DUTY OR NON-DUTY
" THE PANEL OF DEFENSE FIRMS BENEFITS BOTH THE INSURED AND THE INSURANCE CARRIER BY KEEPING THE DEFENSE COSTS IN CHECK ."
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 .
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 .
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-todefend 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 . +
BY : GWENYTH P . LUU , CLCS DIRECTOR - COMMERCIAL LINES JGS INSURANCE , A BALDWIN RISK PARTNER
Gwenyth P . Luu helps organizations improve their bottom line and lower their total cost of risk by implementing the JGS Proactive Service Platform . The JGS Proactive Service Platform is an inclusive strategy that focuses on primary cost drivers of a risk management program . Gwenyth helps businesses understand all of their potential and actual costs and liabilities , execute an actionable strategy , and deliver superior client service and support . The JGS Proactive Service Platform is driven by continuous strategy and service delivered on a daily basis throughout the year . The service platform includes risk control strategies , claims advocacy and management , contract reviews and insurance program design reviews .