This paper discusses the most important features of the defense section of a typical management and professional liability policy. These features have the most impact on how a claim is handled once it is tendered to the insurance company, and are important to understand.
Duty-to-Defend vs Non-Duty-to-Defend – In a duty to defend policy, the Insurer has the duty to defend a claim once it is tendered. In a non-duty to defend policy, the Insured has that obligation. Most middle market professional liability policies and D&O/EPL policies for private companies and non-profits are written on a duty to defend basis. Most public company D&O forms are written on a non-duty to defend basis. Here are some pros and cons of each:
Duty to Defend
– The insured gets access to the insurance company’s panel counsel list, or is provided a defense by a firm selected by the insurer. These are usually experienced attorneys and they usually work for pre-negotiated rates.
– The Insured gets to hand over the claim to the insurer, who does most of the heavy lifting and handles the day-to-day work in settling the claim.
– The insurer is obligated to defend “all four corners of the claim,” which means if there are covered and uncovered matters, the insurer cannot allocate defense costs, and must pay the whole tab. They can and will still allocate any indemnity payments.
– The insured typically is not able to use their own counsel. They will most likely be forced to use the law firm the carrier chooses for them.
– The insured may have less control over the day to day progression of the claim.
Non-Duty to Defend
– The insured gets to choose the counsel they want to use (subject to the insurer’s approval).
– The insured gets to control the process.
– The Insurer will allocate defense costs between covered and uncovered matters.
– The insurer may be much tougher regarding what are reasonable attorney fees billed by the law firm.
Choice of Counsel – This is a related topic that comes up during the underwriting or claims process quite often. In many circumstances the insured may have a relationship with a law firm that they would want to use if there is a claim. Many insurance carriers have a panel of pre-approved firms they require be used. Some carriers are flexible about adding a new firm to their panel, or making an exception for a particular account or claim, but most are not. This is an issue that should be brought up during the underwriting process, not at the time of the first claim. In many circumstances, the ability for the insured to use their counsel of choice will depend on the size of the account, the nature of services, the venue, whether that firm is already on the carrier’s panel counsel, and whether the policy is written on a duty to defend basis or not (see above).
Based on the pros and cons above, it can be most beneficial for the insured to be flexible with regards to choice of counsel in order to get a better form. In many cases, the insured is willing to compromise on terms and conditions to be able to use their own firm. Again, these discussions should be had during the underwriting process to avoid surprises and disagreements when a claim does arise.
Hammer Clause – This is another related defense coverage issue in most policy forms. There is actually no section of the policy labeled the “hammer clause”—the expression is vernacular- it refers to an image of the insurer holding a metaphorical hammer with which to “hit” the insured; the “hammer” clause refers to a paragraph or clause which talks about what happens (usually in a duty to defend form) when a settlement opportunity has been reached with a plaintiff, but the insured refuses to settle. The insurer cannot settle without the insureds consent, BUT the “hammer” clause states that if the insured does not agree to the settlement, then the insurer is no longer obligated to pay any additional settlement or defense costs over the amount they could have settled the claim for.
Many carriers are willing to “soften” the hammer clause to “70/30” or “80/20” so that in the same scenario, the carrier would be obligated for 80% (or 70%)of any additional costs, and the insured would be obligated for 20% (or 30%), up to the policy limit, of course. In most circumstances, this has the same effect—which is to make the insured responsible for at least a portion of future expenses, and therefore “hammers” them into agreeing to the settlement. Some carriers will remove the hammer clause completely, which may be the best option. In this case, the insurer would be obligated for the full amount of any settlement and will stand by the insured and continue to fight until the insured agrees.
That stated, we end this paper with a cautionary reminder that in general, when an insurer believes that settlement is the best option (as opposed to protracted litigation), the insurer will do whatever it can to compel rapid settlement— whether or not the insured completely agrees. As always, should you have any questions, please get in touch with your Socius representative.