Articles|September 01, 2019
A Duty To Defend – A Unique Insurance Coverage You May Want To Evaluate
By Jeff Cavignac
President CPCU, RPLU, ARM
One of the more challenging issues facing a Design Professional (DP) is the contractual obligation to defend their client. This is not covered by a DP’s Professional Liability practice policy. Assuming the risk without insurance could expose the firm to uninsured defense expenses and potential negative impacts on project profit margins. Alternatively, it could result in lost business and lost income because the DP felt they had to walk away from an otherwise desirable project.
Aspen Insurance, through Founders Specialty, has come up with a unique product they call Contractual Defense Protection (CDP). In simple terms, this policy works in conjunction with the Design Professionals Practice policy and covers the gap created when a DP agrees to defend their client.
This coverage would come in to play when a Design Professional’s Client has a claim against them and they ask the Design Professional (DP) to provide a defense for them, for which the DP is contractually obligated to do. The Design Professional tenders the claim to their practice policy insurer and the practice policy insurer rejects such tender based on the contractual liability exclusion or the fact that the Client is not an insured under the DP’s policy. At that point, the DP would tender the claim to Aspen. Aspen will help the DP perform its duty to defend the DP’s Client, such as suggesting a qualified defense attorney. Aspen would be responsible for paying the “Client Defense Expenses” subject to the policy limit and to a “reasonableness” standard, i.e. they will only reimburse the DP for “reasonable” attorney fees in light of the locality where such legal services are performed. Although there is no deductible on this program, there is a 20% coinsurance provision. The coinsurance amount is capped at a specific dollar amount depending on the size of the DP.
The premiums for this coverage are fairly modest, averaging about .005%- .0075% of fees, subject to the following minimum premiums: $3,500 for $500,000 limit in CDP coverage and $5,000 for $1,000,000 (plus taxes and fees). In other words, DP firms with up to $10,000,000 in revenue would likely hit the $5,000 minimum for a $1,000,000 limit for a retro inception policy. A brochure on the program is attached.
The CDP policy closes a gap in coverage for DP’s at a relatively modest cost, however, there are some other issues that should be considered. We put the question to several Professional Liability Claims Adjusters and Attorneys that specialize in the defense of Design Professionals. Below you will find their comments and Aspen’s response:
“It is not unusual for our insureds who have signed a contract requiring them to defend their client to receive a tender of defense demanding the insured pay for the client’s defense. Since the immediate defense costs are excluded, we generally deny the client’s defense. While it is theoretically possible the client could make some motion in court to get a ruling that the insured is obligated to pay for the defense, in my 6 or so years with adjusting claims, I have never seen that actually occur, or a motion even be made. In my over 30 years in the practice of law defending A&E’s I saw the motion be made twice. The motion was granted one time and denied the other.”
Aspen Response: Every scenario is different, but we recognize that many DPs will not want to adversely affect their relationship with their Client and want to honor their duty to defend provision rather than force the Client to sue them in court. As such, the CDP policy can provide significant financial assistance to the DP in paying for these immediate defense costs, thus mitigating the hit to a DP’s cash flow.
“If the insured is at fault, and that fault caused the client to be sued, the client’s defense costs could be awarded as damages against the insured and would be covered. Since most claims settle in mediation, the exposure for these defense costs as damages is taken into account in the settlement process. On the other hand having the coverage could be a marketing tool for the insured. The insured could point out to prospective clients that it actually has contractual liability coverage which other competitors may not have.”
Aspen Response: There is typically no guarantee that Client Defense Costs will be awarded as damages as part of a settlement under the DP’s practice policy. Even if there is specific language addressing the issue, such costs are typically not awarded until the claim is finally resolved. In the meantime, the DP may have to incur significant defense costs on an immediate and upfront basis. This is why many DP’s have elected to walk away from deals with a duty to defend prior to the availability of the CDP policy.
“This product may set a precedent that we don’t want to set. For years DP’s have been fighting the obligation to defend their clients and recognizing now that there is a product to insure it, gives the DP less leverage in fighting against it. In addition we don’t know how sustainable and viable this product is. What happens if it goes away?“
Aspen Response: Unfortunately, over time, DPs have been less able to successfully fight the duty to defend, as their argument that it is an uninsured exposure and thus should not be agreed to has not been persuasive enough to prevail in too many instances. The CDP policy was introduced to give DPs a solution to handle the duty to defend exposure instead of being faced with agreeing to this uninsured exposure or walking away from the deal altogether. If the Client is insistent on the provision, the DP can now negotiate that the cost of the CDP policy to be included in the bid for the project, which is typically only a very small percentage of the overall project cost.
As for product viability, Aspen has every intention to continue to provide the coverage in the future. The DP can also take some assurances by the fact that the Aspen policy has a three year ERP which will be available in the future. In addition, it could be argued that the existence of the coverage is a “bonus” to the DP in those cases that they would have agreed to the duty to defend in the absence of such coverage anyways.
We also asked some specific questions of our own and you will find the responses from the Aspen Underwriters below.
- The Aspen Duty To Defend (DTD) coverage is triggered by a denial of coverage from the practice policy. Would a Reservation Of Rights (ROR) by the practice policy insurer count as a denial?
Yes, that is correct. We say coverage is triggered by exclusion by the practice policy of Client Defense Expenses which is what the ROR would exclude.
- What happens when an indemnity provision has both an upfront duty to defend as well as reimbursement of defense costs if the Insured is negligent. If Aspen defends the matter and it turns out the design professional was negligent, would Aspen subrogate back against the practice policy carrier for the defense?
Yes, Aspen would have that right to subrogate back against the practice policy insurer. However, in the meantime, Aspen is covering 80% of the costs of the duty to defend, so that helps the DP’s cash flow tremendously. Any amounts recovered by Aspen pursuant to subrogation would be applied as set forth in the DTD policy, which potentially includes getting the DP’s 20% coinsurance back as well.
- How does Aspen determine the defense attorney when in fact the policy is written for the Design Professional (DP) but the DP’s client is being defended?
Aspen does not determine the defense attorney. Aspen merely suggests defense attorneys that can be used if the DP wants help in that process. The duty to defend remains the DP’s through the whole process. Aspen cannot force an attorney on the DP or the client. Note that Aspen pays the “reasonable” cost of the defense. If the DP or the Client chooses a very expensive attorney, then Aspen would only pay for the reasonable costs as determined for that location of the country. The DP would have to pay the difference over reasonable costs. That is why we recommend that the duty to defend should be negotiated with a reasonableness standard included.
- Would Aspen have a panel of attorneys similar to what a practice policy insurer may have?
Aspen would use their current panel counsel (probably larger firms that would have a broader practice) as a starting point.
- Are there guidelines as far as rates charged by defense attorneys?
Aspen would pay such panel counsel in the ballpark of where they pay them now in those states for regular A&E claims.
- Could the exclusion barring coverage for worker’s comp claims be interpreted to deny a DTD claim when the owner is being sued by an injured construction worker?
If the injured worker made a negligence claim against the client not based on work comp laws, and then the Practice Policy Insurer declines because of the contractual liability exclusion or the fact that the client is not an insured under the Practice Policy, then that could bring the DTD policy into play. It would likely be very fact specific.
This is a unique product that may solve the challenges presented by the contractual obligation to defend a DP’s client. On the other hand, there are other factors mentioned above that should be considered when evaluating this coverage. Ultimately it will be up to the individual Design firm. If you would like to discuss this further, please give us a call or if you are interested in applying for coverage, please complete the application attached.
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