Does your insurance company have a duty to defend you during a lawsuit?
A duty to defend clause in your liability policy means your insurance company must work out the details of your legal defense.
The terms of your liability policy may include duty to defend
To find out your insurance company’s role during a lawsuit, read the fine print in your insurance contract. If there’s a duty to defend clause, your insurer must defend you against a lawsuit that involves a potential claim on your policy.
Duty to defend means it’s your insurer’s responsibility to hire lawyers and mount a legal defense. They can also make decisions like whether to settle or take the case to court. This takes some pressure off your tech company, since you won’t have to track down an attorney, negotiate terms, or pay legal costs up front.
This policy differs from a duty to indemnify policy, which only requires your insurer to pay you back once you’ve completed the legal fight for a covered claim. This compensation is called indemnification.
When asking, “will my insurance company defend me?” take a look at your policy. You may see a duty to defend clause in these types of insurance coverage:
- Commercial general liability insurance
- Errors and omissions insurance (E&O) also called professional liability insurance
- Employment practices liability insurance (EPLI)
- Directors and officers insurance (D&O)
Together, these liability policies cover all kinds of common lawsuits, including third-party bodily injury and property damage, claims you made a mistake or gave poor advice, wrongful termination, harassment, and discrimination.
Duty to defend vs. right to defend
A duty to defend policy means it’s your insurer’s obligation to defend your business against liability claims. But if your insurer has the right to defend, it means they can choose whether or not to provide your defense.
Some excess insurance policies like commercial umbrella insurance give your insurer the right to defend you, but not the duty. These policies let your insurer decide whether or not to manage your defense on a case by case basis.
The fine print varies depending on your state
The fine print of how duty to defend plays out depends on the laws in your state. For example, duty to defend in California means "a duty to defend any suit which potentially seeks damages within the coverage of the policy." In Colorado, "a duty to defend exists when a complaint includes any allegations that if sustained would impose a liability covered by the policy."
Why would you want your insurer to defend you?
Lawsuits drain time and money. Small business owners already have their hands full, so handing the work off to your insurance company is often the best bet for a good outcome.
Here’s how your tech company can benefit from duty to defend.
Experienced legal defense
Your tech company might not be prepared for a lawsuit – but your insurance company likely has that experience. When they defend you, you’ll benefit from a network of proven lawyers and established practices and procedures. They’ll also handle complex paperwork and deadlines.
There’s no conflict of interest since you both want to win the suit and keep costs low. In the end, it’s your insurer who pays the settlement or judgment. That’s an extremely strong motivator for them to perform well on your behalf.
Legal help for iffy claims
If your insurer has a duty to defend your business, it has to defend any potential claim. Even if the claim doesn’t turn out to be covered, your insurer will pay your legal costs up to that point. It just won’t pay damages for uncovered claims.
Say, for example, that a client sues a telecommunications company, claiming the equipment it installed caused a fire. It’s unclear whether the incident involves professional liability or criminal negligence – or even whether the telecom company is at fault. Whatever the outcome, the company’s E&O insurer has a duty to defend the lawsuit until a court decides.
Sometimes a suit includes multiple allegations, some that your policy covers and some it doesn’t. As long as one claim might be covered, your insurer has to defend the entire suit.
Protection against fraudulent suits
A duty to defend policy helps your business fight against fraudulent lawsuits. If there’s even a chance the accusation could lead to a valid insurance claim, it’s your insurer’s duty to defend you. Even if the case is thrown out of court, the policy will cover your legal costs.
Say a client files a professional liability suit against a business intelligence firm over losses that were unrelated to the firm’s work. The client’s accusations are completely fabricated, so there won’t be damages. The firm’s insurer provides legal defense anyway.
No out-of-pocket legal expenses
With a duty to defend policy, your insurance carrier pays for all legal expenses beyond your deductible. You’ll only need to pay if the expenses exceed your liability insurance policy limit. That’s a huge bonus for small businesses that don’t have a lot of cash on hand.
Liability insurers also often find better rates for legal defense, since they work with the same lawyers consistently. These lawyers already know your insurer’s billing practices and expectations and they can help keep your legal defense costs below your policy limit.
When does the insurer’s duty to defend end?
Your insurer’s duty to defend ends when your policy limits are reached. For example, many general liability policies state that the right to defend ends when the insurer has used up the applicable limit in the payment of judgments or settlements.
The insurer’s duty to defend also ends when the lawsuit is resolved within your coverage limits. That could happen when both parties agree on a settlement, or the court determines a judgment that your company must pay.
Things get a little more complicated when there are multiple claims. For example, what if your policy limits aren’t high enough to cover settlement costs for everyone who filed a claim? In that case, those who filed first have priority. Your insurer doesn’t have to pay settlements after the coverage limits run out – the responsibility falls back on your company.
If you want to file an appeal, your policy might not specify whether this falls under duty to defend. For example, you might want to appeal a judgment that rules your company needs to pay punitive damages of $100,000. The good news is that most courts rule in favor of the policyholder, assuming reasonable ground for an appeal.
When is it better to defend yourself?
If your tech company has its own legal team or a strong preference for a specific law firm, you may prefer a duty to indemnify or non-duty to defend policy. This policy gives you control over your own defense counsel, which means you can choose your lawyers and make key decisions.
When your insurer doesn’t have a duty to defend you, it can only compensate you for legal costs after the fact. It can’t provide direct legal support for any ongoing lawsuits.
Here’s why you might want to carry a non-duty to defend policy.
You can choose your lawyer
A non-duty to defend policy lets you hire your own legal team. As long as the lawyers charge what your insurer considers reasonable rates, your insurer may compensate you in full.
Keep in mind that insurers might not cover every attorney. They may ask to review and approve your lawyers before they agree to pay for their services. If you want to work with a specific law firm, ask your insurer to include the right to use that firm in your policy language when you buy it.
Many people want the best lawyers representing their company in high-stakes liability lawsuits, like lawsuits against top leadership. For example, a successful suit against the director of a growing software development startup could put the whole company at risk. A growing business might choose non-duty to defend D&O insurance so it can hire the best lawyers for these cases.
You will have more say in your defense
A duty to defend policy limits the control you have over your legal defense. For example, some policies let the insurer decide whether to settle a suit or take a case to court. A non-duty to defend policy gives you, not your insurer, control over these important decisions.
Insurance companies often prefer to take charge of your defense. After all, it lets them control the costs they end up paying. But if your insurer refuses to defend a claim, you can request a declaratory judgment from a local court. Most disputes over duty to defend are decided in favor of the insurance policyholder.