Duty to Indemnify
The carrier's obligation to pay covered damages or settlements on behalf of the insured, as distinguished from the duty to defend.
What It Is
The duty to indemnify is the carrier's obligation to pay, on behalf of the insured, those sums that the insured becomes legally obligated to pay as damages because of a covered occurrence or wrongful act. Unlike the duty to defend, which is based on the allegations in the complaint, the duty to indemnify depends on the actual facts as determined through investigation, litigation, or settlement.
The duty to indemnify is narrower than the duty to defend. A carrier may have a duty to defend a lawsuit but ultimately have no duty to indemnify if the facts establish that the claim falls outside coverage. For example, a carrier must defend a GL claim alleging both accidental and intentional acts, but if the verdict determines the damage was intentional, the duty to indemnify does not apply to intentional acts.
The duty to indemnify typically covers compensatory damages including both economic losses and non-economic damages like pain and suffering. It generally does not cover punitive damages, though this varies by state and policy language. Some jurisdictions allow coverage of punitive damages if vicarious rather than direct, while others prohibit coverage of punitive damages as against public policy.
Why It Matters for Brokers
Brokers must understand the distinction between the duty to defend and duty to indemnify because they create different financial exposures. The duty to defend provides immediate protection against defense costs, while the duty to indemnify ultimately determines whether the client's financial exposure from a judgment or settlement is covered. Policies that provide only indemnity (common in D&O and professional liability) leave the insured to manage defense costs upfront.
Real-World Example
An employer is sued for wrongful termination with allegations of both discrimination (potentially covered under EPLI) and breach of an employment agreement (excluded as contractual liability). The EPLI carrier defends the entire case. At trial, the jury finds no discrimination but awards $175,000 for breach of the employment agreement. The carrier's duty to defend was fulfilled by providing the defense, but the duty to indemnify does not extend to the contractual liability verdict. The insured must pay the $175,000 judgment.
Common Mistakes
- 1Assuming that the carrier's defense of a claim guarantees indemnification of any resulting judgment, when the duty to indemnify depends on actual facts and coverage.
- 2Not advising clients that policies with indemnity-only coverage require them to fund defense costs and seek reimbursement, creating cash flow challenges.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker clearly distinguishes between defense and indemnity provisions in each liability policy, noting whether defense is provided directly or on a reimbursement basis. The system highlights policies where the duty to indemnify has limitations or exclusions that may not be apparent from the declarations page alone.