“The Insurer shall have the right, but not the duty, to defend Claims and to appoint lawyers for that purpose.”
“It shall be the duty of each Insured and not the duty of the Insurer to defend Claims.”
The first extract is from an EPL policy, the second from a D&O policy. When both sections exist in a Management Risks policy, both remain separate and distinct. The duty to defend principle is an important one, and it governs how the mechanics of a claim are handled. It describes the insurer’s obligation to provide an insured with defence to claims. So why are they different? The answer is partly to do with control and costs and partly to do with convention.
In one case we know of, an unfair dismissal claim settled for £12,000, but the legal costs were an astronomical £110,000.
Without sensible definition, employment claims costs can quickly spiral. If there is no ability on the part of the insurer to be able to validate the competency of a lawyer, and no way to control the rates, other than a ‘reasonableness’ provision, matters can quickly get out of hand. In one case we know of, an unfair dismissal claim settled for £12,000, but the legal costs were an astronomical £110,000. With only a ‘reasonable’ argument to beat the costs down with, there was only ever going to be one winner. So, the reasons EPL insurers will want to have the control include:
1) they can command much more competitive hourly rates. This is particularly beneficial to a client where a deductible applies and they get the direct benefit of that relationship;
2) there is less chance of a conflict arising, a common feature when the client’s own solicitors have advised them on the subject that later gives rise to the claim; and
3) well-rehearsed reporting and claim management guidelines avoid delay in often time critical scenarios. If, on every instruction, there was a process of capability, appropriateness and rate dialogue to settle, time is taken and costs are accruing.
Conversely, in the case of D&O claims, it is not market practice to dictate who an insured may use, although the insurer would reserve the right to associate on any investigation, defence, negotiation and settlement, and would need to be consulted prior to any spend against the policy (this essentially allows validation of lawyer and rates). The market takes this differing position for a number of reasons, including:
1) in criminal matters, where a director may be facing potential imprisonment, it might be considered inappropriate to compel an insured to use an insurers choice of lawyer, if they were not comfortable in doing so;
2) elements of the claim may not fall for cover and, again, insurers cannot compel the use of certain lawyers, even though the policy may respond to some of the defence costs or loss that may be incurred;
3) often, D&O insurers are not in a position to confirm cover at the time of instruction, so they cannot reasonably insist on compelling use of a lawyer the insured might not otherwise choose.
This then, is the main reasoning for the difference in position. There are some curiosities, such as the cover for EPL against individuals on a D&O policy. Plus, some insurers stipulate a maximum hourly rate within the wording on a blended D&O/EPL policy, despite the fact that the D&O rate can be twice and more that of an EPL lawyer. However, generally speaking, the position hasn’t changed too much in the last 20 years, suggesting something of a settled situation.