Insure The Beltway

Commercial insurance & the duty to defend 

Worker waits to access the work site while an
insurance issue is resolved 

In advising many local business owners about how best to protect their businesses from loss I find that I encounter the same issues over and over again. One such issue that crops up frequently is a misunderstanding about a particular clause contained within every commercial general liability policy, known as the "duty to defend."

So what is the duty to defend? In short, it obligates an insurance company, to "defend" a policy holder against a "suit" (understood to mean lawsuit or civil proceeding), should one be brought against the insured during the policy term. The duty to defend is in some ways the essence of the policy, given that its from this language that an insured finds coverage if they're sued. 

For the most part, business owners are pretty happy with this provision of their policy, except when they aren't. In fact, most often they've never even heard about it until I give them some sour news, here's how it plays out.

A local contractor, my client, wins a bid to work with a much a larger contractor, supplying them with, heck it could be anything - but we'll say kitchen and bath fixtures, and the labor to install them. The larger contractor demands that the smaller contractor supply a certificate of insurance, and typically with higher limits of liability currently carried, sometimes as much $5 million.

My client asks me to produce a certificate of insurance (COI) reflecting the limits in accordance with the contract they've just won. In order to produce such a document, an actual policy with  such limits must also be obtained -- and that's what gets us to the "duty to defend," -- here's why.

The insurance company that is being asked to increase its limits will look very closely at what it is that the larger contractor is actually building and what the possibility or "risk" that a lawsuit might result from that activity. Its a belief, and not an inaccurate one, that if a project is going to be sued, even if only one element, supplier, or contractor is at fault, all the parties -- including our smaller contractor, will be named in that lawsuit. That's the rub for our smaller contractor, and why I sometimes must relay sour news about the duty to defend provision of their insurance policy to them.

As with most things in the world of commercial insurance, there is a kernel of good news, and a way out for our small contractor. The good news is this; as a result of their growth, and shift in business focus they've outgrown their current insurance company, which happens, and it is better to learn during a paperwork issue then during a claim! The way out, and onto that work site -- a different insurance company, a company more specifically geared to address the needs of a growing contracting business, and willing to embrace their duty to defend!