The Professional Liability coverage form for design professionals has several distinct coverage options that are not typical on a General Liability policy. One of the most misunderstood options is First Dollar Defense deductible.
First Dollar Defense is a coverage option offered by the insurance carrier that states when a design professional is faced with a claim the deductible will apply to damages only. In essence, the insurance carrier is paying the ‘first dollar’ to defend that claim. When the claim is resolved with no settlement or indemnity payment by the carrier (i.e. damages) the design professional does not pay any portion of their deductible. If damages or settlement payments are the result of the claim, then the design professional is required to contribute to that settlement up to the deductible amount.
Converse of the First Dollar option is the Straight deductible, which applies to both damages and defense costs. When this option is chosen on the policy, if the carrier seeks outside legal counsel, the design professional is responsible for defense costs up to the deductible.
First Dollar Defense is often a higher premium option, but can limit the design professional’s deductible payments for nuisance or unfounded claims.
When looking at a claim situation the differences become clear:
ABC Design Firm, Inc has been named in a suit for an error in design. The claimant states that it will cost $250,000 to correct the error. Insurance Carrier receives the notice, opens a claim file, and reminds ABC that the Professional Liability policy has a $10,000 deductible.
Over the next two years Insurance Carrier hires lawyers and specialists, at a cost of $60,000, to prove that ABC was not negligent in their design. The court decision favors ABC and there are no indemnity or settlement payments made to the claimant.
First Dollar Deductible: If the First Dollar Deductible is in place, ABC gets to keep their $10,000.
Straight Deductible: If the Straight Deductible is in place, ABC must pay Insurance Carrier the $10,000 deductible.
With either deductible, if Insurance Carrier makes an indemnity payment on behalf ABC, they must pay up to the $10,000 deductible to pay for damages.