When a board member is sued for breaching their duties, one crucial question arises - who handles the legal defense? Is it the insurance company or the board members themselves? The answer lies in understanding the concept of "duty to defend" within insurance policies. In this article, we will explore the duty to defend and its implications for both privately held and publicly traded companies, shedding light on how each approach impacts the insured.
Duty to Defend: the Definition:
Duty to defend refers to an insurer's obligation to provide a legal defense when a claim is made against an insured. It typically applies to various types of insurance policies such as directors and officers (D&O) liability insurance, employment practices liability insurance (EPLI), and professional liability policies. Whether referred to as duty/right or right and duty, these terms can be found in the policy's terms and conditions section.
The Insurer's Role:
In cases where the insurer holds both the duty and right to defend, they take charge of managing and arranging legal counsel as soon as a claim has been reported by the insured party. This means that from day one, it becomes their responsibility not only to retain qualified legal representation but also to handle all aspects of managing the defense strategy on behalf of their client.
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Duty to Defend Privately Held Companies and Non-profit Organizations:
This approach is prevalent in policies designed for privately held companies and non-profit organizations. These entities typically rely on their insurers' expertise in navigating complex legal matters while benefiting from pre-negotiated rates with law firms listed on their panel experts.
By assuming control over hiring lawyers promptly after being notified about a claim, insurers effectively act as quarterbacks during litigation proceedings. They streamline communication between all parties involved while ensuring efficient coordination throughout every stage of the defense preparation.
Publicly Traded Companies & Non-Duty-to-Defend:
Contrary to the insurer-managed defense model, publicly traded companies often opt for policies that assign the duty to defend to the insured party. This means that once a claim is reported, it becomes the responsibility of the board or management team to handle their own legal defense.
Under this approach, insured parties retain control over managing their defense strategy by selecting counsel according to their preferences. However, it's important to note that such a selection must be agreed upon by the insurer. This arrangement allows organizations more flexibility in crafting their unique response and can align with specific corporate governance requirements.
The Key Difference: Control
The significant difference between these two approaches lies in control. Privately held companies and non-profit organizations benefit from relinquishing control over defending themselves against claims after reporting them promptly to their insurers. In contrast, publicly traded companies maintain authority over retaining preferred legal counsel and shaping their defense strategy with approval from insurers.
Considerations for Insurance Buyers:
Insurance buyers must understand and evaluate these differing approaches when purchasing insurance policies tailored specifically to their organization's needs. Making an informed decision involves considering factors like risk tolerance, available resources (both financial and personnel), existing corporate governance structures, as well as past experiences with litigation matters.
Additionally, policyholders need clarity regarding how each approach impacts coverage limits. This is because the costs associated with mounting a proper legal defense can significantly impact available funds for settlement or indemnification payouts if required.
Understanding the concept of duty to defend within insurance policies is vital when navigating potential claims against board members or employees accused of breaching duties under various liability coverages. Whether insurers assume responsibility for hiring lawyers promptly or allow insured parties greater autonomy in managing their own defenses has implications on cost efficiency, coordination during litigation proceedings, and maintaining control throughout complex legal processes.
By comprehending these variations in duty-to-defend models offered by insurers based on organizational structure (privately held vs. publicly traded) and industry-specific considerations (non-profits), insurance buyers can make more informed decisions when selecting appropriate coverage.