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Duty to defend

Want your insurer in your corner? A duty to defend policy makes it an insurer's obligation to provide legal defense for a lawsuit, instead of just compensating you for the claim.

What is duty to defend?

A duty to defend insurance policy gives your insurance company the right to defend your business against any lawsuits that might be covered by your commercial general liability policy. It empowers your insurer to decide which lawyers to hire and whether to settle or take the case to court.

To fulfill its duty to defend, your insurer must hire and pay for your defense counsel – even when the claim doesn’t end up being covered by your policy.

Which business insurance policies include duty to defend?

You may see a duty to defend clause in your:

What is duty to defend vs. duty to indemnify?

Policies that aren’t duty to defend may be referred to as duty to indemnify, duty to pay, or reimbursement policies.

These policies place the right to defend a liability suit on your company. They will pay back your legal costs after you resolve an incident, instead of making your insurer responsible for your legal defense from the start. This compensation of covered claims is called indemnification.

Here’s how duty to defend and duty to indemnify policies differ on important issues.

Who chooses the defense team

When it’s the insurer’s duty to defend your company, they’ll usually hire lawyers who they’ve worked with before. If you have a duty to indemnify policy, you can hire the lawyers you want to work with – even if they haven’t worked with your insurer before.

Though you can choose your lawyers, your insurer might ask to review and approve these attorneys before it agrees to compensate them. If you know the legal team you want, it’s best to bring up the issue when you buy duty to indemnify coverage. Just ask your insurer to add the right to use that law firm to your policy language.

Who makes key legal decisions

A duty to defend policy limits the control you have over your legal defense. For example, some policies let the insurer decide whether or not to settle a suit or take a case to court. A duty to indemnify policy gives your business, not your insurer, control over these important decisions.

Why do many businesses choose duty to defend policies?

Basically, it comes down to how much your company wants to take on. If your tech company has the time, expertise, and cash flow to handle its own defense, duty to indemnify coverage offers more flexibility. Otherwise, duty to defend makes the most sense.

Here’s why duty to defend policies are great for small businesses:

No out-of-pocket legal expenses

With a duty to defend policy, your insurance carrier covers all your legal expenses. Unless the defense costs exceed your policy limit, you’ll only need to pay the deductible.

Say, for example, a client files a $1 million lawsuit against a data science business it claims failed to deliver promised results. The business has a duty to defend E&O policy with a $2 million limit and $1,000 deductible. It pays the $1,000 out of pocket, but doesn’t receive any other bills from its lawyers or insurer, even when the court awards $1 million to the client.

With a duty to indemnify policy, you’ll need to pay your legal expenses out of pocket. Then, later on, you can file a claim to recoup these costs from your insurer. Your insurer may push back against your claim at this point or refuse to cover some costs. It’ll typically audit your invoices and reduce your compensation if it believes you paid above market value for some services.

Coverage for all potential claims

If you have a duty to defend policy, your insurer must defend all potential claims. Later, if the insurer determines that your policy doesn’t actually cover the claim, it will usually still pay for your legal costs up to that point. If a suit includes multiple allegations, your insurer has to defend against the entire suit, even if your liability policy only covers some of the claims.

If you think a lawsuit involves a potential insurance claim, but your insurer disagrees, you can request a declaratory judgment from a local court. Courts typically decide these cases in the insured’s favor.

Say, for example, a web designer is sued for copying another company’s logo. With a duty to defend policy, the insurer has to mount a legal defense. It doesn’t matter whether the designer did anything wrong or whether the suit is frivolous.

Non-duty to defend policies, on the other hand, interpret insurance coverage in a stricter way. They will only compensate you for claims that your liability insurance policy clearly covers.

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