D&O Indemnity

Call to Duty

Should carriers defend a company in litigation or just indemnify it?
By: | October 15, 2013 • 8 min read

We are all familiar with “duty-to-defend” language commonly associated with general liability policies. There is “non-duty-to-defend” language in the marketplace as well. This language is often found in public, private and some nonprofit directors’ and officers’ (D&O) liability policies and employment practices liability (EPL) policies.

Confusion arises when risk managers, insureds and agents do not understand the differences and true context of these clauses.

Advertisement




“Duty-to-defend” language is routinely found in most EPL (1,000 or less employees), private company D&O policies, and almost all nonprofit D&O policies. The term essentially means that, in the event a claim is made against a policyholder for an alleged wrongful act, the insurance carrier has the right and duty to defend the claim — even if it is groundless, false or fraudulent.

A “non-duty-to-defend” policy — also known as an “indemnity” — is used in all public D&O policies and some EPL and errors and omissions (E&O) policies. This type of policy states that it is the policyholder’s responsibility, not the insurance company’s, to defend a claim.

Then, there are some policies that state the carrier has the right, but not the duty, to defend a claim. In some unique circumstances, we have seen manuscript wording that allows an insured to choose the preferred option at the time of the claim. Such a choice needs to be part of the negotiation between the broker and carrier before the policy is issued.

R10-15-13p28-30_02D&O.inddIn one recent case, we had negotiated the right for the policyholder to choose between duty-to-defend and indemnity at the time of a claim. The insured, a manufacturer that had just suffered its first EPL claim, was able to select the option that best fit the company’s needs. It chose indemnity, because the policyholder felt the litigation would be settled quickly and at normal costs.

Choosing Self-Insured Retention or a Deductible

Self-insured retention (SIR) and deductibles are excellent tools for underwriters that want to avoid claims frequency and for insureds that want to manage their premium cost. As types of co-insurance, they hold the policyholder responsible for partial payment of a loss.

It is important to understand the difference between SIR and deductibles as well as the roles they play in the defense of a claim.

Most often, duty-to-defend policies use a deductible, which is always included as part of the defense costs and is not normally “first dollar” defense, as often perceived. When a deductible is used, that amount is subtracted from the amount of a claim as defense costs are incurred.

Because the carrier has a duty to defend the insured, the carrier can advance all defense costs on the policyholder’s behalf until a settlement is reached, then it will subtract the amount of the deductible. In situations where a claim was settled within the deductible amount, the carrier will require reimbursement from the insured for all of the defense costs it incurred.

The advantage is that the insured bears no out-of-pocket expense until settlement, helping their cash flow. Recently, a claim was reported that included covered and uncovered allegations filed against a security guard company in New Jersey. Because it was a duty-to-defend policy, the carrier defended all the allegations. This case was settled in August, and because of the global nature of the settlement, the insured avoided any allocation issues with the insurance company arising out of covered and uncovered allegations.

In contrast, a SIR is used almost exclusively in a non-duty-to-defend policy. In that situation, an insured must manage the litigation process from the time the claim is initially made until the amount of the SIR is satisfied. Then, the insurance company pays or advances funds.

Pros and Cons

When carriers have duty-to-defend clauses in their policies, they are obliged to manage the litigation process from the initiation of the claim.

Advertisement




That means the policyholder’s defense strategy is predominantly in the control of the insurance company. Insurers have the right to select defense counsel, who are usually, but not always, on their counsel panel. When the insurance carrier’s counsel is used, the overall costs of the litigation are usually minimized.

The duty-to-defend policy form is customarily used with smaller, less sophisticated privately held companies and nonprofit organizations that benefit from the insurance company’s choice and relationship with qualified defense counsel.

On the other hand, policies with non-duty-to-defend clauses put the management of the litigation process squarely on the shoulders of the insured. That includes the selection of defense counsel and payment of defense costs as they are incurred, although arrangements are often made for the carrier to make quarterly payments.

R10-15-13p28-30_02D&O.inddThis approach is employed most often with either sophisticated large insureds and/or catastrophic potential exposures. Due to the nature of this type of D&O claim, it is in the insured’s best interest to control its own defense — particularly when allegations of fraud and misrepresentations are involved.

The reasons for this are fairly obvious. If a carrier providing the policy suspects the insureds have misrepresented themselves or committed dishonest, fraudulent or even criminal acts, the insurance company is less likely to view the policyholder in a favorable manner.

In some cases, the insurers may even try to rescind the policy because of such conduct. That has been the case for a number of notable, publicly held companies that have filed D&O claims during the past few years.

One drawback to the non-duty-to-defend option is the cost of defense, which may total hundreds of thousands of dollars. Such a protracted defense can become a financial burden. For this reason, the non-duty-to-defend form is frequently used by more sophisticated entities experienced in complex litigation matters.

The distinguishing difference between the non-duty-to-defend and the duty-to-defend policy is that the carrier does not step in to defend the claim until the SIR is satisfied. In practice, however, it remains the sole discretion of the carrier as to how they handle the SIR or deductible when a claim is made, because each policy contract varies, and each carrier handles claims differently.

Selecting Counsel

As mentioned before, when a duty-to-defend policy is used, the carrier generally retains the right to select legal counsel. In some instances, however, an insurance company may allow the insured to use its own defense counsel, if pre-approved in advance of a claim. This can be negotiated at the time coverage is placed. As an alternative, a number of insurance carriers now provide defense coverage via “panel counsel.”

Panel counsel consists of a group of pre-approved attorneys used by the carrier to handle claims on its behalf. They are experts in their fields, so the panel counsel acts as the insured’s claims counsel and manages the litigation process on the insured’s behalf, while working with the carrier to settle the claim.

Advertisement




Because of this relationship, the cost of defense is usually less — mainly due to lower pre-agreed hourly rates and efficiency due to counsel’s legal expertise.

When panel counsel is used, the policyholder will select their representation from a list provided and developed by the insurance carrier. This is routinely done once the policy is issued. But in some instances, the insured may have the option to make that choice at the time of a claim.

A non-duty-to-defend policy stipulates that it is the “duty of the insured and not the insurer” to select his or her own defense counsel. Contractually, the carrier still retains the right to approve the selected defense counsel, but such consent cannot be unreasonably withheld. Most often, the carrier just wants to be comfortable that the insured’s choice is qualified for the particular area of law.

With the non-duty-to-defend clause, the cost of defense, as mentioned, is borne by the insured and is only reimbursed at designated periods throughout the claim process once the SIR is satisfied. To help with those costs, the insurance carrier often will “advance defense costs” to reimburse out-of-pocket expenses incurred by the insured, thus limiting the hardship on the policyholder’s working capital.

This type of arrangement is typically associated with D&O policies, and reimbursement is usually made quarterly or, in some cases, monthly. However, this is not without stipulations. The rule of thumb is, the more sophisticated the insured (i.e., public company, industry, size, etc.), the more likely they will be better served with an indemnity policy.

Under most policies, a carrier will require compliance with a number of conditions before the insured is reimbursed. As an example: The claim must be a covered claim; the SIR must be satisfied; and the insured and carrier must have agreed to the costs of defense. And lastly, if it is established that there is no liability under the policy, then the insured will reimburse the insurer for all costs of the defense.

Whether a deductible or SIR is used, the payment of defense costs will almost certainly reduce the limit of liability in most policies. Nevertheless, there are a few duty-to-defend carriers that will provide defense costs in addition to the limit of liability.

Also, as the market changes, D&O and EPL carriers may permit an endorsement that allows insureds to select either the duty-to-defend option or defend claims themselves. As a rule, that option must usually be exercised within 30 days of notice of a claim.

When selecting coverage, it is important to know what defense provision is the correct one for your organization. Risk managers should talk to their brokers about the differences in the policy forms and how that relates to the organization’s needs.

The ability to have a choice can be a big advantage for the insured and should always be considered when deciding which coverage proposal is the best option. With that said, there are tradeoffs that need to be evaluated when the defense is outside of the carrier’s or policyholder’s control.

Of course, there is no absolute answer when selecting the appropriate defense provision because each insured’s business and needs are different. For smaller entities, economics may play an important role, whereas a larger entity may feel more comfortable using its own defense counsel.

Peter R. Taffae, is managing director of ExecutivePerils, a national wholesale broker. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Workers' Comp

Keeping Workers on Their Feet

Slip and fall prevention programs must interweave all of the factors contributing to the risk.
By: | July 6, 2017 • 11 min read

If you peruse the last decade’s worth of literature from the CDC, NIOSH, or numerous other agencies or organizations, you’re bound to come across the “good news” that slips, trips and falls are largely preventable.

Advertisement




So it’s frustrating, then, that slip, trip and fall injuries consistently account for more than a quarter of all nonfatal occupational injuries, and at least 65 percent of those injuries happen on same-level walking surfaces. And those figures just don’t budge all that much from year to year.

According to the “2016 Liberty Mutual Workplace Safety Index,” falls on same level currently rank as the second highest cause of disabling injuries in the U.S., with direct costs of $10.17 billion, accounting for 16.4 percent of the total national injury burden.

“Not only are they still happening often, but they tend to be very significant injuries,” said Mike Lampl, director of research at the Ohio Bureau of Workers’ Compensation.

“We’ve seen these trends grow over the years,” said Wayne Maynard, product director, risk control, with Liberty Mutual. “Bottom line is, it’s a real, real big problem.”

So why are preventable falls so hard to prevent? This stubborn status quo, say experts, is that the causes of slips and trips are typically far more complex than they seem. There are nearly always multiple factors in play, from footwear and flooring and the interplay of both, to cleaning procedures, lighting, housekeeping, weather, and workers’ mental or physical conditions as well as overall awareness.

And all of these factors are being exacerbated by the fact that incidents often go unreported.

“Slips, falls — people get up, move on, they don’t report it,” said Maynard.

“When somebody’s injured and files a claim — in the workers’ arena, how many are behind the scenes that may have happened that are not reportable? …. The unreported number is considerable in my opinion.”

The key to making any headway in reducing slips and falls on the same surface, say experts, is to have a comprehensive fall prevention plan that addresses all possible factors. No small task.

Engineering Solutions

Flooring conditions are often the most obvious starting point. Ideally, said Maynard, all the right choices are made at the planning and design stage. But sometimes mistakes are made, and in other cases, a business may be inheriting an older space with floor chosen for a different purpose.

Patricia Showerman, senior loss control consultant, Arthur J. Gallagher & Co.

So even flooring in good condition may be the wrong type of material and may not have the necessary coefficient of friction (slip resistance) needed for the work being done.

If companies want to drill down into all the details of the surfaces in their facilities, a friction coefficient study is always an option, said Patricia Showerman, senior loss control consultant at Arthur J. Gallagher & Co.

But if a company doesn’t want to take that step, she said, it may be a simpler matter of saying, “Let’s look at what you’ve got. Let’s look at your floor surfaces and how you’re maintaining them.”

A lot of people want that “shiny grocery store glam look,” she said. “And if you can do it properly, and maintain it properly and keep that coefficient of friction and have the shiny look, that’s great. That’s what everybody wants but how do they get there?”

Certain surfaces may start out with an adequate coefficient of friction when they’re clean and dry. But add even an invisible layer of dust or debris, “and it’s like microscopic little BBs that you slide across,” said Showerman. “So if you have dust on your floor, you are dramatically reducing your slip coefficient.”

For companies that do have flooring surfaces in need of improvement, ripping up the floor and replacing it isn’t typically a feasible option. Fortunately there are more budget-friendly ways to get the maximum slip resistance from existing flooring, such as coatings and etchings.

A coating adds a microscopic layer on top of the flooring that creates a grip surface while maintaining the shine. Showerman likened the effect to the way that Velcro fasteners work.

“You want that hook effect … sharp points are going to microscopically stick into the soles of your shoes, rather than rolling off the top.”

Etching can work in a similar way, chemically altering the existing surface to make it imperceptibly gritty. Etching can also be used to create pores in an existing surface, which is useful for areas such as machine shops, she said.

Be Smart With Surfactants

While keeping floor surfaces clean is one of the best ways to remove slip and fall hazards, cleaning them the wrong way can actually do more harm than good.

Failure to follow appropriate cleaning procedures can severely diminish a surface’s coefficient of friction.

Experts suggest that companies engage with their chemical suppliers, and discuss their flooring as well as the types of dirt or grease removal and disinfectant needs. Detergents – which can contain different types of surfactants — aren’t a one size fits all solution.

Advertisement




Sometimes purchasers might be inclined to try to cover all their bases by buying the strongest product on the market, but that might mean adding unnecessary surfactants that make surfaces less slip resistant.

“Clearly identify the types of surfaces you’re using it for, the type of oil or dirt or debris you have, and whether or not you need a sanitizing step,” said Showerman.

“You’ve got to find the right balance.”

But that’s only half the battle. A significant problem experts see time and time again is that companies don’t understand how their flooring is being maintained on a day-to-day basis by front-line employees. Failure to follow appropriate cleaning procedures can severely diminish a surface’s coefficient of friction.

“This is where you’re seeing someone with a mop and bucket and they are just re-smearing that grease from one place to another. They put the dirty mop in the dirty bucket, the mop gets full of that emulsified grease and you’re smearing it across the room. In high grease areas, you have to replace with clean water consistently.”

In other cases, a worker without the proper training may grab the first detergent he finds, even if it’s meant for the equipment rather than the floor. Or perhaps he mixes equal parts detergent and water when he was supposed to only use 8 oz. of detergent for every five gallons of water.
Sometimes people will even over-concentrate the detergent on purpose, she added.

Peter Koch, safety management specialist, The MEMIC Group

“I see that in the food industry frequently,” said Showerman. “They find that the more detergent they leave on the floor, the easier it is to clean up next time … but then everyone’s slipping and falling like in a cartoon.”

A company could invest a significant amount in flooring improvements, only to have the benefits undone by improper detergent use or failure to follow recommended rinsing procedures.

It’s incumbent upon safety managers to reinforce that maintaining floor surfaces isn’t just a matter of housekeeping, but a key part of the company’s workplace safety program.

The Human Factor

When you’ve done everything possible to address hazards in the physical work environment, workers themselves remain the wildcard. Most employers routinely include slip and fall hazards in their safety awareness training or toolbox talk programs. But that training should go well beyond a general “watch where you walk” message, say experts.

“One of the most overlooked parts for employee safety is actually employee training,” said Peter Koch, safety management specialist at  The MEMIC Group.

“How do you train an employee to not slip and fall? I think many times that is wrapped in a “you have to be more careful” message, which is valid but nebulous and not very helpful — it means something different to everyone based on your risk tolerance as an individual.”

Koch’s employee training regimen revolves around four elements: surfaces, awareness, footwear and environment (SAFE).

Advertisement




The first goal of the surface portion is just to get employees to start thinking about the different types of surfaces they walk on and how it can change throughout the work day. Koch said he likes to ask: “How many different types of surfaces did you have to walk on the get to this training room?”

The footwear piece of it is the most straightforward. Are your shoes designed for the work that you’re doing and the surfaces you’re walking on? Are they in good condition? Are the soles worn out?

There is no ASTM standard for measuring the performance of slip-resistant footwear, added Gallagher’s Showerman. So workers should be reminded that wearing the right shoe isn’t a guarantee — it’s just one piece of the solution.

Awareness, said Koch, may be the most challenging piece of the puzzle — helping people to think about their gait, what they’re carrying, what they’re doing, and simply where their heads are at any given moment.

“If you’re thinking about 15 things you have to get done by the end of the day, or you have a particularly challenging employee interaction coming up that day, or you had a fight with your girlfriend last night— or whatever it is — you’re not focused. Then you take that step through the icy patch, and now it relies completely on your athletic ability and luck to stay upright.”

Workers may not necessarily make the connection between personal factors and fall risk. Someone who has an ear infection or is taking certain medications, for example, may not even be aware that their balance might be compromised, putting them at higher risk for a fall.

Employees also should be reminded of how even normal daily stressors can contribute to risk. Everyone is under pressure to deliver more in less time. Everyone is rushing, everyone is stretched to their limits. Add the ever-present cellphone beeping and buzzing and demanding our attention and perhaps it’s a wonder slips and falls don’t happen even more often than they already do.

We’re so conditioned to react when the vibration goes off or the tone chimes in our pockets that we just grab it without thinking, Koch said.

“If you knowingly put yourself at risk by knowingly going quickly through an area with slip and fall exposures, it’s just Russian roulette – at some point you’re going to get broken.” — Peter Koch, safety management specialist, The MEMIC Group.

“Even that, in certain conditions, is going to be enough to put you on the ground.”

Awareness of environmental factors should also be part of the training, Koch said, especially in terms of what workers can’t control, like inclement weather.  He said the main thing he tries to impress upon people is to slow down in a high-risk environment.

“If you knowingly put yourself at risk by knowingly going quickly through an area with slip and fall exposures, it’s just Russian roulette – at some point you’re going to get broken.”

Koch says that getting people to put all of these facets of awareness together is where the training can really click.

The goal is that when they approach an area with a higher-risk surface, employees are thinking “for those few seconds or minutes that I’m going to be walking through it, I need to have a greater sense of awareness, I need to put away the mental [distractions] and focus on what I’m doing – don’t answer your phone, don’t answer your texts.”

Some employers are looking to address the human piece of the slip and fall puzzle by using training that goes far beyond hazard awareness. Active slip-prevention training focuses on body mechanics and teaches workers how to respond when they feel themselves begin to slip.

One such program revolves around the Slip Simulator, technology born of a research partnership between Virginia Tech researchers and UPS. The simulator that creates slippery and hazardous conditions in a controlled environment while participants walk in a harness so they can slip safely. An instructor offers real-time guidance on how to alter their movements to avoid falling.

Advertisement




After mastering the initial technique, trainees face additional challenges related to their specific work environments, such as walking up ramps or turning wheels. A New Mexico security team practiced drawing firearms while standing on the simulator, which led to a change in how they wear their weapons. Workers at an Ohio refinery practiced stepping over pipes and turning large valves.

Clients of the program are reporting 60 to 80 percent reductions in accident rates.

The Road Ahead

A comprehensive slip and fall prevention plan is a must for employers, experts agreed, with clear, consistent procedures that empower employees to be a part of the solution.

“Employees play a very critical role,” said Liberty Mutual’s Maynard. “If they see a slip risk or a slipperiness issue, they need to be able to report it and they need to be able to get that corrected immediately. They have an important role in maintaining a safe facility and reducing risk themselves — be proactive, don’t walk by, clean it up.

“Any time you can involve the employee in solutions …. the likelihood of success of that intervention is higher.”

Maynard added that the best prevention plans will also be forward-looking.

“Understand where current safety performance is. Then make a roadmap to get better,” he said. “Emphasize where you’re doing well,” then identify opportunities to effect improvement, now and over the next three, four or five years.

“Prevention is too often reactive,” Maynard said. “We’ve got an issue and now what do we do? The goal is for companies to be proactive.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]