A board member is sued for breaching her duties. The claim is reported 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 claim, such as a legal writ or subpoena, is filed against an insured. Then 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 in the case. The ‘Duty to defend’ clause in their insurance policy spells out who has to do what, the insured or the insurer.
How does ‘Duty to defend’ work?
There are two approaches:
- The insurer holds the duty and right to defend: as soon as a claim has been reported to the insurer, the insurer takes the lead in arranging for and managing the defence on behalf of the insured. In other words, the insurance company steps up to quarterback the defence right away 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, the insured takes the lead in managing their own defence. The insured retains their own preferred legal counsel, provided the insurer agrees with their selection. Typically, this is the approach on D&O insurance policies for publicly traded companies. This condition is often 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 be aware that these terms and conditions exist, how they work, and their organization’s needs to make a purchasing decision that suits their needs.
- The ‘duty to defend’ clause spells out who has to do what after the insured files the claim with the insurance company.
- When the insurance company has the ‘duty to defend’, the insurance company steps up to quarterback the defence right away and assign the claim to a law firm of their 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)