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DEFENSE AND SETTLEMENT A. DUTY TO DEFEND The MCPL policy provides that Underwriters have the right and duty to defend any Claim to which this insurance applies, even if any of the allegations of the Claim are groundless, false or fraudulent. Scope of Duty to Defend. The policy imposes on Underwriters the duty to defend the insured as long as there is the potential for coverage for a Claim against an insured, even if the Claim is groundless, false or fraudulent. This duty is referred to as the “potentiality standard.” The duty to defend is broader than the duty to indemnify and is determined by the allegations in the Claim. In a duty to defend policy, the insurer provides an attorney and assumes the defense of a Claim against the insureds under the policy. The insurer’s obligation to defend a Claim is triggered whenever the facts alleged by the claimant could even potentially result in a judgment within the scope of coverage. The insurer is required to provide a full defense to all Claims, even if some allegations would be uncovered. A suit containing any potentially covered allegations must be defended even when it is unlikely that a settlement or judgment will fall within the indemnity coverage. If the allegations in the underlying complaint are vague or contradictory, the insurer must assume that the duty to defend has been triggered as long as the Claim contains allegations that “sound in” negligence. Although the policy covers only negligent acts, a Claim that apparently alleges only intentional acts, or that does not describe the insured’s intent, may trigger a duty to defend if there is any possibility that liability might arise from a negligent act. In one case, a court held that an insurer had a duty to defend a lawsuit alleging intentional conduct by an employer who decided to terminate an employee benefit plan and deny benefits to plan participants. The court concluded that the coverage for negligent acts may include decisions which are discretionary and intentionally made, but may also nonetheless be negligent decisions. Options of Insurer. On presentation of Claims, an insurer generally has three options: 1. Accept Coverage and Defend. If the insurer accepts coverage, it generally retains counsel to defend the insured, pays defense counsel, controls the Claim defense and pays amount of any settlement or judgment, subject to the policy Retention amount. 2. Deny Coverage. If the insurer denies coverage and refuses to defend the Claim, the insured has the right to retain defense counsel, control the Claim defense and settle without consent of the insurer or take the Claims against the insured to judgment. In some jurisdictions an insurer that denies coverage must promptly initiate a declaratory judgment action seeking a declaration of no coverage in order to preserve its defenses. 3. Defend under a Reservation of Rights. The insurer may reserve its right to challenge both its defense and indemnity obligations by agreeing to defend the Claim under a reservation of rights. The insurer notifies the insured in writing that it will defend the insured, but that it is reserving its rights under the policy to challenge at a later time whether it owes a duty to defend or a duty to indemnify. If an insurer reserves such rights, the insurer may conduct an insured’s defense in good faith without waiving its right to assert any policy defenses, provided it gives the insured notice of any potential defenses in the reservation of rights. In some cases, an insurer defending under a reservation of rights may be able to to recoup defense costs in the event that the Claim is ultimately determined not to be covered. Independent Counsel. Underwriters have the right to control the defense of its insured, based on policy wording that grants Underwriters “the right and duty to defend any Claim.” The relationship between policyholder, insurer and insurer-retained defense counsel is a tripartite relationship in which the defense counsel has two clients— 11 · PROFESSIONAL LIABILITY COVERAGE
the policyholder being defended and the insurer that retains and pays counsel. Having multiple clients creates the possibility of a conflict of interest for defense counsel when the insurer has reserved its right to deny coverage. An insurer under a duty to defend policy cannot control the defense or select counsel if doing so creates a potential conflict with the insured’s interests. A conflict of interest exists when an insurer reserves its rights on a coverage issue and the outcome of that coverage issue can be controlled or influenced by defense counsel retained by the insurer. For example, when a complaint contains allegations of both intentional and negligent conduct by the insured, it may be possible for defense counsel to steer the defense away from a finding of any negligent conduct. When such a conflict has been identified, the insured generally has the right to select independent counsel. If the insurer also retains counsel, both counsel provided by the insurer and independent counsel selected by the insured are allowed to participate in all aspects of the litigation. If multiple insureds are defendants in the same matter, the conflict analysis must be performed separately for each insured. The right to select independent counsel can be waived by the insured. Breach of Duty to Defend. The consequences of breaching the duty to defend vary from state to state, but can be substantial. Once the duty to defend has been triggered, the insurer may be subject to “bad faith” exposure for any failure to provide a defense. Specifically, if the insured is unable to defend the action without the insurer’s assistance, the insurer may be liable for any settlement or default judgment resulting from the action, even if the settlement or judgment includes elements that would otherwise be beyond the scope of coverage. Depending on the jurisdiction, an insurer who denies a duty to defend and is ultimately found to have a duty may be deemed to have waived all of its other defenses, including the policy limits. In addition, the insurer may be held responsible for any attorney fees incurred by the insured during the defense of the Claim, any attorneys fees incurred attempting to persuade the insurer to change its erroneous coverage determination, any other damages (such as business or reputational losses) caused by the insured’s inability to defend itself from the underlying lawsuit, as well as punitive damages. B. THE RIGHT TO DEFEND The policy not only imposes on Underwriters a duty to defend a Claim, it also gives to Underwriters the right to defend. Underwriters have the right to control the defense of the action against its insured, including selection of counsel. Defense Costs incurred without Underwriters’ approval are not covered by the policy and do not erode the applicable Retention. In furtherance of the right to defend, the policy requires the insured to provide assistance and cooperation to Underwriters. The policy requires that the insured, upon request, among other things, to submit to an examination under oath, to attend hearings and depositions, to assist in effecting settlement, or securing witnesses and evidence, and otherwise to aid in the investigation and defense of the Claim, all without charge to Underwriters. (Condition VII.E). C. THE RIGHT TO SETTLE The Policy also provides that Underwriters have “the right to negotiate the settlement of any Claim….” (Sec. II). An insured may not settle any Claim or admit liability without Underwriters’ consent. Failure of an insured to abide by this condition may be a defense to coverage. Underwriters may not commit the insured to any settlement without its consent. If the insured refuses to consent to any settlement recommended by Underwriters to which the claimant has agreed, the insured may continue defense of the Claim in the legal proceeding at the insured’s expense. Underwriters’ liability for the Claim is limited to the amount in excess of the Retention which they would have contributed had the insured consented to the settlement. PROFESSIONAL LIABILITY COVERAGE · 12
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- Page 3 and 4: MORTGAGE COMPANY PROFESSIONAL LIABI
- Page 5 and 6: C. WHAT ARE DEFENSE COSTS? The MCPL
- Page 7 and 8: E. WHAT CONSTITUTES A WRONGFUL ACT?
- Page 9: B. NOTICE OF CLAIMS The MCPL Policy
- Page 13 and 14: EXCLUSIONS A. IMPROPER BENEFIT EXCL
- Page 15 and 16: K. GOVERNMENTAL ACTION EXCLUSION Th
- Page 17: COMMON ENDORSEMENTS In addition to
DEFENSE AND SETTLEMENT<br />
A. DUTY TO DEFEND<br />
The MCPL policy provides that Underwriters<br />
have the right and duty to defend any Claim to which this insurance applies, even if any of the allegations of<br />
the Claim are groundless, false or fraudulent.<br />
Scope of Duty to Defend. The policy imposes on Underwriters the duty to defend the insured as long as there is<br />
the potential for coverage for a Claim against an insured, even if the Claim is groundless, false or fraudulent. This<br />
duty is referred to as the “potentiality standard.”<br />
The duty to defend is broader than the duty to indemnify and is determined by the allegations in the Claim.<br />
In a duty to defend policy, the insurer provides an attorney and assumes the defense of a Claim against the<br />
insureds under the policy. The insurer’s obligation to defend a Claim is triggered whenever the facts alleged by<br />
the claimant could even potentially result in a judgment within the scope of coverage. The insurer is required<br />
to provide a full defense to all Claims, even if some allegations would be uncovered. A suit containing any<br />
potentially covered allegations must be defended even when it is unlikely that a settlement or judgment will fall<br />
within the indemnity coverage.<br />
If the allegations in the underlying complaint are vague or contradictory, the insurer must assume that the duty<br />
to defend has been triggered as long as the Claim contains allegations that “sound in” negligence. Although the<br />
policy covers only negligent acts, a Claim that apparently alleges only intentional acts, or that does not describe<br />
the insured’s intent, may trigger a duty to defend if there is any possibility that liability might arise from a<br />
negligent act. In one case, a court held that an insurer had a duty to defend a lawsuit alleging intentional conduct<br />
by an employer who decided to terminate an employee benefit plan and deny benefits to plan participants.<br />
The court concluded that the coverage for negligent acts may include decisions which are discretionary and<br />
intentionally made, but may also nonetheless be negligent decisions.<br />
Options of Insurer. On presentation of Claims, an insurer generally has three options:<br />
1. Accept Coverage and Defend. If the insurer accepts coverage, it generally retains counsel to defend<br />
the insured, pays defense counsel, controls the Claim defense and pays amount of any settlement or<br />
judgment, subject to the policy Retention amount.<br />
2. Deny Coverage. If the insurer denies coverage and refuses to defend the Claim, the insured has the<br />
right to retain defense counsel, control the Claim defense and settle without consent of the insurer or<br />
take the Claims against the insured to judgment. In some jurisdictions an insurer that denies coverage<br />
must promptly initiate a declaratory judgment action seeking a declaration of no coverage in order to<br />
preserve its defenses.<br />
3. Defend under a Reservation of Rights. The insurer may reserve its right to challenge both its defense<br />
and indemnity obligations by agreeing to defend the Claim under a reservation of rights. The insurer<br />
notifies the insured in writing that it will defend the insured, but that it is reserving its rights under the<br />
policy to challenge at a later time whether it owes a duty to defend or a duty to indemnify. If an insurer<br />
reserves such rights, the insurer may conduct an insured’s defense in good faith without waiving its<br />
right to assert any policy defenses, provided it gives the insured notice of any potential defenses in the<br />
reservation of rights. In some cases, an insurer defending under a reservation of rights may be able to to<br />
recoup defense costs in the event that the Claim is ultimately determined not to be covered.<br />
Independent Counsel. Underwriters have the right to control the defense of its insured, based on policy wording<br />
that grants Underwriters “the right and duty to defend any Claim.” The relationship between policyholder, insurer<br />
and insurer-retained defense counsel is a tripartite relationship in which the defense counsel has two clients—<br />
11 · PROFESSIONAL LIABILITY COVERAGE
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