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By Sterling Miller, Senior Counsel with Hilgers Graben PLLC
Looking back, I realize I spent a good amount of time working on insurance-related issues as in-house counsel. Sometimes it was helping the insurance team figure out what types of coverage were needed, other times it was about filing a claim or trying to answer questions from senior management about how the policies worked, and—unfortunately—several times it involved litigation with the insurance carrier over its failure to pay claims.
As in-house counsel you (or someone on your team) should have a solid understanding of basic insurance law issues. While hopefully your company will never need to make a claim against its insurance, if it does, Legal’s ability to spot issues and help guide the process can mean the difference between a quick payout or a long court battle with the insurer. You do not need to become an insurance law expert, but you should know the basics and know when you need to get help from outside counsel. This edition of “Ten Things” will discuss some things you should be familiar with regarding insurance purchased by your company.
1. The role of in-house counsel
Many in-house legal departments view insurance as something “the other guy” needs to worry about, i.e., usually someone in Finance or Risk Management. While technically true, in-house attorneys ignore the insurance process and the company’s policies at their risk (and risk to the company). While Legal may not own the insurance process, you cannot stand off to the side and only get involved when a claim is filed. It is important that Legal participate in the process from the beginning, understand the different policies, and know what to do and how to proceed in the event a claim needs to be made or if a claim is denied by the insurer. In-house lawyers should be valued partners of the “other guys,” including hosting regular meetings to discuss insurance coverage for the company, the procurement or renewal of policies and how to deal with common problems. As you set goals for Legal, be sure to include one or two around the issue of insurance, and ensure that someone in Legal has the lead position with respect to insurance questions (and gets the training they need to be successful in that role).
2. Different types of insurance policies
Start with understanding the different types of insurance coverage a company typically has in place at any one time. There are many different types of policies and, for a price, you can insure almost any type of risk. Here are some common policies and a short description of what they cover:
Commercial General Liability (CGL)—provides broad insurance protection for claims against the policyholder alleging such things as bodily injury, property damage, advertising injury and/or personal injury
Directors and Officers (D&O)—insurance that protects corporate officers and directors against claims alleging wrongful acts in their capacity as officers and directors
Errors and Omissions (E&O)—insurance designed to protect the company against claims that it was negligent in providing professional services
Cyber and Privacy Liability (Cyber-risk)—insurance that protects against data breaches, computer technology, privacy issues, computer virus transmission and similar risks
Environmental—insurance that covers claims related to environmental incidents, such as pollution spills, toxic cleanup, etc. Can be important if CGL excludes pollution/environmental–related claims
Excess & Umbrella—insurance that kicks in once the primary insurance policy is exhausted (or limits paid out) or to fill in gaps in the primary insurance coverage of certain risks
3. Key terms
There are several key terms you should know as part of any day-to-day understanding of how your insurance policies work:
First Party vs. Third Party—first-party insurance insures against loss of or damage to a policyholder’s property, e.g., business interruption insurance or fidelity/crime policies. Third-party insurance covers the policyholder’s liability to another party, e.g., CGL insurance or E&O insurance.
Occurrence vs. Claims Made—for third-party insurance it is important to understand whether you have an “occurrence policy” or a “claims-made policy.” Occurrence-based policies mean that the insurance in place at the time the injury occurred is the policy under which to make your claim. For example, if you are sued in 2015 for an injury that arose in 2012, the policy in effect in 2012 is the one to look to for coverage. Claims-made policies mean that you look to the insurance in place on the date the claim is made. Under these policies, pay close attention to any “retroactive date,” which limits how far back the policy will cover. For instance, a claims-made D&O policy in effect for 2015 with a retroactive date of 2011 will cover the company for lawsuits filed in 2015, even if the actions at issue took place in 2011 or later. If the actions took place in 2010 or earlier, the policy does not apply.
Policy limits—a policy limit is how much coverage you have and how it is calculated. If you have a $5 million overall limit policy, then you have $5 million of coverage regardless of how many claims are made against the policy, i.e., if all claims exceed $5 million you’ve exhausted the policy limits. If you have a $5 million limit per occurrence, then each occurrence arising during the policy period has a separate policy limit of $5 million, regardless of the number of claims filed. “Per occurrence” provides a much greater level of coverage than an overall limit policy (but is likely more expensive). Company management should understand which type of policy it has so no one is under any misconceptions about the amount of insurance available in the event of multiple claims.
Glossary—The Insurance Information Institute has a helpful glossary of key insurance terms. Click here.
4. Reading an insurance policy
There is no substitute for reading your policies. This is the only way you can truly understand the nature and amount of insurance protection available. You will typically see the following (and click here to see a sample CGL policy):
Insurance binder—this is the initial document that summarizes the basic terms of the policy. When the policy is delivered it should be checked against the binder to make sure they line up.
Declarations—the first section of the policy is the declarations page. This is a summary of the policy and includes the named insureds, the policy period, the policy limits/amount insured, the specific type of insurance purchased (e.g., CGL, E&O, etc.). If you do nothing else, check the “named insureds” and make sure it lines up with everyone’s expectations around who’s “covered” by the policy. This is important if the company has subsidiaries (or is a subsidiary).
Policy Form—next comes a standard document describing who or what is insured, the actual insurance agreement (and definitions), endorsements, exclusions and any conditions. Most policies are based on standard forms with little customization. Read the Policy Form carefully, especially the endorsements (adding to the coverage), exclusions (what’s not covered) and the conditions, all of which amend or impact the applicability of the insurance to any particular situation. When reading the exclusions look for exceptions to the exclusion that can provide insurance where it appeared such claims were excluded. Conditions are duties of the insurer and the policy holder, e.g., the policyholder’s duty to give notice of a claim.
Generally—when reading an insurance policy, read it quickly one time through to get familiar with the format, general provisions and key terms, and then go back a second time for a slow read to truly understand the coverage and the obligations, especially those of the company. Legal should keep a full set of copies of all of the company’s insurance policies (including old policies as those may—under an occurrence policy—still be important).
One of the most important sections of the policy discusses how and when to give “notice” to the insurer of a claim. Insurance companies will often try to avoid responsibility under the policy by claiming that notice was “deficient” in some manner (e.g., it was “late”). Fortunately, most courts construe notice liberally in favor of the insured and require that the insurer provide evidence of material prejudice from the “imperfect” notice before allowing the insurer to escape responsibility. One key role in-house counsel can play regarding insurance coverage issues is to help with preparation of the notice of a claim. Understand the requirements of the notice provision and, even then, give as broad a notice as possible with respect to a potential claim, stating that you are making the claim under any and all applicable policies. Remember that with respect to a lawsuit, it’s not necessarily the headings of the claims that matter, it’s the specific facts alleged. You need to match the facts alleged in the lawsuit to your policy. If you restrict your thinking to just the “name of the claim” in the lawsuit, you may miss out on allegations that bring the lawsuit under your policy.
6. Deductible vs. Retention
A retention-based policy means that the insured needs to go “out-of-pocket” some amount before the insurance company has any obligations. A typical example is defense costs. If you have a $1 million retention policy, this means your company will need to pay the first $1 million out-of-pocket before any insurance will kick in. This can be painful, especially when it comes to attorneys’ fees and costs. If you have a $1 million “deductible” policy, then the insurer’s obligation to defend/resolve any claim is immediate, with the insured paying its deductible amount toward the costs or claim.
7. Duties of the parties
You should be aware of the respective duties of the parties under the policy. There are typically three parties to a business insurance policy: the insured, the insurer and the broker. To keep things short, we’ll skip the broker and focus on the key duties of the other two:
Insured—payment of premium, prompt notice of loss/claim, honesty when completing the applications for insurance (this is important), cooperation with insurer in defending a claim against the insured.
Insurer—collection of premium, payment of claims, issue the policy, duty to defend, duty to indemnify.
8. Duty to Defend vs. Duty to Indemnify
An insurer has these two key duties. The duty to defend is the duty to pay the costs of defending a claim against the insured. This duty is broader than the duty to indemnify, which is the duty to pay out any damages owed by the insured to a third party. The duty to defend is broader because the insurer must provide a defense if any of the allegations in the lawsuit against the insured are covered by the policy and they must pay for the defense of all of the claims, even if one of the claims is otherwise excluded. The costs of defense are sometimes outside the policy limits, meaning they are unlimited. Some policies place the cost of defense within the policy limits meaning defense costs could wipe out any insurance money left to pay out claims. This can be a big problem in the event of mass tort litigation. Consequently, it’s important that in-house counsel understand which type of policy the company has or is considering and to ensure that the policy selected is the one desired (and that everyone understands the potential issues if the cost of defense is placed within the policy limits).
9. Reservation of Rights
Here’s where things get messy. You’ve given notice of your claim to the insurance company and you get back a letter where the insurer accepts the claim subject to a “reservation of rights.” This is a reservation of rights letter (ROR). First, keep in mind that this is not a denial of coverage. It does mean that you may have a tough road ahead in terms of getting paid (e.g., defense costs). Second, the insurer may be teeing you up for a declaratory judgment claim—which they would file in a venue they think most favorable to them given the issues. Third, an ROR means there are several things you need to do:
Respond—always respond to a ROR, even if your response is simply “we do not agree with the insurance coverage positions set out by you in your letter of [date].” A better plan is a more detailed response. For this, you will be well served to hire outside counsel that specializes in insurance coverage matters.
Cooperate (within reason) —even with an ROR in place you will still have a duty of cooperation with the insurance company (e.g., provide copies of pleadings). However, with an ROR you need to be careful that the insurer does not take the information you provide and use it to support their denial of coverage. This is likely when the ROR uses language from the plaintiff’s complaint as a basis to potentially deny coverage (i.e., the insurer’s defenses to your policy claims are similar to/same as the underlying plaintiff’s allegations). If so, there is now an inherent conflict of interest between the insurer and insured and you need to be careful what information you turn over to the insurer, as you may waive privilege. Make sure you have a confidentiality agreement in place with the insurance company, preferably the same one the court entered in the case. The insurer may be satisfied with meetings with your outside counsel (vs. jeopardizing the privilege) or, at a minimum, ensuring that no one at the insurer involved in the coverage dispute has access to your confidential documents.
Control of the defense—As noted, the ROR may tee up an inherent conflict between the insurer and insured where their interests are not aligned. If so, most states acknowledge that the insured controls the defense and is no longer required to accept counsel that the insurer seeks to impose. Also, things like the insurer’s “outside counsel guidelines” will likely not apply to your choice of counsel. As the insurer is still paying for the cost of defense, you need to reasonably cooperate with them, but keep your inherent conflict top of mind. This is a tricky area and another reason why investing in experienced coverage counsel will prove valuable.
10. Litigation with the insurance company
Sadly, not every encounter with your insurance company will be positive. Litigation may be the only way to protect the company’s rights. Some things to keep in mind:
First, if the relationship gets contentious or if the ROR is particularly gruesome, or the insurance company utterly fails to live up to the agreement, consider being first to file. The insurer is probably already thinking about a declaratory judgment. By filing first, you pick the venue, set the timing and send a message to the insurer that your company is not going take a breach lying down.
Second, whether you file first or not, know that the insurance company will be interested in three things: delay, delay and more delay. They will try to keep pushing things out into the future, using every tactic at their disposal to be unresponsive—ask for additional time to respond, seek continuances, etc. You must think like a plaintiff’s lawyer. Be aggressive in terms of pushing things forward as quickly as possible toward trial. File for summary judgment on “duty to defend” as soon as possible. Don’t fall for the “let’s put the case on hold and mediate” line. You can mediate while the litigation goes forward.
Third, keep your senior management up to date on how the case is progressing. They will want to see quick action/results, and money coming in as soon as possible. Unfortunately, it does not always work that way. Make sure your CEO and CFO understand the litigation process and to expect the insurance company to do everything possible to delay the case, increase your cost to prosecute, and hope that ultimately you will accept substantially less than you are entitled to under the policy to settle the matter.
Lastly, look at all possible causes of action, including bad faith, breach of contract, statutory and punitive damages, interest (pre and post), any statutory penalties that might be available and recovery of your attorney’s fees for the litigation.
I don’t mean to imply that all experiences with insurance companies will be bad. I had a number of positive experiences over the course of my career. In fact, many insurers offer programs to help you Suggest spot and minimize risk. Still, you must be vigilant to ensure that your company receives the benefits of the policies it paid for. Hopefully, you’ll never need to make a claim. But if you do, the insurer should live up to its end of the bargain. In-house counsel can play an important and helpful role around the procurement and utilization of insurance (and retain experienced coverage counsel). Insurance policies are valuable corporate assets. Spend some time thinking about how insurance works today at your company and whether Legal is playing the right (or any) role in that process. If not, begin planning now and come up with an A—Z plan to ensure Legal is engaged at all of the important points, including obtaining the right insurance, working with the broker, and leading the process to make a claim and respond to any ROR.