Securing Insurance Coverage: A Primer for Business Litigators
“I’m a business litigator, not an insurance specialist. I’ll leave those sleep-inducing insurance issues to the coverage attorneys.” Wrong! Like it or not, if you defend clients in litigation, you must be ready and able to help your client secure insurance coverage. Otherwise, your client – and you – will suffer.
A now defunct, prominent California law firm learned the hard way the importance of looking after its client’s insurance interests. See Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 18 Cal.4th 739 (1998). The firm represented a jean manufacturer in an intellectual property dispute against one of its major competitors. However, the firm failed to inquire about or otherwise investigate whether any potential coverage might be triggered by the lawsuit. Three years and $30 million (in defense costs) later, the firm’s negligence was discovered, and the lawsuit was finally tendered to the client’s liability carrier. Unfortunately, despite the fact that the claim was covered, the client was only able to recoup only $12.5 million of its out-of-pocket expenditures because of the late tender. Undoubtedly, the law firm promptly tendered the subsequent malpractice lawsuit to its errors and omissions carrier.
While this may seem like an extreme example of the harm that can result from an attorney’s failure to simply tender a claim to a client’s liability carrier, it nonetheless highlights the importance of addressing insurance issues early in a case. The reality is that procuring coverage can be as important, if not more important, than addressing the liability issues. The following is a simple checklist that every litigator should follow when representing a client in litigation.
Move Quickly. Whenever you take on a new piece of litigation, you must immediately evaluate the insurance landscape. Virtually every liability policy contains a “cooperation clause” or “voluntary payments clause” which prohibits an insured from incurring defense or settlement costs without the insurer’s consent. In light of these provisions, insurance companies will always refuse to pay for litigation expenses incurred prior to the tender of the claim to them. What this means is that you are wasting your client’s money by delaying your insurance investigation until after you perform other litigation-related tasks. Furthermore, if the claim is potentially covered under a “claims made” policy, which provides coverage for claims made against the insured and reported to the insurer within the policy period, delaying the tender of a claim to the carrier may result in losing coverage altogether.
Consider All Policies. Ask your client to provide you copies of all policies from the date of the alleged wrongful activity through the date the lawsuit was filed. Be specific. Tell your client you want to look at general liability policies, errors and omission policies, directors and officers liability policies, umbrella policies, and even homeowner policies (which almost always provide some coverage for third-party claims). Corporate clients usually have coverage portfolios significantly broader than the standard CGL policies. If you don’t provide your client with some guidance regarding potentially applicable policies, your client may end up just providing you only its current general liability policy, possibly ignoring significantly broader sources of coverage.
If in Doubt, Tender. Don’t get bogged down analyzing whether a third-party claim triggers coverage under the liability policy. If you are not sure, tender. The worst that can happen is that the insurer sends you a denial letter. An insurer’s obligation to defend the case is triggered if there is a potential for coverage based on the claimant’s allegations. See United National v. Frontier Ins., 120 Nev.Adv.Rpt. 77, 99 P.3d 1153 (2004). Remember, the burden is on the insurer to conclusively prove that the claim cannot result in an award of covered damages to avoid defending a claim. See Montrose Chem. Corp. v. Sup. Ct., 6 Cal.4th 287, 300 (1993). Also, don’t let your or your client’s view of the merits of the claims (or lack thereof) discourage you from tendering. Most liability policies specifically state that the insurer must defend against “groundless, false or fraudulent” claims that seek potentially covered damages. Even if it appears doubtful that insurance will ultimately cover a judgment should the case proceed to trial, you may be able to get the insurer to fund your defense and possibly contribute toward a settlement.
Be the Squeaky Wheel. Insurance companies often wait for months, or even longer, before responding to a tender. Don’t let this happen. If you don’t receive a response from the insurer within 20 days, send a follow-up letter. If the insurer requests information, send it to the insurer promptly. If not pushed, the insurer will often be more than happy to “investigate” coverage throughout the duration of the litigation. Force the insurer to promptly complete its investigation and to make a decision regarding coverage. If it denies coverage, evaluate the denial and, where appropriate, challenge the insurer’s assumptions. Don’t rely on the insurer’s investigation of the facts and claims being asserted. Conduct your own investigation and report any findings to the insurer. Remember, facts outside the four corners of the complaint may be relied on to trigger coverage. See Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, 880 (1998). You should present evidence of these facts to the insurer if they support coverage.
Remember Insurance Throughout The Lawsuit. Because business disputes evolve over the course of the litigation, it is critical to keep insurance in mind the entire case. As new theories and facts emerge, consider whether they help or hurt the insured’s coverage position. If it is unclear whether the other side is asserting a potentially covered claim at the outset of the lawsuit, conduct discovery to determine if such claims are being pursued, thereby turning implied allegations into explicit ones. What better way of proving that the claimant is asserting a potentially covered claim than a verified discovery response from him! Also, consider very carefully the insurance implications of any motion for summary adjudication which does not dispose of the entire case. If you end up dismissing the only claims covered by insurance, you may cause your client more harm than good. Lastly, as counsel for the insured, you should gather and preserve evidence that support’s your client’s coverage arguments throughout the lawsuit. If you wait until the litigation has ended, it may be too late, and the evidence may be lost.
Retain coverage counsel if necessary. There may come a point when your client needs to retain separate coverage counsel to assist you with the case. For example, your client may want to consider a coverage specialist to carefully scrutinize an insurer’s denial letter or reservation of rights letter to determine if the insurer’s coverage assertions have merit. Coverage counsel can also be retained to simply monitor a lawsuit to ensure that the insurance interests of the insured are protected. Letting the insurer know that the insured has retained its own coverage counsel often keeps the insurance adjustor in check, compelling him to pay more attention to the claim and to take reasonable coverage positions.
Furthermore, separate coverage counsel will be ethically necessary if you have been retained by the insurer to defend its insured and you find yourself in the middle of a coverage battle between the insurer and its insured. See Nevada Supreme Court Rule 157. (In the “tripartite relationship” which is created when an insurer retains an attorney to defend its insured in a lawsuit, the attorney has two clients, i.e., the insured and the insurer.) Thus, you must advise the insured that you cannot provide it with coverage advice and that it must obtain that advice elsewhere. If you fail to do so, ignoring the coverage dispute in the hope that it will go away on its own, the insured may reasonably assume that you are protecting all of its interests, including those related to insurance.
By taking these simple steps, you, as a business litigator, will more effectively represent your client in all aspects of the litigation. You will also rest assured knowing that the basic insurance interests of your client have been protected and that you have done what you can to secure and maintain coverage throughout the duration of the lawsuit.