Insurance Law

With respect to the insurer's defense obligation, when a claim is made of which even a part is covered by the policy, the insurer pays 100% of the insured's defense costs. In the indemnification context, an insurer generally is only obligated to pay if the claim for which an insured is liable is covered by the policy, though insurers frequently pay to settle cases involving both covered and uncovered claims.

In recent years, insurers, particularly in the directors and officers liability and professional liability context, are inserting "Allocation" or "Relative Exposure" provisions into policies that, in situations involving both covered and uncovered claims, require that the insurer and the insured use their best efforts to determine a fair allocation of payments of defense and/or indemnification between covered and uncovered claims, leaving the insured responsible for the uncovered portion. In addition to opening the door to disputes and/or litigation between insurers and insureds regarding fair allocation, these provisions represent a significant decrease in the benefit being purchased by an insured and, as such, insureds should be on the lookout for these provisions in or as options in their policies.

To be clear, this is not a "brand new" provision and has appeared in some directors and officers liability policies for more than a few years. However, it is becoming more commonly used and at least one large insurer recently added it to its new professional liability insurance form.