News & Updates

  • Reimbursement vs. Duty to Defend

    By Brian Pilarski, Commercial Insurance Advisor

    Businesses purchase insurance to provide financial protection against exposures due to the business operations, employees, and litigation matters. General liability, property, auto, and work comp are traditional policies- all protect the entity, the commercial business, due to injury or property damage.

    Protecting the Executives- For Business Decisions (Non-Injury Matters)

    Executives are able to protect themselves, individually, for non-injury, non-property damage matters through Directors’ & Officers’, Employment Practices Liability, Cyber Liability, Crime, and other specific insurance products. The policies protect the decisions of the officers, owners, and managers, as well as the decisions made by staff, contractors, and others on behalf of the organization.

                                                                          Defense in Executive Risk Claims                                

    Insurance protection for D & O and EPL is offered under two different defense options:

    1. Duty to Defend: The carrier is contractually required to respond to all claims, will pay expenses and liabilities, and bill the client for their responsible amount (deductible).
    2. Right but not the Duty to Defend (Reimbursement) Indemnification policy: The carrier has the right but not the duty to respond to all claims. The carrier will review the matter and requires approval for various points of the matter. The carrier must affirm the firms used for defense, approve of the defense direction, and must approve any and all settlements. The policy is subject to a self-insured retention, payable before the carrier will incur any costs for defense or settlement.

    The majority of smaller companies are offered a “duty to defend” policy by the insurance carriers. The insurance company prefers to control the defense and any discussions, settlements, or denials. Smaller organizations may lack time, resources, or adequate ability to handle such matters. A smaller firm’s involvement may unintentionally create a large liability for the insurance carrier above the deductible. Common matters and internal procedures by insurance companies allow for efficiency and cost savings in handling matters for smaller companies. The deductible amounts are often minimal.

    Larger privately held organizations and publicly traded organizations most commonly purchase coverage on a “reimbursement” basis. The policy allows flexibility by the client to handle matters under their deductible and more autonomy with response to frivolous matters or take direct control of matters not covered (fraud, intentional acts). The insurance carrier seeks to be involved in all aspects in the event they are later defending or liable above the retention. The retention amount is often much higher than a right & duty to defend policy.

    Assigning Defense Counsel (Panel Counsel)

    Right & Duty to Defend: Generally, most duty to defend policies have the contract assign the right to appoint counsel to the insurance company. Some exceptions are made to this rule, which is customarily negotiated at the policy placement/renewal. Panel counsel are used by most insurance companies for these matters. The law firms negotiated reduced rates in exchange for case volume and are often retained as in-house counsel. Internal expenses are greatly reduced with the matters and the firms act as litigation managers for the carriers.

    Reimbursement Right but Not Duty: The policies offer more flexibility to the insured, as the contract shifts the duty of defense to the insured for the matters. However, the carrier still retains the right to approve the defense counsel. Negotiation of the counsel should be done at policy inception, with agreed upon rates and attorneys assigned (outside of conflict matters). Insurance carriers are increasingly insisting on panel counsel for reimbursement policies as well, citing the cost savings and aligned outcomes for the carrier. Some exceptions to counsel assignment at the time of claim can be made, depending on the carrier and circumstances of the claim.

    Pros & Cons

    Each client’s circumstances dictate which option may be best suited for the policies. Each year, cash flow, employee engagement, and outside counsel changes may cause a business to adjust its policy preferences. Additionally, the insurance carriers and overall insurance market conditions may limit what options may be available to the insured. There is not a right or wrong defense option, each have their specific attributes:

    Right & Duty to Defend PROS

    • Defense and response required by carrier, regardless of the nature (doesn’t guarantee coverage, still subject to terms and conditions of the policy)
    • Carrier handles all matters and final adjudication proceedings
    • All costs, expenses, and defense covered by insurance company
    • Litigation is managed by the carrier through its conclusion

    Right & Duty to Defend CONS

    • Carrier controls the final determination of settlement, course of action
    • Some matters may damage reputation of the client but inexpensive for the carrier, causing a business issue going forward for the business
    • Carrier handles all matters and final adjudication proceedings
    • Counsel is assigned and controlled by insurance carrier

    Reimbursement Right but Not Duty to Defend PROS

    • Client retains duty to defend, more latitude under the retention limit
    • More flexibility in counsel selection (carrier depending, decreasing in 2016-2017)
    • Carriers have final say but state the client’s preference in counsel “must not be reasonably be withheld”
    • Settlement, under retention, in the right of the client (insured)
    • Litigation is managed by the client through its conclusion, with carrier involvement

    Reimbursement Right but Not Duty to Defend CONS

    • Carrier retains the right to refuse defense
    • No parameters on refusal, only it must not be unreasonably withheld
    • Client must front litigation costs through the retention
    • Carrier still must approve any settlements or decisions on the matter, which may frustrate client or counsel
    • Client must coordinate litigation through adjudication
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      Reimbursement vs. Duty to Defend