Take a look at one of your insurance policies. Skim through the legalese. Do see you anywhere it says that the insurer has “the right and duty to defend” against a suit or covered claim? Or does it say it has “the right to defend,” with no mention of duty? The difference in terms is subtle, but it can drastically affect how your policy works in action.
“The ‘right’ is an insurer’s option, whereas the ‘duty’ is an obligation,” Buckwalter says. An insurer with a duty to defend is legally required to help you in the event that you’re sued for a covered claim, usually by providing legal counsel and payment for legal fees.
So why is the word “right” included in there at all?
The reason for the insurer to maintain a right to defend would be in cases where their policy is an excess policy, says Buckwalter. This means it could be…
“For example, if you get sued for causing an automobile accident while driving a car that is not yours, you may have two liability policies that might cover you – the policy that attaches to the vehicle, and your own personal policy,” Buckwalter says.
In this scenario, the primary policy with the duty to defend you is the car owner’s. Say it has a coverage limit of $50,000. However, your personal policy – while secondary – has a limit of $1,000,000. Because it can stand to lose out on a lot more money, your personal policy insurer may invoke its right to defend you so it can have control in the litigation process and manage its losses. In other words, it wants to have a say in what happens.
Another reason an insurer might use its “right” is when there’s a chance the claim won’t be considered covered. For example, this might happen if:
- You did something that might be illegal.
- It’s not clear who was at fault in an accident.
If it’s not covered, the insurer has no duty to defend you – you’re on your own. But they might choose to defend you anyway, just in case it ends up being ruled as a covered claim.
Your E&O Insurer Likely Has a Duty to Defend You – to a Point
What does all this mean when it comes to your Professional Liability Insurance (aka Errors & Omissions Insurance)?
The good news is that all standard E&O policies should contain “duty to defend” language to some extent, Buckwalter says. “However, the scope of the ‘duty’ can vary based on whether the insured has a deductible or ‘self-insured’ retention,” he adds.
If you have a deductible, it means the insurer’s duty to defend doesn’t kick in until you’ve paid the entire deductible. Using another car accident analogy, say you have a $500 deductible, and the damage to your car is $1,000 – your insurance company will only give you $500.
But, here’s where that tricky “right to defend” language can play a role again. Buckwalter says the insurer has the right to control your legal defense from the very beginning:
- If you have a low deductible (i.e., you’re only paying a little and the insurer is paying a lot), the insurer is likely to insist on which attorneys to use, your defense strategy, etc.
- If you have a high deductible (and you’re paying a lot before your insurer steps in), you have a lot more say.
“It all depends on the nature of the case, the specific insurer involved, the amount of the deductible, and the insistence level of the insured,” Buckwalter says. If you’re a small tech company, you’ll probably defer to the expertise of your insurance company.
Discuss This Language with Your Insurance Agent
Buckwalter says that one common theme he’s noticed in insurance disputes is that there’s miscommunication with the insurance agent. He says too often the only thing discussed is cost, while knowing what your policy will and won’t do is essential.
“The first piece of advice I would give to a company is to ask questions, and then ask more questions of your agent,” Buckwalter recommends.
For more information, read “Get to Know Your E&O: 5 Things to Check for in Your Errors & Omissions Insurance Policy.”