It is well established that the choice of lawyer under a Directors & Officers (“D&O”) policy/section of cover should involve the insured person and ought not to be mandated. Employment Practices Liability (“EPL”) is different and it has always been the case that insurers will direct policyholders to a ‘panel’ of firms to manage time and costs, but also to avoid potential conflicts.
The language differences between EPL and D&O can be subtle, but the outcomes differ materially:
EPL: “The Insurer shall have the right, but not the duty, to defend Claims and to appoint lawyers for that purpose.”
versus:
D&O: “It shall be the duty of each Insured and not the duty of the Insurer to defend Claims.”
When both sections are operative in a Management Liability (“ML”) policy, they should remain separate and distinct. The duty to defend principle is an important one. It governs how the mechanics of a claim are handled and describes the insurer’s obligation to provide an insured with defence to claims. So, why are they different? On EPL claims, three main reasons exist:
- all parties can access much more competitive hourly rates. This is particularly beneficial to a client because deductibles exist on all EPL policies and they will get the direct benefit of that relationship within the deductible amount;
- there is less chance of a conflict arising, sometimes a feature when the solicitors may have advised on a matter that forms part of a claim; and
- well-rehearsed reporting and claim management guidelines avoid delay in often time critical scenarios. If, on every claim instruction, there was due diligence process and rate ratification to navigate, valuable time may be lost.
Conversely, in the case of D&O claims, it has not been market practice to dictate who an insured person may use (although the insurer would reserve the right to associate and consent, essentially sense checking the suitability of choice for the claim in question and acceptance of hourly rates). The market takes this different position for a number of reasons, which include:
- in criminal matters, where a director may be facing sanctions up to potential imprisonment, it might be considered inappropriate to compel an insured to use a lawyer chosen by an insurer if they were not comfortable in doing so;
- elements of a claim may not be covered and allocation of costs could be involved. Again, it could be awkward to mandate the selection of the law firm, even if the policy may respond to some of the defence costs or loss on the claim in question; and
- often, D&O insurers are not in a position to confirm cover at the time of notification, so they cannot reasonably insist on compelling use of a lawyer the insured might not otherwise choose.
It is perhaps no surprise that insured persons often wish to match the services of a preferred/specialist solicitor law firm to the allegations presented, rather than use one that is mandated to them. In these scenarios, some policy conditions cap the hourly rates that the policy will pay, which for some areas of law can fall meaningfully short, leaving a funding gap to be covered by the insured person and/or their employer.
There are also some curiosities, such as the cover for EPL against individuals on a D&O policy. These scenarios are rare, however, and generally travel through the EPL sections of cover in the first instance. Corporate Legal Liability sections of cover tend to follow the line taken by EPL policies/sections, which is just one more reason why blending the D&O and CLL limits together in a single insuring clause is an unattractive feature of ML policies.