In a liability
insurance policy, the insurance company has the duty and also the right to
defend the insured. The cost involved in defending the insured does not affect the
policy limits provided the policy does not state otherwise. This rule is useful
because in many cases the defense costs are high when a judicial trail is
involved. In some cases, the defense costs can be higher than the claim amount
making the defense part of the policy more valuable. Defense costs can be
higher than the claim amount particularly in nuisance cases. These are
situations where a case is made against the insured party even though the
liability is low.
The coverage of
a claim under a liability policy can vary based on the duty to defend or right
to defend clause.
Before buying a
liability policy, one should know the difference between duty to defend and
right to defend and the obligations of the insurer under each wording.
Duty to
defend
Under the duty
to defend provision in a liability insurance policy, the insurance company has
to provide legal defense against any claim made against the insured. The insurance company can choose the lawyers
to defend the case.
The duty to
defend provision makes it obligatory on the insurance company to defend a claim
based on allegations against the insured. This is irrespective of the fact if
the allegations are later proven to be true or not. If the allegation falls
within the ambit of liability insurance coverage, then the insurance company
has to indemnify the insured under the duty to defend provision.
In other terms
the insurance company’s obligation to defend the insured depends on the
allegations made in the legal suit and is exclusive of the fact if the claim is
not covered under the insurance policy.
The insurance
company can refuse to act under the duty to defend provision if the allegation
is not covered in the insurance policy or comes under the policy exclusions.
Right to
defend
Let us now look
at the right to defend provision in a liability policy. This provision is
related to the insurer’s obligation to pay the legal costs and damages to the
insured after trail on the lawsuit is complete and a decision is made on the
settlement amount. Under right to defend the insurer can decide whether to
insure the policyholder or not and can opt out if they believe the claim will
be unsuccessful or falls outside the purview of the policy coverage.
Under this
provision the insured has the right to choose the lawyers to defend his case
and decide on his defense strategy. Here the insured has more control on the
defense strategy.
Key
Differences: Duty to Defend vs. Right to Defend
|
Aspect |
Duty to
Defend |
Right to
Defend |
|
Who controls
defense? |
Insurer |
Insured |
|
Who chooses
legal counsel? |
Insurer |
Insured (with
conditions) |
|
Obligation to
pay legal costs? |
Insurer |
Insurer
reimburses based on policy terms |
|
Common in
which policies? |
General
liability insurance, professional indemnity |
Errors & omissions,
D&O policies |
Why is it
important to know about duty to defend and right to defend?
Those insured
under any liability insurance policy should understand the aspects of duty to
defend and right to defend clause in their policy. This is crucial when they
are faced with any claims because the duty and right to defend does not apply
to claims made under bodily injury or property damage.
The right to
defend is not valid if the applicable limit of insurance is exhausted for the
payment of claim settlements under Coverages A or B or medical expenses under
Coverage C.
The right to
defend is applicable only in those countries coming under the covered territory
and where the laws of the territory allow the insurer to defend the claim.
Before buying
any liability insurance policy one must read the policy wordings carefully to
understand if the insurer has the duty to defend or the right to defend.
If the insurer
has the duty to defend but fails to do so when a claim is made, then the
insurer is liable to pay the damages charged on the insured even if ultimately
the claim may not be covered under the policy.
Individuals and
businesses in India should carefully review the terms of their liability
insurance policy to understand whether their insurer has a "right to
defend" or a "duty to defend" and seek advice if they have any
questions.
It
is best to consult an insurance broker in such cases.We at Zen
Insurance Brokers assist in choosing an insurance policy with clauses suited to
your requirements. Choose your insurance policy wisely. Get in touch with us
for any assistance.
Disclaimer:
Zen Insurance
Brokers is an IRDAI registered broker which facilitates quick and adequate
insurance broking services. We deal with only regulator approved products of
insurers. We do not underwrite the products.
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