The More You Know :: Corporate Counsel’s Guide to Managing Insured Litigation

If you manage insured litigation for your company, this post provides quick guidance to help maximize your company’s insurance benefits. 

Notice

More insurance coverage problems arise from the insured’s failure to give timely, proper notice than from any other issue. Once you are aware of a potentially covered claim or lawsuit, identify the insurance policies that may be applicable, locate the notice provisions in the policies, and comply with them.

A single occurrence or lawsuit can trigger more than one insurance policy or type of coverage. Commercial general liability (CGL), errors and omissions (E&O), and cyber liability policies can contain overlapping coverages. Private company and nonprofit directors and officers liability (D&O) policies may also provide broad coverage for “wrongful acts” that may overlap with the coverage provided by errors and omissions or cyber liability policies.

If there are excess or umbrella policies that could potentially be implicated, notify those insurers sooner rather than later to avoid problems stemming from late notice or a failure to disclose information regarding a claim.

If your company is an additional insured on policies issued to a third party (think vendors, suppliers, contractors, etc.), you must provide notice directly to those insurers (or notice must be provided specifically on the company’s behalf). Notice to the third-party indemnitor (including an indemnity tender) is often insufficient to comply with the notice provisions in an insurance policy. Hopefully, the contract between your company and the third party required the latter to supply a certificate of insurance (COI). Use the information on the COI to provide notice. Even better, ask for a copy of the policy(ies) at issue before disputes ripen; it’s helpful to have a copy in hand if you need to dispute a coverage denial or other adverse positions taken by the insurer(s) and you will then have all the information you need to comply with the notice requirements of the policy.

Timing + Trigger Considerations

To give timely notice to all potentially implicated insurers, it will be important to understand which policies (and which policy years) may be triggered. This involves correctly identifying both the substantive coverages and the particular policy years potentially implicated by the claim.

Occurrence-based liability policies – like most CGL and commercial auto liability policies – cover accidents and other incidents that take place while the policy is in effect, regardless of when a lawsuit is filed. The policy in place when the explosion or accident or other damage occurs is the policy that responds to the claim. If the conduct or damage alleged in the lawsuit spanned a period of years, multiple policy years might be in play, potentially requiring notice to multiple insurers. Notice is often required on an “as-soon-as-practicable” basis and the insurer must generally show prejudice to deny coverage on late-notice grounds.

Claims-made liability policies work differently; the policy in effect at the time a “claim” is made is the operative policy. Most D&O, E&O, employment practices liability, fiduciary liability, and cyber liability policies are issued on a claims-made basis. Coverage is triggered and notice is required when a “claim” is first made, making it important to understand what constitutes a “claim” under potentially applicable policies. While a lawsuit is obviously a claim, many policies define “claim” more broadly. For example, many claims-made policies define a “claim” to include demand letters, triggering the notice requirements before litigation ensues.  Employment practices liability policies often require notice at the EEOC phase because an EEOC charge is a “claim.” The notice provisions of a D&O policy may be triggered by a governmental investigation, a Wells notice, or a subpoena. In these situations, notice may be late if it is provided after a lawsuit is filed. Claims-made policies often require notice within some period of time after policy expiration, at the latest. If the insured fails to comply with the notice requirements in a claims-made policy, the insurer may be able to disclaim coverage based on late notice without having to establish prejudice.

Indemnity + Insurance

Designed to shift responsibility from one potentially liable party to another, indemnity agreements are commonplace in corporate contracts, playing a central role in corporate risk management. Indemnity provisions are often coupled with insurance requirements that reinforce the risk transfer by seeking to ensure that the indemnifying party can fulfill its contractual obligations. When appropriately tailored to the parties’ relationship and the associated risks, these indemnity and insurance terms can provide substantial protection to the company by transferring specified exposures to a third party and its insurers.

When confronted with a lawsuit that should be indemnified by a third party, determine first whether the indemnitor was required to include your company as an additional insured on its own policies. If so, provide notice of the lawsuit directly to the indemnitor’s insurer and request a defense. Notice to the indemnitor is often insufficient to trigger the indemnitor’s insurer to defend an additional insured. If the contract requires the indemnitor to provide a copy of the policy, request the policy at the outset. If not, use the certificate of insurance to identify insurers that should be notified.

Note that the insurance coverage available to an additional insured under an indemnitor’s policy may be subject to limitations not expressed in the policy itself if the policy clearly manifests an intent to incorporate limitations expressed in the contract. Judicial application of this rule has generated significant uncertainty for additional insureds. Additional insureds will want to focus on the language of the service or vendor contract to avoid uncertainty, keeping in mind that limitations in the contract may be read into the insurance policies.

Working with Insurer-Appointed Counsel

Understanding your company’s rights and obligations as an insured (or additional insured) under an insurance policy or program is critical to protecting your company’s interests. 

       Unqualified Loyalty

The lawyer engaged and paid by the insurance company to defend its insureds owes the insureds – your company and any covered individual defendants – a duty of unqualified loyalty under Texas law. While the lawyer and her firm have a business relationship with the insurance company, your company is the client (along with any individual insured defendants). If the insurance company’s guidelines or specific instructions interfere with the lawyer’s ability to discharge his duty of unqualified loyalty to the insureds, the defense lawyer must ignore the insurer’s instructions and must protect her clients’ interests. Indeed, if a defense lawyer appointed by an insurer believes that a conflict of interests exists between the insurer and the insureds, she is obligated to inform the insureds. Finally, defense counsel must preserve the confidentiality of information provided by the insured and must have the insured’s consent to disclose confidential information to the insurance company.

       Cooperation

Liability policies often contain provisions requiring the insured to assist with and cooperate in the defense of the claim. These provisions may also prohibit admissions of liability, the assumption of financial obligations, or settlements reached without the insurer’s consent. The insured should respond to reasonable requests for information the insurer legitimately needs to defend the claim and evaluate settlement demands, but the cooperation clause pertains to the defense of the case and does not require an insured to “cooperate” with an insurer’s attempt to bolster a coverage denial.

       Independent Counsel

If the insurer has a duty to defend, it typically has the right to make strategic decisions regarding the defense of the lawsuit, including the right to choose the lawyer who will represent the insured. This makes a certain amount of sense, since the insurer is paying the defense lawyer’s fees and expenses and will have financial responsibility for the outcome of the case. If the insurer has accepted coverage with no reservation of rights and is providing an unconditional defense, interests are generally aligned; the insurer and insured share a common objective in defeating the plaintiff’s claims. If the insurer has reserved its right to deny coverage and the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, however, the insurer is able to “steer” the case away from coverage and this conflict of interest will prevent the insurer from conducting the defense. To be clear, not every disagreement between an insurer and its insured meets the criteria for a disqualifying conflict. When the insurer has reserved its right to deny coverage on issues intertwined with the defense of the case, the insured may want to seek the advice of coverage counsel to determine whether it has grounds to reject the insurer’s proffered defense and select independent counsel at the insurer’s expense.

Settlement Issues

Under Texas law, an insurer is obligated to accept a settlement demand that comports with the Stowers doctrine. The demand must be unconditional, within policy limits, and reasonable for the settlement of covered claims. When there are both covered and uncovered claims, focus on potential liability and exposure for the covered claims. If the demand is reasonable vis-à-vis the covered claims, the insurer must accept it – and the insured has a basis for resisting an insurer’s attempt to force a contribution based solely on the fact that non-covered claims will also be released.  

We have decades of experience managing the challenges corporate policyholders encounter with insured litigation. If you are navigating these or other issues, we’d love to help.