What Is First Dollar Defense?

When an insurance policy has a first dollar defense, commonly referred to as a dollar one defense, any legal defense costs do not apply towards the policy deductible. If an insurance claim purely results in defense costs with no indemnity payments, the insured party doesn’t pay anything out of pocket. In this case, a deductible only applies if there is a judgement or settlement awarded to the claimant.

First Dollar Defense is an important asset to those who are insured with an Errors and Omissions Professional Liability Policy. There is typically an additional cost to add a FDD to an existing E&O policy.

Here is a breakdown of how FDD, also referred to as ODD works:
A deductible is the amount the insured party pays before the insurance carrier pays any expenses. These insurance carrier expenses can be any defense and/or indemnity costs incurred in the event of a claim. When FDD is added to an insurance policy, the insured is only required to pay a deductible when the carrier commits to an indemnity payout. When an existing E&O policy does not have FDD, the insured would have to pay a deductible, regardless of the carrier’s expenses, such as indemnity and/or defense costs.

In an example case, the insured party submits an insurance claim with the expectation that the insurance company will pay the majority of the deductible or the entire $30K. This hypothetical case is long and complicated, resulting in $300K of defense costs for the carrier. Then, the case is dismissed by the court with the ruling that the insured was not at fault. Ideally, the insured party has FDD added to their insurance policy along with the $30K deductible, and that smart insured party pays ZERO of their deductible! With FDD coverage, the insured does not have to remit payment because there was no damage or indemnity payment made by the insurance carrier and the only costs were defense labor.

While FDD is an additional cost to your current Errors and Omissions Professional Liability Policy, it is worth considering the benefits. Even claims that don’t seem to have value need to be defended, and an FDD add-on keeps the policyholder safe from having to pay the large deductibles.

An important factor that can affect your firm is the difference between First Dollar Deductible vs. Straight Deductible. An FDD is considered a “damages only” deductible, and a Straight Deductible is known as “expenses and damages” deductible. When a policyholder has a Straight Deductible, the firm is responsible for defense costs up to the deductible once the claim is opened. It is more common for large firms with an adverse claims history to offer their clients a Straight Deductible. Smaller, claim-free firms typically offer a First Dollar deductible option. In some cases, small firm insurance companies may offer a $0 deductible regardless of expenses, damages, or settlements. The First Dollar Deductible and Straight Deductible options do not apply to any $0 deductible offers.

To learn more about First Dollar Defense and if your policy offers coverage, Contact Us today!