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BUSINESS
INSURANCE -
THE ROLE OF COVERAGE COUNSEL
David S. Klevatt, Esq.
When
do you have to inform your insurer about that lawsuit filed by an
ex-employee? Do you have to provide notice to your insurer of that
EPA inquiry letter you just received? What about that stockholder
letter threatening your directors with a class action lawsuit? Once
you have given your insurer notice do you have to comply with every
request or demand it makes? Do you have to accept whatever coverage
determination your insurer makes? Are you stuck with the lawyer
your insurer hired to defend you?
Few
businesses are accustomed to navigating the relatively unfriendly
waters of dealing with insurance companies on claims that they have
made. Smooth sailing may be easier to accomplish if companies employ
"coverage" counsel who are familiar with the principles
that govern the relationship between an insurer and insured, and
tactical issues that may arise during the course of litigation.
This article highlights some of the initial insurance coverage issues
and potential pitfalls that befall corporate policyholders.
The
Policies
In addition to property insurance, most companies purchase commercial
general liability insurance ("CGL"), and many businesses
also purchase some form of professional liability insurance, i.e.,
directors' and officers' liability, errors and omissions, professional
malpractice, etc. There are two general types of CGL policies, "claims
made" and "occurrence."
Occurrence
Policies
Occurrence policies cover all injury or damage that occurs during
a policy period, no matter when the claim is made. For example,
if a person slipped in your parking lot in October of 1994, but
did not make a claim against you until July of 1995, your company's
1994 general liability occurrence policy must respond to the claim.
The court's have used this illustration to extend coverage to such
delayed-manifestation injuries as asbestos and environmental pollution
liability claims. Long-expired insurance policies (dating back years
or even decades) are a fertile source of insurance coverage.
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Claims
Made Policies
The insurance industry created "claims made" policies
to try to cut off the "tail" of these long-tailed future
liabilities that occurrence policies must cover for events in prior
periods. A claims-made policy only covers claims against the insured
made during the policy period, no matter when the injury took place.
For example, if your director committed negligence in 1985 but no
claim was made until 1995, the company's 1995 claims-made directors'
and officers' liability or errors and omissions policy may be impacted
-- the 1985 policies would not be involved. Upon renewal these policies
present a real danger to policyholders of losing coverage for "claims"
that have not yet been reported to their insurer.
One
way insurers have permitted insureds to avoid having a claim rejected
on reporting grounds is by including an "extended reporting"
provision that lets you report a circumstance to the carrier that
may give rise to a future claim. For example, if your client threatens
to sue you in 1992 for something you did in 1991 and you report
this "threat" to your insurer, any future claim (filed
after the policy expires) will be considered covered by the 1991
policy.
Who Gets Notice?
There are also helpful steps the insured can take before a lawsuit
is ever filed. For example, since occurrence policies cover events
that may have taken place many years earlier, it is critical that
all old policies are saved. Insurers often do not have copies of
policies, only bare-bones coverage records. The passage of only
a few years can make complete policy construction a challenge. If
complete policies cannot be found company and insurance broker records
can be used to "reconstruct" coverages. Each claim is
unique and full analysis should be given to determine under which
insurance policies notice should be given.
You
and Your Insurance Broker
Your insurance broker can be very helpful in evaluating, placing
and administering policies. You may be surprised to learn, however,
that in Illinois, your broker is often considered your agent and
not the insurer's agent. This means that if your broker fails to
send the insurer your premium, forgets to process your policy renewal,
obtains inadequate coverage or fails to timely report your claim,
the mistake will be held against you -- not the insurer. Conversely,
in some circumstances' brokers are agents of your insurance company.
Thus, your insurance broker might not be the best person for you
to rely upon to present a claim and advocate your company's position
on coverage.
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Rules
of Policy Construction
Policy language can be confusing. In construing insurance policies,
courts use fairly well established rules of construction. For instance,
courts usually construe ambiguities or uncertainties in an insurance
policy against the insurer as they are usually the "drafter"
of the contract. Absent costly coverage litigation, however, if
the policy language is confusing or unclear, the insurer will likely
adopt an interpretation it finds favorable. It is common for the
insurer's claim representative to deny coverage by adopting a policy
interpretation a court would not adopt.
You
should not accept your insurer's negative policy interpretation
at face value. If you are unsure of your insurer's denial or reservation
of its rights, you should consult seasoned coverage counsel.
Insurer's
Duty to Defend
Most liability policies require that your insurer defend you (or
your company) against all claims. The carrier's obligation to defend
a claim is broader than its duty to indemnify or pay a claim. This
means your carrier may be required to defend you against a claim
even though it may ultimately prove to be not covered. If a claim
asserts both covered and uncovered allegations, your insurer may
still have to provide a defense.
The
typical liability policy requires the insurance carrier to provide
counsel to defend claims against the insured. Under some circumstances
-- especially when the insurer has reserved its right to deny coverage
-- the insured can choose their own lawyer to defend them. Generally,
even though the insurance company is paying the lawyer's fees, the
lawyer's duty of loyalty is to the insured and not to the insurer.
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Monitoring
Insurer Appointed Counsel
Even if your insurer has acknowledged coverage and has provided
an attorney to defend your interests this does not mean that all
your worries are over. You must be diligent in monitoring the attorney
your insurer employs to defend you. You must be mindful that this
attorney, who in all likelihood will never represent you again,
may still create an impact on your business. This is especially
true in cases that present the risk of a judgment in excess of your
available insurance, high-profile cases that affect your company's
public relations and cases involving precedential issues and other
important non-economic issues.
- You and your
company's lawyer (as opposed to the lawyer the insurer hired)
should closely monitor the progress of the litigation. Some things
you should consider doing include:
- Meet with
insurer-appointed defense counsel early in the case to discuss
strategy. If you find the lawyer less than competent don't be
afraid to demand a different lawyer.
- Obtain all
reports the defense lawyer has given to the insurer. If the insurer
has reserved its rights, ask to see the reports before they are
sent to the insurer.
- Require that
frequent status reports be provided to permit you and your company's
lawyer to determine early on where the case is heading.
- Require your
authorization before allowing the filing of any legal briefs.
- Request explanations
of legal procedures or strategic moves that you do not understand.
- Make sure
the defense lawyer adequately prepares your witnesses for their
depositions. You or your counsel may want to attend some or all
of these preparatory sessions.
Although
certainly not necessary in every instance, in the long run supervising
the insurer-provided defense counsel may prove to be a very cost-effective
measure. Your company lawyer's role is to spot potential problems
with coverage, supervise your defense, interact with the insurance
company to protect your rights and, when appropriate get involved
in settlement negotiations in order to protect your company's interests.
An
Insurer's Settlement Obligations
In a lawsuit your insurer owes you an obligation of good faith and
fair dealing and must treat your interests equal to its own. Your
insurer's duty of good faith is most noticeably impacted during
settlement negotiations. Generally, an insurer has a duty to accept
reasonable settlement demands that are within the policy's limits.
If your insurer breaches, it can be liable for the entire verdict
against your company, including all amounts in excess of policy
limits.
This
can be a tricky area. Assuming you have your own company counsel
reviewing the progress of the case, they may be able to help you
avoid a costly out-of-pocket judgment. Your lawyer can tell you
what the insurer may not--that in some circumstances you may want
to adopt the claimant's position and demand that your insurance
company accept an offer within its limits. This prevents your exposure
to the risks of trial. In these situations, the insured can greatly
benefit by retaining independent counsel familiar with insurance
law.
In
sum, businesses need to have their insurance coverage handled by
an advocate for the company without any potential conflict of interest.
Independent coverage counsel with the expertise to find and obtain
coverage, to overcome insurance company objections and to protect
the company in litigation and settlement are a valuable asset to
any business.
Copyright
2001 - David S. Klevatt, Esq.
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