Enforce the Duty To Defend Clause

Selecting the types and levels of insurance is vitally important to a small business owner seeking to avoid day-to-day liability risks. So an owner should follow some general insurance guidelines if he or she wants to take full advantage of the protections purchased.

For example, a standard clause used in various types of liability insurance policies requires the insurance company to supply an attorney, at its cost, to defend against a lawsuit filed against the insured. The duty to defend clause also extends to covering all of the related costs involved in defending against the suit, including for example, the cost of expert testimony, depositions, etc.

Clearly this additional coverage can be significant. In many cases, hiring an attorney at a rate of $150 to $300 per hour may preclude the defendant from obtaining representation or induce him to settle a case on unfavorable terms (see our discussion of the economic disadvantages of being sued).

Accordingly, where litigation costs will be extensive, the small business owner should realize the insurance company will have an extra financial incentive to deny coverage. Where the claim is not covered, the duty to defend, of course, does not apply.

The small business owner should determine if the proposed policy has a duty to defend clause. If it doesn't contain this clause, or the clause contains too many exclusions, the business owner may want to consider a different policy. This is yet another reason to obtain an unexecuted copy of the policy before agreeing to its terms.

When the insurance company denies the claim or provides inadequate representation, the insured may be able to force the company to reconsider its position through the threat of a "bad-faith" claim.

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When a lawsuit is filed, the plaintiff alleges a certain cause of action (e.g., negligence) in his complaint. Multiple causes of action may be alleged and each is identified in the complaint as a "count."

Where multiple causes of action are alleged, but one of the causes of action is excluded from coverage, insurance companies sometimes attempt to deny coverage or deny their duty to defend against the action. This is improper. The courts have ruled that if one cause of action is covered, the claim is covered and the duty to defend applies.

In addition, where there is a duty to defend clause, the insured still can hire separate legal counsel. The private legal counsel can ensure that the insurance company provides adequate representation, assist in developing strategies, and document any evidence that may be the basis of a bad-faith claim against the insurance company.

Because the insurance company will provide, at its expense, the lead counsel on the case, the cost of hiring private legal counsel should be less expensive.

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Enforce the Duty To Defend Clause

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