If you're in the process of purchasing professional liability insurance, you might already be aware of how many decisions need to be made before you are actually insured.  As if choosing an insurance company you trust and an adequate limit of liability wasn’t complicated enough, there are other choices you need to make such as additional coverage options. 


When shopping for a lawyer’s professional liability insurance, there are more coverage options to choose from than one may realize. 


When I first joined Protexure Insurance Agency three years ago, I was surprised to learn how many policy options there are with professional liability insurance. 


Whether you are purchasing insurance for the first time or been a policyholder for years, you may have the same notions about liability insurance as I did. I was familiar with health insurance and auto insurance, how different could professional liability insurance be? But, in reality, it is actually quite different. 


One element of liability insurance that I learned about right off the bat and have become very familiar with over the past few years is First Dollar Defense. 


This coverage option is frequently asked about because it is a coverage option that only applies to liability insurance. Therefore, if you haven't dealt with professional liability insurance before, it's possible that you've never heard this term before


To help you better understand this type of coverage, I will review what First Dollar Defense is, how it works, how much it costs, and who needs it. 


What is First Dollar Defense?

First Dollar Defense (FDD),  is an additional insurance coverage option that may be purchased onto a firm’s professional liability insurance policy. You may also hear First Dollar Defense called a Loss Only Deductible or Indemnity Only Deductible. 


When a firm carries first dollar defense coverage if a claim arises the insurance carrier pays the “first dollar” to defend the firm, and in turn, the firm only pays their deductible if indemnity is paid on the claim. 


First Dollar Defense speaks to a specific coverage option offered as additional support if a claim arises.  With first dollar defense, if a claim arises where only defense costs are incurred and no indemnity is paid, the insured will not be responsible for their deductible amount, as the carrier covers the costs to defend.  In turn, if a claim results in a loss payout, the insured will be responsible for their deductible amount.  


First Dollar Defense coverage means the deductible only applies to the damages that occurred within a claim and no deductible is required for defense expenses.


For example, let’s say your law firm is named in a claim but it is found that your firm is not at fault and the claim was nothing of merit.  In this case, only defense costs have been incurred, therefore, your firm would not be responsible for payment of your deductible while your insurance carrier paid to defend you.


How Does First Dollar Defense Work?


The unfortunate time has come, and a claim arises against your firm, now what?  Let’s look at a few examples of possible claim scenarios.


Let’s say your firm is carrying coverage of 100,000 limits of liability with a $5,000 first dollar defense deductible.  A claim arises which incurs $10,000 of defense costs.  At this time, your firm would not need to pay the deductible amount, since no indemnity has yet been paid on the claim, hence the “first dollar to defend” verbiage commonly used with this coverage.  


The carrier is responsible for the “First Dollar” to defend your firm in a claim when First Dollar Defense coverage is in place.  If the claim settles with no indemnity paid, your firm would not be required to pay any out-of-pocket costs, as the First Dollar defense coverage covered the defense costs.  In other words, you would only be responsible for your deductible if the insurance carrier pays the loss for the claim.


If your firm carried the First Dollar Defense coverage and a claim occurred but ended up settling with a loss payout of $10,000, your firm would be responsible for the $5,000 deductible, since more than just defense costs were incurred.


On the other hand, if the same claim were to arise and your firm did not carry the First Dollar Defense coverage, your firm would be responsible for the deductible amount of $5,000, even if the claim closes with only defense expenses paid. 


How Much Does First Dollar Defense Coverage Cost?


In general, obtaining more insurance coverage comes at a higher premium cost.  There is not a definite answer as to exactly how much First Dollar Defense coverage would cost your firm.  Some deciding factors include jurisdiction, limits of liability carried, and deductible amount carried.  The best way to find out is to contact your insurance agent and request to see some additional options. 


While no one wants to pay more for their insurance premium, the cost of the additional coverage may be worth it to you.  There is no guarantee that when a claim arises, only defense costs will be incurred, but the peace of mind of the additional coverage may be worth it.


Am I Required to Purchase First Dollar Defense?


Certain states and counties, New Jersey to name one, require First Dollar Defense coverage. 


Unsure if your firm falls into one of these jurisdictions?  No need to worry, if your practice falls within one of these particular jurisdictions, your insurance carrier will only provide coverage options that are within your jurisdiction’s guidelines.  If your firm falls outside of the jurisdictions that require First Dollar Defense, carrying the coverage is up to you. The insurance carrier you are working with will help you determine if First Dollar Defense will benefit you and your law firm.


Shopping for the correct coverage can be a bit more involved than one may think. But, asking your insurance agent the right questions and being aware of all the coverage options available to you will set you up for success.


We want to ensure you truly feel comfortable in obtaining adequate coverage for your firm. With so many coverage options and additions available, we have compiled a list of the options and their cost to help you with the next steps of obtaining a professional liability insurance policy.