Most public D&O policy forms are clear regarding the duty to defend—specifically that it is the insured's duty and not the duty of the insurer to undertake defense of a claim against an insured. These are often referred to as reimbursement, or pay-on-behalf-of, policies under which the insurer does not have a duty to defend. In such instances the policyholder is required to retain defense counsel to defend itself and is entitled to reimbursement from the insurance company to the extent the claimant's allegations are potentially covered and made against the insureds.

A duty to defend normally arises only when the policy contains an affirmative statement or promise that the insurer will defend the insured.

The following is an example of typical wording requiring the insured to provide defense.

It shall be the duty of the Insured Persons and not the duty of the Company to defend claims against Insured Persons.

Chubb 14-02-8919NY(11/2003 ed.)

While uncommon under public D&O forms, some D&O policy forms do contain an affirmative duty to defend. However, such an affirmative duty to defend is most often found in policies designed for not-for-profit organizations, associations, and smaller private companies. The following are examples of so-called duty-to-defend D&O policies.

It shall be the duty of the Insurer and not the duty of the Insureds to defend any Claim. Such duty shall exist even if any of the allegations are groundless, false or fraudulent. The Insurer's duty to defend any Claim shall cease when the Limit of Liability has been exhausted.

ACE, PF-15193NFP (07/05)

The Insurer shall have the right and duty to defend each Claim covered under a Liability Coverage Part for which the Insurer receives notice, even if such Claim is groundless, false or fraudulent. The Insurer may make any investigation it deems appropriate.

Arch 05 PCD0071 0003 10

An important feature of a duty-to-defend policy is that the insurer is required to appoint, hire, and control defense counsel for its insureds, In addition the insurer must pay 100 percent of defense expenses even if only a small portion of the claim is potentially covered.

Even when a D&O policy does not contain an affirmative duty to defend, the insurer may still retain a good deal of control over defense by imposing certain requirements and restrictions upon the insured.

Consent for Settlement

Most policy forms that do not provide a duty to defend require the insurer's consent for settlement of claims with the proviso that such consent shall not be unreasonably withheld. It is also common for D&O policies to contain language giving the insurer the right to recommend settlement with refusal by the insured to settle resulting in restrictions on the amounts recoverable under the policy. Such language is commonly known as a “hammer” clause.

In the following example, if the insured rejects the insurer's recommendation to settle a claim and instead chooses to litigate, the insurer's liability is limited to the amount for which the claim could have been settled, including defense costs incurred prior to the date such a settlement is refused.