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A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com Volume 260—NO. 56 Wednesday, September 19, 2018

Corporate Insurance LAW Expert Analysis Defense Costs Coverage 101

pon receipt of a claim, the risk the insurer is required to pay defense manager or in-house coun- costs on behalf of the insured. sel should coordinate with While the duty to defend is broader the company’s insurance than the duty to advance, it also gives broker to make sure notice the insurer control over the defense isU submitted to the insurer. However, of the claim. Typically, where a policy By And even earlier, in anticipation of claims, Howard B. Theodore A. contains a duty to defend, the insurer Epstein Keyes counsel should review the terms of the will have the right to appoint defense relevant insurance policies and develop requested by the broker or the insured. counsel. Thus, with a duty to defend an understanding of the defense cost While each of these clauses provides policy, the insured gets the benefit of coverage provisions. insurance for defense costs incurred by broad defense coverage but gives up An insurance company’s obligation the insured, there are distinctions worth the right to choose defense counsel and, to pay defense costs incurred by its considering which may dictate which effectively, control of the defense. insured in response to a claim typically clause is preferable for a given insured. An exception to this rule, in most falls into one of two categories: (1) a jurisdictions including New York, is Duty to Defend duty to defend or (2) a duty to advance that where there is a conflict of inter- defense costs. The duty to defend is While case law varies to some degree est between the insured and the insurer, most often included in general liability from state to state, the duty to defend is the insured is entitled to select indepen- (GL) policies while the duty to advance broader than the duty to advance under is more likely to be included in direc- New York law and the law of the major- tors’ and officers’ liability (D&O) poli- ity of other jurisdictions. It is also well- While case law varies to some degree cies. Policy forms can vary, however, settled that the duty to defend is broader from state to state, the duty to defend and a GL or D&O policy may contain than the insurer’s duty to indemnify for is broader than the duty to advance either type of defense obligation. In loss under a policy. The duty to defend under New York law and the law of addition, specialty insurance policies is triggered “whenever the allegations the majority of other jurisdictions. covering, for example, employment in a complaint against the insured fall practices or pollution liability risks within the scope of risks undertaken by dent defense counsel. Public Service Mut. may contain either a duty to a defend the insurer, regardless of how false or Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 or duty to advance clause. groundless those allegations may be.” N.Y.S.2d 422 (1981). In the case of such Regardless of the type of insurance Seaboard Surety Company v. Gillette a conflict, the insurer is responsible to policy, an insurer may be willing to con- Company, 64 N.Y.2d 304, 486 N.Y.S.2d 873 pay the reasonable defense fees of inde- sider including either defense clause if (1984). Even where some asserted claims pendent counsel. fall outside the scope of covered risks, Duty to Advance Defense Costs as long as some of the claims are within Howard B. Epstein is a partner at Schulte Roth & Zabel, and Theodore A. Keyes is special counsel the scope of coverage, the insurer will In contrast to the duty to defend, at the firm. have a duty to defend. Once triggered, the duty to advance merely requires Wednesday, September 19, 2018 the insurer to reimburse the insured because the insurer is more likely to concern where the insured is involved for costs incurred in defense of claims. pay 100 percent (or close to 100 per- in a regulated industry and where it Moreover, while the duty to defend cent) of the defense costs above the may be the subject of investigations requires the insurer to pay defense costs applicable deductible or retention. In or claims by government agencies. on behalf of an insured whenever the contrast, under a policy with a duty to Similarly, where the insured operates claims alleged fall within the scope of advance, there is likely to be consider- in an industry in which litigation is the risk insured, the duty to advance able lag time between the submission relatively common or routine, the only requires the insurer to advance of legal invoices and payment by the insured may prefer to have control defense costs for covered claims. insurer, and there is also a stronger over its defense. Likewise, where a Policies that contain a duty to advance possibility that the insurer will pay less claim concerns private, confidential clause generally require the insurer to than 100 percent of the invoices—either or even potentially embarrassing advance defense costs on an unspeci- based on an allocation between cov- issues, the insured will likely prefer fied “timely basis” or within a specified ered and uncovered claims or persons to have control of the defense. period of time that can range from 30 or based on the insurer’s defense coun- Timely Notice and Tender to 120 days after submission of invoic- sel guidelines. es. Such policies also typically permit Where choice of counsel is important In any event, regardless of the type of the insurer to allocate defense costs to the insured, a duty to advance will defense obligation, the risk manager or to covered and uncovered claims and likely be the preferred option. Choice in-house counsel should be sure to give thus, in some cases, provide a basis for of counsel may be of primary impor- timely notice of claim in order to avoid the insurer to advance only a percent- tance to an insured if the insured has a jeopardizing the right to coverage. In age of the defense costs. In addition, a relationship with counsel in whom they addition, it is crucial to give notice as duty to advance is conditional—in the have developed confidence. Similarly, soon as possible because an insurer’s event that it is subsequently determined if the claims at issue require a particu- obligation to pay defense costs is not that there is no coverage for the claims, lar expertise or in-depth understanding typically triggered until notice has the insurer may have a right to seek of a specific industry, the insured may been submitted. So while a couple of recoupment of the defense costs from believe it is better positioned to select weeks’ delay in providing notice may the insured. counsel than the insurer. Likewise, not jeopardize coverage, the defense On the other hand, in the context of a where the claims asserted threaten costs incurred prior to the notice will duty to advance, the insured is typically the continued viability of the insured’s not be recoverable from the insurer. entitled to select its own defense coun- business, the insured will likely pre- Further, to the extent that an opportu- sel and has control of the defense as well fer to retain counsel with whom they nity for early settlement negotiations as the responsibility to defend the claim. have substantial experience or counsel may arise, it will be necessary to coordi- In addition, a duty to advance will typi- with a reputation for expertise in the nate those discussions with the insurer. cally be triggered by a written demand relevant area. Consequently, notice should always be seeking monetary relief whereas a duty While a duty to advance clause typi- provided before any significant defense to defend, in some policies, will only be cally grants the insured the right to costs are incurred. triggered by an actual suit. select counsel, in some cases selec- tion of counsel will be subject to insur- Key Considerations er approval, such approval not to be Whether a duty to defend or duty to unreasonably withheld. In the case of advance is a better fit for a particular either a duty to defend or advancement insured may depend on several factors policy, it may also be possible to nego- including the insured’s profile and the tiate pre-approval of defense counsel. types of potential claims. For example, Where control of the defense is the a cost-conscious insured may prefer a primary concern, a duty to advance Reprinted with permission from the September 19, 2018 edition of the NEW duty to defend because defense costs policy will likely be a better fit for the YORK LAW JOURNAL © 2018 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, will be paid directly by the insurer and insured. Control may be the primary contact 877-257-3382 or [email protected]. # 070-09-18-21