Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

CHAPTER 10 – DEFENCE COSTS

Professional indemnity policies ordinarily cover both third-party legal liability and defence costs.

Defence costs may or may not attract the policy excess/deductible and may form part of the overall limit of indemnity or have an additional limit.

Regarding the entitlement to costs, a policy will usually either entitle the insurer to take over conduct of the defence at its own cost or indemnify the insured for the costs incurred in the investigation or defence of a claim by its own solicitors. Defence costs usually comprise the reasonable legal fees and associated disbursements incurred by solicitors, barristers and experts for the purposes of defending the claim, sometimes together with any related investigation costs (usually incurred before proceedings commence) and can extend to public relations costs and travelling expenses. They will not ordinarily cover claim preparation costs and the time and lost business opportunity incurred by the insured providing instructions and assisting in the conduct of the defence. A defence or investigation costs clause will be triggered by a claim against an insured within the policy period or upon operation of a contractual provision or the statutory deeming provision (section 40 of the ICA) in respect of an earlier notification of a circumstance. The policy will not, therefore, respond to costs incurred by an insured in anticipation of a claim or investigation unless it has notified of the circumstances that may give rise to a claim/investigation and received prior consent to incur those costs under the terms of the policy – although, in the absence of prejudice, failure to obtain prior consent can be cured by section 54 of the ICA. As one might expect, an insured is entitled to coverage for the costs of defending claims to which the policy does respond, even if the underlying claim is wholly without merit or even fraudulent. 535 If the policy does not respond to the underlying claim, there will usually be no coverage for costs. The advancement of defence costs One requirement that can be (but is not always) found in claims made and notified policies, including professional indemnity policies, is the requirement for the advance payment of defence costs. This requirement is a benefit that entitles insureds to indemnity for the costs of defending a claim under the policy even where the insureds’ entitlement to coverage may involve complex issues of law or fact (or both) that cannot be resolved quickly, in respect of which an insurer may have reserved its rights in relation to coverage. Affording access to funding for defence costs can benefit an insured, even when allegations fall within a policy exclusion, until indemnity is declined by proper reference to the evidence or a finding or admission is made against the insured to that effect. Limitations on the prohibition for the advancement of defence costs to insureds in certain circumstances are usually predicated on a ‘finding or conclusion’ that the insured engaged in conduct that otherwise would be excluded from cover – for example, because of dishonesty.

535 Cooper v Farmers’ Mutual Insurance Society [2001] OTC 652.

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