When most business owners think about their business insurance policies, they think about how much the policy will "pay" on a claim. The business owner does not think about one of the most important aspects of business insurance policy -- the defense of the business when it is sued.
All business liability policies will provide for a legal defense of the business. For example, this is a common clause in a professional liability policy:
"We have the right and duty to defend and appoint counsel, at our expense for any suit brought against you for a covered claim."
The insurer has a financial interest in defending your business. The insurer knows that well-represented businesses pay significantly lower judgments than unrepresented businesses. The insurer does not want its insured hiring the corner lawyer who prepared the owner's will to defend the company in a high-value lawsuit. Insurance companies have relationships with large law firms throughout the world. The insurance company will choose a lawyer with experience in trial litigation to defend the business.
This benefit of business insurance is often overlooked or ignored by businesses. And, depending on where the business is located, it can be a huge benefit. Legal fees for trained, experienced trial attorneys at the partner level averaged $348 per hour according to a National Law Journal survey. Associates (generally, lower-tiered attorneys with less than eight to ten years experience) averaged $274. But, these are average rates. In some communities the rates are much lower, but some communities like New York or San Francisco, the rates are even higher -- a Chicago-based firm, Jenner & Block, reported partner rates in excess of $1,000 per hour. When the insurer agrees to pick up the tab for a defense, it absorbs a significant cost to the business.
The insurer's duty to defend is broader than its duty to "pay a claim" or indemnify the injured person. The insurer may not have a duty to pay a claim, but can still have the duty to defend against the claims.
The insurer's agreement to defend claims includes a number of benefits depending on the policy and insurer:
- Assignment of a Qualified Defense Attorney- The insurer will assign a lawyer to defend the business. This lawyer is paid by the insurer, but the lawyer represents the business and not the insurer.
- Pre-Claim Assistance- Some policies will include pre-claims assistance as part of the defense. For example, after an industrial accident, and before any "claim" is made, the insurer may send out investigators and experts to preserve evidence, take statements and investigate the scene.
- Administrative and/or Regulatory Defense- The insurance policy may provide for the business to be defended in administrative hearings. This is especially true in professional liability policies that provide for a defense before any disciplinary panel.
- Payment of Bonds- During commercial disputes, a presiding court may require a posting of a bond to pursue an appeal or to recover property. The insurer will post the bond for the insured.
- Payment of Costs to Defend- The insurer will pay for costs the business incurs while defending a lawsuit. This provision is becoming very important in the age of electronic discovery. Electronic discovery is expensive.
Each policy is different and each state is different make sure you consult with your insurance professional regarding the policy defense provisions.