While insurance policy endorsements are additional costs up front, many of them can lead to substantial savings later down the road. One optional endorsement that most professional liability carriers offer is known as the “First Dollar Defense” endorsement. Generally speaking, choosing to add this endorsement to a professional liability policy is a good risk management choice for design firms.
What is First Dollar Defense?
A design firm who has the First Dollar Defense endorsement does not have to pay the policy deductible if the only costs incurred on a claim are defense costs. In other words, if no verdict, judgement, or settlement is awarded to the claimant, the design firm does not have to pay the deductible.
Some even refer to First Dollar Defense as an “indemnity-only deductible” because the deductible is only due if an indemnity payment (i.e., a compensatory payment for damages as a result of a verdict, judgement, or settlement) is made to the claimant. Claims that only incur defense costs are not exactly uncommon, so this endorsement certainly provides an extra layer of protection.
First Dollar Defense in Action
Here’s a hypothetical to provide a better idea of exactly how the First Dollar Defense endorsement works:
- A design firm has a professional liability policy with limits of $1,000,000 per claim and $2,000,000 per year. The policy deductible is $5,000 per claim.
- A claim is filed against the design firm, and the insurance carrier incurs $9,000 in defense costs, but the claimant is not awarded anything.
- In such a case, the design firm would not be responsible for paying the $5,000 deductible out of pocket. On the other hand, a design firm who had an identical policy minus the First Dollar Defense endorsement would be forced to pay the $5,000 deductible.
Are all Design Firms Eligible for First Dollar Defense?
The simple answer is no—not all design firms are eligible for the First Dollar Defense endorsement.
Insurance carriers might not offer this endorsement to large firms with really high deductibles. Additionally, design firms with a less-than-ideal claim history may also be barred from adding First Dollar Defense to their policies.
Nonetheless, this endorsement remains a good option for a large number of firms. Design firms who are interested in the First Dollar Defense endorsement should contact their insurance account managers to see if it is available.
Conclusion
Although adding First Dollar Defense to a professional liability policy costs a little more up front, it can often result in greater savings down the road. Claims that only incur defense costs are relatively common, so it is worth it for most design firms to at least inquire about adding First Dollar Defense to their policies.
About the Author
Mike Pettit is in his second year as an A/E Risk Manager. Prior to his current role, he worked in personal lines.
Mike received a bachelor’s degree in risk management & insurance from Florida State University in 2019, and a Juris Doctor from Ohio Northern University Pettit College of Law in 2023.
The above comments are based upon DesignPro Insurance Group’s experience with Risk Management Loss Prevention activities and should not be construed to represent a determination of legal issues but are offered for general guidance with respect to your own risk management and loss prevention. The above comments do not replace your need for you to rely on your counsel for advice and a legal review, since every project and circumstance differs from every other set of facts.
Disclaimer: The viewpoints expressed in this article are those of the author(s) and are not necessarily approved by, reflective of or edited by other individuals, groups, or institutions and this article is an expression by the author to generate discussion and interest in this topic.