Exclusively from Foa & Son
Standard liability policies make two specific promises to policyholders. The first is the obvious one most people understand right away, the promise to pay, specifically to pay sums the insured is legally obligated to pay as damages arising from a covered claim. That’s the biggie, of course, and what most people think of if they think at all about these policies.
There’s another promise, often overlooked but equally and perhaps even more important; that’s the insurance company’s promise and duty to defend the insured against suits and claims alleging damage and liability. In fact, the duty to defend is actually broader than the duty to pay damages. If you’ve ever read a lawsuit you know they typically contain numerous claims and allegations; attorneys like to throw as much as they can against the wall in the hope that something sticks. While many allegations in a suit may not be covered by the policy, the general rule in most jurisdictions is that if even one complaint in a lawsuit has the potential for being covered, the insurer must defend against all allegations. Also, in general, where there is any ambiguity whether a complaint might be covered or not, courts are usually generous toward policyholders in finding an initial duty to defend.
This is an important and valuable aspect to liability insurance coverage, and it’s a pretty good deal for the policyholder. Finding a good lawyer experienced in claims litigation may be a challenge for starters, and good lawyers don’t come cheap. Insurance companies have a stable of experienced litigators at their disposal, and pick up the tab, at least initially. Another key, and valuable, point: in most standard liability policies the costs for defense are outside policy limits. Put simply, if you have a policy with limits of a million dollars and it costs you half that in legal fees and defense costs just to fight a claim, you still have full policy limits available to pay a settlement if you lose; dollars spent to defend a claim don’t erode limits. And since the duty of an insurance company to defend their policyholder is actually broader that the duty to pay a claim, it’s not uncommon to find insurers defending cases where they actually end up paying no damages.
Like we said, a good deal for policyholders…but not with all policies. Standard, occurrence based liability policies are almost always duty to defend policies as described above. Claims made management and professional liability type policies, like D&O, EPL (employment practices liability), and such, are different and may not include a responsibility for the insurance company to defend; that responsibility is specifically assigned to the policyholder. For these specialized types of policies this may not automatically be a bad thing; you might prefer to hire your own attorneys, who know already the intricacies of your business and industry, to defend these types of claims. Unfortunately, such policies will also typically specify that defense costs are within limits, so money spent on defense erodes the limits available to pay any settlement. That’s something to keep in mind when deciding what limit of liability to buy for these policies.
As a general rule, though, if any liability policy you consider is an occurrence policy, the insurance company will probably have the duty to defend. For claims made policies, all bets are off; you need to read the form to find out who defends. Fortunately, you won’t have to look far; in any policy responsibility for defense will usually be right there on the front page of the coverage form; it’s that important a consideration.
Keep in mind, too, that the duty to defend isn’t an open ended or endless responsibility. If the part of a claim giving rise to the duty to defend is dismissed for any reason, then the insurer’s duty to defend ceases instantly. This puts a policyholder in the middle of ongoing litigation in the difficult situation of having to finance and potentially find new counsel in the middle of a lawsuit. It can also create a complicated situation where the interests of the insurance company and the insured are not fully in line. This might happen when a claim includes both covered and uncovered allegations. The insurance company would prefer to prevail on the covered allegations, thus freeing itself from defense obligations; the policyholder would prefer to prevail on the uncovered allegations, so that insurance would cover any settlements. In this the insured defendant’s interests align with the plaintiff, since the plaintiff usually prefers to have insurance policy limits available to pay any settlements.
Other key points to remember about insurance policy duty to defend:
- Where the insurance company has a duty to defend, they also have the right to select defense counsel, while defense counsel has an ethical obligation to serve the interests of the insured as well as the insurer.
- Should a conflict arise between the insurer and the insureds, most courts have held that the insured has the right to select its own independent counsel.
- Last point, when an insurance company assumes the duty to defend, be prepared to receive what is known as a reservation of rights notice from the insurance company. This is a letter sent to an insured stating that the insurer will provide a defense on behalf of the insured but that the insurance company may also argue (reserves the right) to have the claim determined to be outside the insurance policy and therefore not covered. Its purpose is to prevent the insured or a court from considering the provision of legal defense by the insurance company as an admission of liability or coverage by the insurance company.