By Gwen Luu, Director – Commercial Lines 
Almost every company doing business of any type is going to have some sort of insurance against claims by third parties. Commercial General Liability (CGL) insurance, Employment Practices Liability (EPL) insurance, and Director & Officer (D&O) liability insurance all fall into this category. One part of these policies, and the thing that makes them so valuable to companies, is their ability to pay for legal defense costs when businesses are being sued by third parties.
Issues can arise, at times, with the specific language being utilized in the policies. No two policies are going to be exactly the same, so having an understanding of the policy language and what it means is essential for the insured. There are two large areas in which confusion and misconceptions can arise, ultimately leading to friction during the claims process:
Duty-to-defend – Duty-to-defend means that if a claim is made against the insured, the carrier of the insurance has the right and the duty to defend that claim, even if the claim is groundless or false.
Non-duty-to-defend – This is also known as indemnity or reimbursement language. It is found in most D&O policies, errors and omissions (E&O) policies, and EPL policies. The clause states that the insured is the one responsible for defending a claim, subject to the written approval or consent of the insurance carrier.
To make things even more complex, some policies will contain hybrid-defense language that may state that the carrier has the right to defend a claim but that the carrier does not have the duty to defend. That language allows the insured to choose which option is preferable to them at the time of the claim and could result in a different self-insured retention (SIR). Deductibles and SIR are tools which are utilized by underwriters to manage claim frequency and for insureds to manage premium costs, and to help account for claims frequency, both of which hold the insured responsible for the partial payment of a loss.
There is an additional downside to indemnity policies which can sometimes overcome the preference that an insured would have control of their own defense. When third parties bring claims, some of the parties involved or the allegations being made may fall outside of the policy and would be, therefore, “uncovered.” This is known as allocation. These provisions enable a carrier to pay only the portion of the claim or defense that is directly attributable to the persons, entities, or claims covered under the policy. This situation can put an insured at odds with their carrier in the defense of claims that both have the goal of resolving.
Duty-to-Defend
The way duty-to-defend usually goes is that the insurance company will hire counsel for the insured. That counsel will typically come from a group of defense firms that has been preselected by the insurance company. Generally, these insurers are given access to law firms at preferred insurance carrier rates. Sometimes, the firms can be well-known and other times they may be lesser known. The panel of defense firms benefits both the insured and the insurance carrier by keeping the defense costs in check. Since insurers frequently work with the same firms, it also ensures all parties are familiar with billing practices, usually leading to less billing disputes.
The largest point of contention here is that some insureds may feel as though counsel selected by the insurance company may present a conflict of interest or that the loyalties of the counsel are not to the insured but are instead to the insurance carrier. These issues are largely unfounded. In the event of a conflict, most states agree that the insured has the right to independent counsel paid by their carrier even in the event of a duty-to-defend clause in a policy.
Non-Duty-to-Defend
When these clauses are in place, the insured can hire their own defense counsel. The insured controls their defense. The process for reimbursement in these policies is more involved, often with the insurance company conducting a review of the bill and making adjustments for a slew of reasons. The carrier, in this case, still has approval over the choice of counsel the insured can choose. Carriers usually want to see an insured using a “qualified” law firm, meaning one with which the carrier has experience. They also take into account the market rates for the services being provided.
The grand takeaway from all of this is that there is no right or wrong answer when it comes to defense. Most policies are written on a non-duty-to-defend basis. The size of the insured company can influence the decision on the type of policy selected. Larger companies who have established risk management policies typically prefer non-duty-to-defend and often formulate a defense in their own way. Smaller companies may do the opposite. Regardless, it is essential to understand what the language means when making the decision
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