The endorsement excluded coverage for bodily injury or property damage “caused intentionally by or at the direction of the insured.”
- After an altercation in Missouri, John R. Jones sued Gray alleging Gray “wilfully, maliciously, brutally and intentionally” assaulted him and sought actual and punitive damages.
- Gray notified Zurich, asserted he acted in self-defense, and requested a defense.
- Zurich refused to defend, reasoning the complaint alleged an intentional assault and thus fell within the intentional-act exclusion.
- Gray defended the Missouri action himself and suffered an adverse judgment for damages.
- Gray sued Zurich in California for breach of the duty to defend and for failure to indemnify him for the Missouri judgment; the trial court entered judgment for Zurich, and the Court of Appeal affirmed.

## Issues

1. Whether an insurer’s duty to defend is triggered when the third-party complaint alleges intentional injury but facts known to the insurer indicate a potential for covered liability (including nonintentional liability or self-defense).
2. Whether policy language promising to defend suits “even if” allegations are groundless, false, or fraudulent is limited by an intentional-injury exclusion that does not clearly address the duty to defend.
3. Whether requiring a defense in an action alleging intentional wrongdoing is barred by public policy or defeated by insurer-insured conflicts of interest.

## Decision

- The California Supreme Court reversed the judgment for Zurich.
- The court held Zurich breached its contractual duty to defend Gray in the Missouri action.
- The court ruled the duty to defend is broader than the duty to indemnify and arises when there is a potential for coverage based on the allegations and facts known to the insurer.
- The court rejected Zurich’s arguments that public policy or conflict-of-interest concerns eliminated the defense obligation.
- The case was remanded to determine damages caused by the breach, including the amount of the Missouri judgment and Gray’s reasonable defense costs and attorney’s fees.

## Legal Principles

- The duty to defend is broader than the duty to indemnify and is triggered by a potential for coverage, not only by ultimate coverage.
- In evaluating the duty to defend, the insurer must consider the complaint and facts communicated or otherwise known that suggest liability might fall within coverage.
- Ambiguities in insurance policies, particularly as to exclusions affecting defense obligations, are construed against the insurer and in line with the insured’s reasonable expectations.
- A defense promise to defend suits even if allegations are “groundless, false or fraudulent” supports a duty to defend when the insured disputes allegations that would otherwise implicate an exclusion.
- An exclusion for intentionally caused injury does not, without clear language, eliminate the duty to defend suits that merely allege intentional conduct.
- Conflict-of-interest and public policy concerns do not excuse the duty to defend; the insurer may defend while protecting its coverage position (including through a reservation of rights).

## Conclusion

The court held that an insurer must defend a suit whenever the allegations and known facts create a potential for covered liability, and an intentional-injury exclusion will not relieve that duty absent clear policy language negating a defense obligation for suits alleging intentional harm.


Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 419 P.2d 168 (Cal. 1966)