Owners awarding a project to a prime contractor regularly give the prime a form contract; the contractor then routinely passes a form contract awarding the subcontracts on to their subcontractors.
Both prime contractors and subcontractors regularly sign form contracts agreeing to a laundry list of duties, i.e. the duty to defend, the duty to indemnify, the duty to hold the party harmless, etc. without fully understanding what they mean.
It is important for contractors to know what a duty to defend is, why the duty to defend is such a valuable provision, when the duty attaches, when the duty ends, and the consequences of an insurer failing to defend an insured. For clarity in this article, in the case of a prime contractor agreeing to defend an owner, the prime contractor is the insurer and the owner is the insured. In the event of a subcontractor agreeing to defend a prime contractor, the subcontractor is the insurer and the prime contractor is the insured.
What is the duty to defend?
Negotiating for a duty to defend is a valuable provision for the insured and an expensive provision for the insurer. When an insurer agrees a “duty to defend,” the party agrees to provide a defense for an insured, agrees to the duty to select and pay for defense counsel, and agrees to pay for all court costs and expert fees.
Why is the duty to defend valuable?
The duty to defend is a significant benefit for the insured. Some of the benefits of a duty to defend include:
- avoiding the time associated with finding its own attorney;
- avoiding the expense of having to immediately pay for a retainer or monthly invoices for counsel;
- avoiding the stress and uncertainty of budgeting for legal fees for an uncertain and usually extended period of time;
- having access to the superior resources of the insurer; and
- ensuring that it will be able to financially defend itself in the event of a claim.
When does the duty to defend attach?
The duty to defend usually “attaches” upon a showing that that insured could be liable under the claims and facts alleged in the complaint. The insurer must protect the insured against groundless, false claims, allegations where no negligence or defect actually occurred and (more obviously) claims where the insured may have fault.
When does the duty to defend end?
The duty to defend lasts until the conclusion of the underlying lawsuit or until the insurer can establish in court that there is no potential for coverage and therefore no duty to defend.
What are the typical damages for failing to defend?
If an insurer refuses to provide a defense for the insured, the usual contract damages are the costs of the defense.
