Top 10 Issues To Consider When You Are Sued: Issue #2: Insurance Coverage

When faced with a lawsuit or other type of claim including administrative and regulatory claims, insurance policy benefits are often the most important asset that a business or individual possesses. Depending on the type of claims asserted and the type of policy, it is possible that coverage may exist for all of the expenses to be incurred in defending against or responding to the claims (e.g., attorney's fees and investigative expenses), as well as some or all of any settlement or judgment that ultimately might be paid. Because insurance benefits are potentially so valuable, it is important that the policyholder takes all necessary and appropriate steps to maximize the likelihood of recovery under its policies. Among the most critical steps is the immediate tender of a claim to the proper insurer to avoid forfeiture of coverage altogether under so-called "claims-made" policies, which have become quite common and which are a trap for the unwary.

This Update will briefly discuss the steps that should be taken in order to best ensure a full recovery of insurance benefits in the event that a lawsuit is filed or another type of claim is made against you.

Step 1: Recognize When a "Claim" Has Been Made Against You.

There are generally two types of liability insurance policies: (a) claims-made policies, and (b) occurrence based policies. Claims-made policies cover claims that are made against you during the policy's coverage period. Some policies – known as "claims-made-and-reported" policies – only cover claims that are both made against you during the coverage period and reported to the insurer during the coverage period. Courts in some jurisdictions have held that policyholders who are only several days late in reporting claims forfeit their coverage.

This means that you need to be careful not only to report the claim in a timely way, but also to recognize that a "claim" has been made against you in the first place. Some policies broadly define claim to mean "any written demand for monetary or non-monetary relief." This is much broader than a lawsuit, and policyholders who wait for a demand letter to mature into a lawsuit run the risk of losing their insurance coverage.

Occurrence based policies, by contrast, are ordinarily triggered based on the date that an underlying event (such as an accident) took place. These policies typically do not have a strict deadline for providing notice, but as discussed further below, providing notice as soon as possible is still extremely important.

Step 2: Locate and Catalog Any Potentially Applicable Insurance Policies Immediately.

There are certain types of claims for property damage or bodily injury that develop over long periods of time; that is, the property damage or bodily injury is caused by an on-going process that spans many years. Claims falling into this category might include, for example, those caused by environmental contamination, construction defects, and exposure to or ingestion of certain products, such as asbestos or prescription drugs. Claims of this nature, which are said to have a "long-tail" period, have the potential to trigger all of the occurrence based policies in place during the injurious process. If so, this can result in a significant increase in the amount of available insurance coverage.

In order to effectively take advantage of the considerable benefit that historic insurance policies might provide when facing a claim with a long-tail period, however, it is important that the policyholder be able to locate those policies. Lost policies can present a number of challenging obstacles for the policyholder seeking coverage under them. For this reason, it is important to save all insurance policies and to store them in a place where they easily can be found. In the event that this has not been your practice, it is advisable to now try to locate and catalog your old policies so that you will have them handy if and when the time comes that you need to consult them. Your insurance broker is often a good resource when attempting to locate old policies.

On a related note, a corporate policyholder that merges with or acquires another company should carefully review, catalog, and preserve all historic insurance policies of the acquired company. These policies might potentially be the only source of coverage for any long-tail liability that is assumed (either knowingly or unknowingly) by the acquiring company as part of the transaction.

Also, to the extent that you are named as an additional insured on the insurance policies of other entities, such as sub-contractors, business partners or vendors, these policies can be just as valuable to you in the event of a claim as are your own policies. Certificates of insurance and other evidence of policies on which you might be named as an additional insured should be carefully preserved.

If actual policies cannot be located, you should still search and collect any secondary evidence of coverage, such as correspondence relating to past claims, checks reflecting premium payments or any other documents that might contain potentially applicable policy numbers or policy information. Though it is difficult, insurance policies can sometimes be reconstructed and, in some states, insurance companies are required to reconstruct lost policies.

Step 3: Recognize the Need for Professional Assistance.

Insurance claims vary in complexity. Most claims, however, require professional legal assistance from the start. While brokers are usually very knowledgeable about insurance policies and can be very helpful, the use of brokers to handle your coverage issues, including notice, can be fraught with problems. For instance, because it is difficult to properly assess notice-related issues (i.e., what to say and what not to say) without going into privileged material, and because the relationship between a policyholder and its broker is not privileged, you are at serious risk of a privilege waiver if you engage in a full and frank discussion with your broker regarding issues of notice. An insurance company, in turn, likely will seek discovery of the once privileged material should you find yourself in a coverage dispute. This thorny situation can be avoided by retaining legal counsel at the outset. Another reason to retain knowledgeable coverage counsel is that it is the best way to ensure you are getting up to date coverage advice. A prudent approach, even with the most simple appearing insurance problem, is to consult an attorney who is familiar with insurance issues and let the attorney work with you and your broker.

Step 4: Give Notice As Soon As Possible.

Once a lawsuit (or any claim) has been made against you or you become aware of events that you reasonably believe might give rise to a lawsuit or claim, it is critical that notice be given as soon as possible under any potentially applicable insurance policies. This is because timely notice is a requirement under almost all liability policies. The implications of not providing timely notice are two-fold.

First, as mentioned above, late notice may afford an insurer with a complete defense to an otherwise covered claim. Second, even if late notice does not provide a complete defense to coverage, an insurer, in most jurisdictions, will have no obligation to pay for any defense costs incurred by the insured prior to the date on which notice is given. Often times a policyholder will be late in providing notice because it gets caught up in the defense of the lawsuit and only later focuses on possible insurance coverage. This is a dangerous practice, however, because during the period of delay substantial policy benefits may be lost.

Step 5: Cooperate With Reasonable Requests From Insurers.

The insurance company's first response to your notice likely will be a letter reserving the insurer's rights and asking for a host of information and documents. You should timely respond to such a request and involve your attorney in the response. If you delay or answer partially, the insurer may assert that as a defense to coverage.

Furthermore, all liability policies impose on the policyholder a duty to cooperate with the insurer. Generally speaking, this duty includes an obligation on the part of the policyholder to supply the insurer with information and documentation related to the claim, especially those materials that an insurer might need in order to make a coverage determination.

While it is important to cooperate, a policyholder should be careful not to provide its insurer with any privileged information and documentation, such as attorney-client communications or work product material. This includes the discussion of privileged information by in-house or outside counsel with representatives of the insurer. If the insurer already has accepted coverage without reservation, then the interests of the insurer and the policyholder may be sufficiently aligned to allow production of certain information to the insurer or communications with insurance representatives without jeopardizing the privilege. In any event, we recommend that you obtain the advice of legal counsel before disclosing any arguably privileged information to an insurer.

Along with cooperation, there are other important conditions required by almost all insurance policies. Most important of these is to avoid taking any action in the defense of the lawsuit that could prejudice the insurer. For example, most policies forbid a policyholder from settling a claim without obtaining prior consent from the insurer. Coverage could be jeopardized if decisions about the lawsuit are made without communicating first with the insurer. Above all, be sure to involve your insurer before you settle.

Step 6: Carefully Evaluate an Insurer's Response to Tender and Pay Close Attention to the Detail of Any Defense Offered by the Insurer.

Most liability insurance policies require the insurer to defend claims that are brought against its insured. This is a complicated area of coverage that insurers are prone to abuse by, for instance, selecting counsel loyal to the insurer and not just the policyholder. Another potential concern is if the insurer attempts to impose guidelines and other limitations on the defense to which the policyholder is entitled that may save the insurer defense costs, but which diminish the quality of the defense. Most policies speak in terms of the "right and duty" of insurers to defend and require the insurer to provide a "reasonable" defense. Billing and other defense guidelines, however, are typically not part of the policy and forcing such guidelines on policyholders and defense counsel is not always justified. And, the insurer's "right and duty to defend" is subject to a number of limitations. In particular, to the extent that an insurer reserves its rights to deny coverage, or agrees to defend you under a reservation of rights, you might be entitled to select defense counsel of your choice.

You should carefully consider setting up the payment and reporting functions of defense counsel through you and then you, in turn, report and seek reimbursement from and through the insurer. Despite the temporary impact on cash flow, this arrangement can be of utmost importance in receiving a proper defense and in retaining the confidentiality of information relevant to your coverage claim.

Remember, your defense counsel, whether selected by your insurer or you, is not your coverage counsel and cannot be expected to recognize all issues that may affect coverage. This is why in all but the most simple cases and cases that do not warrant the extra expense, it is appropriate to have coverage counsel involved at the beginning.

Step 7: Do Not Accept "No" for an Answer Before Fully Exploring the Issues.

Insurance companies routinely deny claims as a matter of course whether justified or not. Similarly, many letters from insurers responding to claims mention only what coverage is not available and do not mention the coverage that is potentially applicable. Insurers presume that some policyholders simply will not have the resources or resolve to engage in a battle over coverage. It is important to be persistent with insurers. Indeed, the difference between coverage and non-coverage often is directly related to the determination and persistence of the policyholder. You need to show the insurance company that you mean business and are well advised. In many jurisdictions, you might be entitled to recover attorney's fees if you are forced to sue your own insurer to obtain the benefits of your insurance policy.

Step 8: Determine What Types of Liability Insurance You Should Carry.

The above steps are part of what you should be doing immediately upon receipt of a lawsuit or claim. But, the groundwork for this process ideally begins before any lawsuit is filed or claim is made. There are many different types of liability insurance policies on the market. Some of the more common types of liability policies are generally known as: (1) commercial general liability (CGL) policies; (2) professional liability or errors and omissions (E&O) policies; (3) directors and officers (D&O) policies; (4) employment practices liability insurance (EPLI) policies; and even (5) homeowners policies. In addition, there are certain liability policies that are tailored for certain specific industries, such as media perils insurance policies, and there are other policies that are designed to cover certain specific risks, such as liability from environmental contamination. Finally, there are various types of umbrella liability policies.

Given all of the different types of liability policies that exist, it is important to determine (before any lawsuit is filed or claim is made) which type(s) of policies you should be purchasing. This task is best carried out by an experienced insurance broker who both understands the particular risks faced by the policyholder and knows what types of policies are available in the marketplace to cover those risks.