New York Codes, Rules and Regulations › Title 11 - INSURANCE › Chapter III - Policy and Certificate Provisions › Subchapter B - Property and Casualty Insurance › Part 71 - Legal Defense Costs In Liability Policies › Section 71.0 - Preamble

Current through Register Vol. 46, No. 28, July 10, 2024
(a) Prior to the
				  original promulgation of this Part in 1983, the Insurance Department had
				  approved a limited number of personal injury and property damage liability
				  insurance policies in which legal defense costs were permitted to reduce the
				  stated limits of liability when such legal defense costs were incident to a
				  claim of legal liability covered under the policy. Further, the department had
				  also approved certain policies that permitted legal defense costs to be applied
				  against the deductible.
(b) Other
				  than those limited circumstances, personal injury and property damage liability
				  insurance policies generally provided that legal defense costs incident to a
				  claim of legal liability and incurred in defending a claim of legal liability
				  under the policy were covered by the policy independent of the stated limits of
				  liability. Those policies placed no limit on defense costs and the stated
				  limits of liability were used solely to pay the amount of damages, up to those
				  liability limits, as ultimately determined by judgement or settlement. In such
				  policies, any deductible was also applied only against the amount of a
				  judgement or settlement.
(c) This
				  Part was originally promulgated to provide rules restricting the lines of
				  business wherein legal defense costs could be offset against the liability
				  limits or against the deductible, and to provide for adequate disclosure to the
				  insured in such cases. At that time, the department was advised by insurers
				  that legal defense costs for directors and officers liability and media,
				  publishing and advertising liability, where reputational interests are of
				  significant concern to the insured, were relatively high compared with actual
				  loss payments. With the legal defense costs offset, insurers can more easily
				  estimate their maximum potential losses, provide such specialized coverages,
				  and determine appropriate rates for such coverages.
(d) Subsequent amendments to this Part arose
				  out of this department's concern with the proliferation of liability policies
				  containing legal defense cost offset provisions for other types of risks. While
				  these policies contained the required notification to insureds the department
				  was concerned with the escalating use of these legal defense cost offset
				  provisions, for the following reasons:
(1)
				  Widespread usage of legal defense cost offset provisions represents a
				  substantial change in traditional insurance coverage, whereby the insurer
				  generally has a duty to defend any liability suit covered under the policy in
				  which damages are sought. This duty to defend typically has been separate and
				  apart from the obligation to pay damages under the policy and, accordingly, an
				  insurer must provide a proper defense regardless of cost. The duty to defend is
				  broader than the duty to pay and extends to any action, even if groundless,
				  false or fraudulent, in which facts are alleged within the coverage of the
				  policy.
(2) In the majority of the
				  policies containing legal defense cost offset provisions filed with the
				  department, insureds are offered neither the option of selecting the defense
				  attorney nor the right to consent to any settlement. Insureds are unable to
				  control how legal defense costs were spent, despite the insured's potentially
				  large financial risk in view of the possibility that legal defense costs may
				  have approached, or even exceeded, the stated liability limits. In such
				  instances, the insured would become responsible for legal defense costs, as
				  well as for damages on the liability claim itself, that exceed policy limits.
				  As respects the deductible, depending on its size, a significant portion of
				  initial legal defense costs could have become the insured's
				  responsibility.