booklet test

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