Understanding the Difference: Duty to Defend vs. Reimbursement Insurance Policy Forms

By Zachary Zenger

When it comes to navigating the complex world of insurance, particularly in the context of legal defense, the two provisions that are widely considered are Duty to Defend and Reimbursement/Indemnity forms. While both provisions are specific to liability coverage, it is important to understand the difference between them because they can impact how a claim is handled.

Duty to Defend

On a Duty to Defend policy form, the insured must choose a law firm from the insurer’s list of pre-approved panel counsel firms. Once a claim is submitted, the insurance company is obligated to provide defense of the claim and cover 100% of the defense expenses as long as at least one allegation is covered by the policy terms/conditions and remains open.

Reimbursement

On a Reimbursement/Indemnity policy form, the insured has the flexibility to choose the law firm they are utilizing. However, the firm and their rates must often be pre-approved by the insurance company in writing.

When defending a claim on this form, the insurance company allocates defense cost reimbursements between covered and uncovered matters. For example, if the claim alleges five wrongful acts, three of which are covered and two that are excluded by the policy terms/conditions, the insurer will only reimburse the portion of defense costs that relate to covered or covered portions of the claim.

When determining which policy is right for you, ask the following questions:

• Does choice of counsel matter? If so, is the preferred firm included on carrier panel listings? How do their billing rates compare to other firms on the panel?

In some cases, the insurance carrier may agree to add an outside firm to panel counsel by endorsement on a Duty to Defend form. This must be negotiated prior to submitting a claim. Additionally, the outside firm must have demonstrated knowledge in the applicable practice areas and comparable billing rates to the other firms listed on the panel.

• Does the company have the internal resources necessary to manage the defense process and related counsel expenses? On a Reimbursement/Indemnity form, insureds should expect to be more significantly involved in the management of the defense process. This can be cumbersome due to the insurance carrier conducting a more thorough audit of the “reasonable and necessary” expenses in their litigation management guidelines and allocating reimbursements between covered and uncovered matters.

On a Duty to Defend form, the process tends to be more streamlined because the panel firms are familiar with the carrier billing practices.

• Does the company have a strong enough balance sheet to sustain additional expenses related to the allocation of covered/uncovered matters or an adjustment/billing dispute by the insurance company?

On a Duty to Defend form, the carrier is obligated to cover defense expenses for all allegations and will advance defense costs on behalf of the insured up to the point of settlement.

Conversely on Reimbursement/Indemnity forms, the carrier will allocate expenses related to uncovered matters, which results in additional expenses incurred by the insured. In the case of a drawn-out billing dispute, insureds must have enough cash flow to continue paying counsel for ongoing expenses while waiting for the carrier to reimburse those expenses.

While there is no right or wrong answer as to what defense provision is best for you and your company, it is imperative to discuss with your leadership team at the time coverage is placed or before a claim is submitted. This will ensure all parties involved understand how the claim will be handled, and expectations are met.

The experienced team at Oswald can help you determine the best ways to protect your organization.