Stated as of 05 Apr 2019 • USA (National/Federal)
An Article highlighting the key points that in-house counsel should consider to maximize the value of their company’s insurance coverage in connection with managing their litigation dockets.
- Take Stock of Policies
- Involve Counsel in Policy Purchase
- Do Not Assume Lack of Coverage
- Notify and Cooperate
- Push Back
In-house counsel are under constant pressure to minimize costs. Insurance coverage for the fees and costs incurred in defending litigation represents a valuable asset, but in the current financial environment corporate defendants may have to take a strong line with insurers when seeking to recover defense costs under existing policies. The plaintiffs’ bar is increasingly creative and aggressive, resulting in more suits (meritorious or otherwise) to defend. At the same time, insurance carriers, facing their own cost-cutting pressures, are responding to those forces by resisting paying defense costs or at least by trying to limit the amount of costs covered. This Article highlights several key points that in-house counsel should consider to maximize the value of their company’s coverage.
Take Stock of Policies
As part of routine housekeeping before a company is ever sued, in-house counsel should take stock of all the insurance policies the company has ever purchased, including (and especially) those policies issued years ago. Old insurance policies can provide valuable coverage for new claims based on events or exposures from the relevant time period. Claims are often made against policies issued as far back as the 1950s or earlier, particularly for long-tail liabilities (such as environmental pollution, asbestos, or other mass torts).
Unfortunately, due to inconsistent record maintenance, old policies are often lost or forgotten. If old policies have been misplaced, it is still possible to prove coverage through secondary evidence, but that process can be expensive and often yields unpredictable results. Millions of dollars in defense costs or indemnity payments that could have been secured through sound recordkeeping can be lost when the policyholder cannot establish the existence of its missing policies. Therefore, in-house counsel must:
- Account for and catalogue all policies from all time periods.
- Review document retention policies to ensure that older policies are not discarded (see Practice Note, Drafting a Document Retention Policy).
Involve Counsel in Policy Purchase
In-house or outside counsel or both should be involved in the process of purchasing insurance policies. Although these negotiations are typically led by the company’s risk manager, insurance policies are contracts potentially worth millions of dollars that should be carefully reviewed by an attorney before purchase. The focus of risk managers is often on the premium amounts, coverage limits, and deductibles. However, it is equally important to focus on the terms and conditions of the contract, an analysis requiring legal expertise that a risk manager may not have. An expensive insurance policy can be almost worthless if the policyholder fails to discover that some of its high-risk activities fall within the scope of policy exclusions.
Practical Steps for In-house Counsel Before Purchasing Insurance
Before purchasing insurance in-house counsel should:
- Review the policy’s definitions, exclusions, dispute resolution provisions, and other subtleties.
- Consider having outside coverage counsel review the policy as well. An hour or so of an experienced coverage counsel’s time at the front end can avert a coverage dispute that may cost hundreds of thousands of dollars to resolve after a claim is made.
- Pay close attention to the endorsements, which are typically prepared for each policyholder separately and can radically alter the coverage that may appear to be provided on the standard forms.
- Check to see whether defense costs erode limits or are in addition to limits because this difference dramatically affects the value of the policy.
- Read carefully the provisions explaining how the limits will apply (for example, on an aggregate or per occurrence basis) and think about how they would likely apply to the types of claims your company is likely to face.
- If the company can afford the premiums, negotiate for the most inclusive possible terms and conditions, including expanded definitions of key terms and broad coverage clauses. Ask the broker or underwriter what options are available.
- To the extent that a company could potentially face liability based on the fraudulent conduct of its employees or third parties, consider also purchasing fidelity, director and officer (D&O), or errors and omissions (E&O) coverage (or all of these).
Do Not Assume Lack of Coverage
When tendering claims and engaging in negotiations with insurers, do not accept at face value conventional wisdom on what types of liability are covered. When confronting a potential loss or liability, a company should review its entire insurance portfolio to determine if coverage exists. Well-intentioned but misguided conventional wisdom may originate with brokers or corporate risk managers with professional backgrounds on the carrier side of the insurance industry. Having seen carriers routinely deny certain types of claims, these individuals may simply assume that there is never coverage for those kinds of claims. Therefore, in-house attorneys must look carefully at the wording of the policy and the claim against the company to reach a meaningful coverage assessment. Companies sometimes hastily, and erroneously, assume that the following three types of claims are not covered.
Patent Litigation
There is a common misconception that coverage for patent litigation is never available. In truth, whether coverage exists depends on the nature of the patent infringement allegations themselves, as well as on the non-patent allegations that the complaint may contain. The only way to know whether any claim is covered is to examine it closely in connection with the policy and the case law that has developed in the relevant jurisdiction and then determine whether there is coverage. Unfortunately, many companies fail to undertake this type of analysis and therefore miss opportunities to obtain coverage to which they are entitled, particularly for defense costs.
Trademark Infringement
Similarly, companies often overlook that a claim for trademark infringement can fall within the coverage of the “advertising injury” section of a standard comprehensive general liability policy. Insurers generally contend that this type of coverage does not exist because their policies do not contain the word “trademark.” However, the majority of cases that address the coverage issues have found coverage for defense costs and liability (see, e.g., Houbigant, Inc. v. Federal Ins. Co., 374 F.3d 192 (3d Cir. 2004); Charter Oak Fire Ins. Co. v. Hedeen & Companies, 280 F.3d 730, 7th Cir. (2002); Capitol Indem. Corp. v. Elston Self Service Wholesale Groceries, Inc., 551 F.Supp.2d 711 (N.D. Ill. 2008)). Therefore, companies that do not pursue coverage for trademark lawsuits usually are leaving dollars on the table.
Data Privacy
More and more, companies are purchasing specialty insurance to cover liabilities arising from data breaches. This is a wise course for any company that may face such claims. However, for a company that fails to obtain such specialty coverage, there still may be coverage under a more standard commercial general liability (CGL) policy. In a highly anticipated decision, the Fourth Circuit ruled that the CGL insurance policy at issue provided defense coverage for a class action lawsuit arising from a data breach. The decision could open the door for coverage under CGL policies for companies that are victims of similar data breaches (Travelers Indemnity Company of America v. Portal Healthcare Solutions, LLC, 644 Fed.Appx. 245 (4th Cir. 2016)).
Practical Steps for Counsel Examining Coverage
In analyzing the availability of coverage, in-house counsel should consider the following:
- Explore options under all types of coverage that the company has in place. In particular, avoid focusing exclusively on comprehensive general liability insurance at the expense of D&O policies, E&O policies, other professional liability policies, media liability policies, and whatever other specialty policies the company may have purchased.
- Examine the underlying complaint to identify which year(s) are “triggered” by the lawsuit and collect policies from all of those years.
- Review the language and terms of policies; they may differ from year to year and among different insurers. Often, small variations in policy language can result in important differences in the available coverage and applicable exclusions.
Policyholders have a significant advantage in most jurisdictions because if a lawsuit contains just one potentially covered cause of action, even if it is buried among many causes of action that are not covered, the insurer must defend the entire suit. Therefore, while many insurance policies exclude coverage for intentionally caused injuries, there still may be a duty to defend a lawsuit that is full of allegations of intentional misconduct if the complaint contains a mere suggestion of liability arising from non-intentional conduct.
For example, in Fuisz v. Selective Insurance Co. of America, 61 F.3d 238 (4th Cir. 1995), an insurer refused to defend a lawsuit in which its insured was accused of intentionally defaming another party. The insured was accused of pursuing a “vendetta,” engaging in “malicious conduct” and repeatedly making “false statements,” all with the intent of injuring the underlying plaintiff. However, the complaint also alleged that the insured had merely “failed to take the proper steps to ascertain” the accuracy of the statements and “published the statements with reckless disregard” for their truth or falsity. On this narrow interpretation the court found that the insurer was obligated to defend the entire lawsuit (Fuiszat 244-45.) Accordingly, once the company is sued, counsel must carefully review the complaint. Even where all of the claims initially appear to be outside the scope of the policy’s coverage, counsel may need only a trace of a covered cause of action to generate coverage for the entire suit.
Strategic Use of Insurance Coverage
Insurance coverage can be an important factor to consider when devising a litigation strategy. The language in the complaint determines whether a claim is covered by insurance. Therefore, with artful drafting, the plaintiff often can steer whether or not the defendant obtains insurance coverage. This is because most insurance policies are written on standard forms, so an experienced coverage lawyer can make highly educated predictions about coverage without actually seeing the defendant’s policies. Depending on the circumstances, the plaintiff may try to:
- Prevent the defendant from obtaining coverage for defense costs. A plaintiff may draft the complaint to decrease the likelihood that any of the claims will be covered in an attempt to eliminate the duty to defend and increasing the burden and pressure on the defendant.
- Create coverage for settlement or satisfy a judgment. The plaintiff may seek to maximize the chances of coverage, such as where the defendant has negligently injured the plaintiff but lacks adequate resources to compensate the plaintiff for its damages. Artful pleading by the plaintiff can increase the likelihood of coverage for the defendant.
- Use a counterclaim as a hook to have its own fees covered. If the defendant asserts a counterclaim that is covered under an insurance policy, the insurer may not only have to defend the counterclaim, but also fund some or all of the affirmative case because of difficulties distinguishing the work needed to defend the counterclaim from the prosecution of the affirmative case.
Notify and Cooperate
Notifications
Most policies have detailed procedures regarding how notice should be given and some may be subject to strict time limitations. Therefore, counsel must always follow notice procedures to prevent handing the insurer potential defenses that are easily avoided. The insurer may respond to counsel’s initial notice letter with a request for additional information. The request may seek to have counsel characterize the claim in a way that will limit coverage. Therefore, counsel must handle these requests carefully.
Duty to Cooperate
Counsel also must consider the duty of cooperation that the insured owes its insurer. This duty is set out in the policy and a failure to cooperate may result in a loss of coverage. For an insured there may be concerns about whether the information it shares with the carrier may be used against it in a future coverage action. Although the policyholder may be tempted to withhold all information from the insurer, this approach could run afoul of the insured’s duty to cooperate and jeopardize its right to coverage. Policyholders should be familiar with the precise language of the cooperation clause in the policy at issue and confirm whether endorsements to the policy language may have altered the duty owed. Because the nature of the duty to cooperate varies by jurisdiction, in-house counsel must be aware of the applicable standards before exchanging information with the insurance carrier.
Push Back
If an insurance carrier initially denies coverage, a company should not accept this response without testing its basis and, if necessary, consulting insurance recovery counsel.
Considerations When the Insured Chooses Counsel
Depending on the policy terms, insurers often may select defense counsel and control the defense of the lawsuit unless the claim, by its nature, gives rise to a conflict of interest between the insurer and the insured. A classic example of this type of conflict is a case where defense counsel will learn confidential information from the policyholder that may defeat coverage. When this conflict of interest arises, the insurer still must pay for the defense but the insured can usually retain its own independent counsel to represent it in the underlying case. An insurer’s offer to defend a case under a reservation of rights presents a potential conflict of interest because the insurer is signaling that although it is defending the case now, it may later contest the insured’s right to coverage. Whether that conflict is great enough to allow the insured to choose its own counsel depends on the circumstances and the law of the jurisdiction.
Insurers Resist Paying Costs if Insured Chooses Counsel
Where the insured can choose its own counsel and control the defense, insurers usually resist paying costs. Common grounds include:
- The chosen defense counsel’s billing rates are too high. Insurers often seek to cap the rates at the amounts charged by a local insurance defense firm in the jurisdiction where the claim is pending. When the policy does not have this type of restriction (it rarely does), policyholders should treat the insurers’ suggested rate cap as an opening offer and press for full rates of their chosen counsel.
- Certain activities or expenses are not reasonable and necessary.
- The defense counsel’s line item description of a particular activity is too vague.
Practical Steps to Avoid Serious Confrontation Over Costs
Insurer may make so many small objections to minor billing entries that preparing a response seems like more trouble than it is worth. However, pushing back against these cuts can yield substantial results. Policyholders should consider the following practical steps:
- Seek the insurance company’s agreement that any undisputed costs will be paid immediately, so that a dispute over a small portion of some fees will not be used as an excuse to withhold payment of the entire bill.
- If possible, agree to a mechanism to resolve fee disputes promptly, such as through binding arbitration without appeal.
- When the insurer disputes a billing entry, work with its defense counsel promptly to prepare a response to the insurer’s objection and reiterate a demand for payment.
- Ensure that the chosen defense counsel is familiar with the insurer’s billing guidelines. Efficiently addressing all of the insurer’s objections and responding immediately can discourage future disputes. Failing to do so emboldens the insurer and results in a claim for a larger monthly discount.
Considerations Where the Insurer Chooses Counsel
Where there is no conflict of interest and the insurer controls the defense and selects defense counsel, the insured must remain vigilant. The law firm chosen by the insurer may be suitable. However, the policyholder must ensure that counsel has the expertise and resources to handle the case, particularly in:
- High-stakes litigation.
- Highly complex cases.
- Cases that involve specialized areas of law.
- Cases defended under a reservation of rights where the policyholder faces potential exposure to an adverse judgment.
