Selection of claims counsel
As mentioned before, when a duty to defend policy is used, generally the carrier retains the right to select legal counsel, However, in some instances, the insurance company may allow the insured to use their own defense counsel if pre-approved in advance of a claim. This is usually done at the time coverage is placed as part of the negotiation process. As an alternative, a number of insurance carriers now provide defense coverage via “panel counsel.”
Panel counsel consists of a group of pre-approved attorneys used by the carrier to handle claims on their behalf. They are experts in their field, so the panel counsel acts as the insured’s claims counsel and manages the litigation process on the insured’s behalf, while working with the carrier to settle the claim.
Because of this relationship, the cost of defense in effect is provided to the carrier at a discounted rate; the same panel is negotiating many cases on their behalf. When panel counsel is used, the insured will pre-select their choice, from a list provided and approved by the insurance carrier. This is routinely done once the policy is issued, but in some instances, the insured may have the option at the time of a claim.
A non-duty to defend policy stipulates that it is the “duty of the insured and not the insurer” to select his or her own defense counsel. Contractually, the carrier still retains the right to approve the defense counsel selected by the insured, but such consent cannot be unreasonably withheld.
As mentioned previously, with the non-duty to defend clause, the cost of defense is borne upon the insured from the beginning of a claim and is only reimbursed by the insurance company throughout designated periods of the claim process, and only once the SIR is satisfied. To help with those costs, the insurance carrier will “advance defense costs” to reimburse the out-of-pocket expenses incurred by the insured, thus limiting the hardship on the insured’s working capital.
That type of arrangement is typically more associated with D&O policy contracts, and reimbursement is usually made quarterly or, in some cases, monthly. However, this is not without stipulations.
Under most policies, the carrier will require compliance to a number of conditions before the insured is reimbursed. As an example: The claim must be a covered claim; the SIR must be satisfied; the insured and carrier have agreed to the costs of defense. And lastly, if it is established that there is no liability under the policy, then the insured will reimburse the insurer for all costs of the defense.
Whether a deductible or SIR is used, the payment of defense costs will almost certainly reduce the limit of liability in most policies. Nevertheless, there are a few duty to defend carriers who will provide defense costs in addition to the limit of liability. That can be a big advantage for the insured and should always be sought where possible.
Also, as the market softens, there may be further room to modify coverage in the insured’s favor. As such, a few D&O and EPL carriers have an endorsement that allows the insureds to select either the “duty to defend” option or defend claims themselves. As a rule, that option must usually be exercised within 30 days of notice of a claim.
When proposing coverage, it is important to know what “defense provision” is the correct one for your client. Depending on the sophistication of the insured, he or she may or may not know the differences. As an agent, you need to engage your client in a dialogue, which will give you some clues as to their particular needs.
Usually, an insured does not have much say in the type of policy they are getting, unless they are savvy buyers and/or have an insurance agent/broker who is familiar with the products available in the marketplace.
Of course there are no right or wrong answers when selecting the appropriate defense provision because each insured’s business and needs are different. For smaller entities, economics may play an important role, whereas a larger a larger entity may feel more comfortable using its own defense counsel.
- insurancejournal.com -
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