A board member is sued for breaching her duties. The insured reports the claim to the insurance company. Now what? Is the insurance company responsible for hiring a lawyer and managing the defence? Or does the board member get to do that? And where is this explained in the insurance policy?
What is Duty to defend?
Duty to defend refers to the obligation to provide a legal defence for a claim made against the insured after that claim has been reported to the insurer.
Sometimes you’ll hear the term’ Duty to defend‘ used together with ‘Right to defend’ or as ‘Right and duty to defend’. Whichever it is, you’ll find it in the Terms and Conditions section of the policy. This concept applies to Directors & Officers Liability, Employment Practices Liability Insurance and other professional liability policies.
Let’s expand on our definition of ‘Duty to defend’:
A party files a claim, such as a legal writ or subpoena, against an insured. Next, the insured reports that to claim their insurance company. Once the insurance company has received the claim, someone needs to retain legal counsel and manage the defence. The ‘Duty to defend’ clause in the insurance policy states who does what; the insured or the insurance company.
How does ‘Duty to defend’ work?
There are two approaches:
- The insurance company holds the duty and right to defend: as soon as a claim has been reported to the insurance company, it takes the lead in arranging for and managing the defence on behalf of the insured. In other words, the insurance company steps up to manage the defence and assigns the claim to a law firm in their panel. These are legal experts with whom they have pre-negotiated rates. This is what you’ll typically see in policies for privately held companies and not-for-profits.
- The insured holds the duty to defend: in contrast to the first scenario, here the insured takes the lead in managing their own defence. The insured retains their own preferred legal counsel, provided the insurance company agrees with their selection. Typically, this is the approach on D&O insurance policies for publicly traded companies. Also referred to as ‘Non-Duty to Defend’.
The key area of difference between these two approaches and how they impact the insured is that of control. When talking about a D&O policy, a ‘non-duty to defend ‘policy gives the board of directors the ability to take the lead on retaining counsel and crafting their defense strategy.
Insurance buyers need to understand these terms and conditions and what their organization’s needs before making their buying decision.
- The ‘duty to defend’ clause spells out who has to do what after the insured files the claim with the insurance company.
- If the insurance company has the ‘duty to defend’, it quarterbacks the defence right away and assigns the claim to a law firm of its choice.
- When the insured holds the ‘duty to defend’, the insured takes the lead in managing their own defence starting with retaining their own preferred legal counsel (as agreed by the insurance company)