What You Should Do When A Complaint Lands On Your Desk
January 1998
Directors, officers, general counsel, and risk managers should always consider their insurance coverage in every lawsuit - as soon as the company is sued. This article is intended to provide helpful hints to ensure that the coverage paid for (directly or indirectly) gets identified and tapped rather than the company's bottom line.
As soon as a complaint against the company has landed on your desk, one of your first thoughts should be: do we have any insurance coverage for this lawsuit?
We cannot overstate the importance of considering whether insurance exists at the very first opportunity. For outside counsel, failure to consider it can be malpractice. For the company itself, ignoring insurance can cost hundreds of thousands if not millions of dollars. Mistaken assumptions that certain kinds of cases or claims are not covered may leave funding sources (potentially unlimited for defense costs) untapped. Delay in tendering the claim can prejudice, and sometimes totally eliminate, your rights under otherwise applicable policies. Uninformed decisions in connection with insurance can leave the company weakened in defending the lawsuit.
This article is a step-by-step primer on what you should do to locate and secure insurance coverage for a lawsuit, as well as on what to expect in response to your tenders. Our focus here is not on substantive law, but on practical advice.
Locate All Policies
Check your files for all potentially applicable policies. Your risk management, finance and administration, or legal departments are the typical places to start.
Call your current and former brokers to get copies of any missing policies or incomplete policy forms, as well as to verify that you have found all applicable policies and forms.
Check each policy form against the policy's "Declarations" page. The Declarations page purpose is to list all of the forms and endorsements that make up the policy. They are typically listed by form number and Heading at the bottom of the declarations sheet (and typically in the order in which the policy is produced). Attempt to track down any missing forms or endorsements.
Do not attempt to narrow your search as to time, because it is not always clear at the beginning of a case what the relevant time period is for triggering coverage (e.g., claims involving continuing injuries or progressive losses may expose years and years of coverage). Your company should be retaining all old policy forms, particularly general liability policy forms. Certain kinds of cases (for example, environmental damage, asbestos/personal injury and class action discrimination cases) can implicate insurance policies reaching back for decades.
If your company has a document retention/destruction policy, be sure that it provides for the preservation of all insurance policies. Do not assume that your brokers, or past insurance companies, will retain old policies: they don't and the burden of proving coverage is (you guessed it) on you.
Identify All Potential Coverages
Look at all of your policies of insurance. Lawsuits can encompass a wide variety of facts and damage claims, can name multiple defendants (e.g., individuals in addition to the company), and can be brought by any number of plaintiffs. Most companies carry more than one kind of insurance policy and any one lawsuit could trigger coverage under two or more of them. Depending on the claim, you might want to pull the following policies: general or commercial/comprehensive liability; directors' and officers' liability; workers' compensation and employers' liability; advertising injury liability; contractual liability; errors and omissions; limited partner liability; fiduciary liability; and fidelity coverages.
Also, do not overlook the possibility that your company has been named as an additional insured under someone else's policy. This is common, for instance, in the case of developers, contractors, and landlords and tenants. Evidence of additional insured coverages may be found in Certificates and Endorsements of Insurance issued by the other entity's broker or carrier. Although the additional insured usually will not have possession of the actual policy, experienced coverage counsel can determine the applicability of said coverage from the certificate and endorsement forms.
Decide Whether or Not To Tender The Claim To Your Insurer
Even if you are unsure whether or not the particular policy provides coverage, ask yourself if there is any reason not to tender anyway.
The tender of a claim, even if legitimate, may increase the costs of insurance or make it difficult to find coverage in the future. Nonrenewal of a policy can be a particular problem for directors' and officers' insurance, for instance, where the market for coverage has narrowed at times and "going bare" may not be an option. You may not want to tender to certain carriers where coverage (and particularly the ongoing defense) is needed for other claims. Consult your risk manager or broker about the possible impact of a tender on your company's insurance program. Both risk managers and brokers need to work with insurers to obtain necessary coverages within budgets and can advise when the costs of pursuing a claim may outweigh the benefits obtainable.
How To Tender a Claim
The initial tender can impact the handling and outcome of the claim. You need to decide:
- Whether to make a "long form" or a "short form" tender;
- Who should make the tender; and
- When the tender should be made.
A "short form" tender simply notifies the insurance company of the case, attaches a copy of the complaint, and requests defense and indemnity. If you are making the tender as an additional insured, you should attach the certificate and endorsement evidencing your status. This is appropriate where coverage is relatively clear, or where you have reason to believe that the claims representative may not spot the coverage obstacles you see.
A "long form" tender sets out in some detail the reasons why you believe coverage is afforded for the claim. Make a long form tender when coverage is not obvious, so that a claims representative is not faced with acknowledging a mistake after denying coverage; when the area of coverage is controversial and you want the insurer to know that you are sophisticated and aggressive; or when you anticipate a rejection out-of-hand and want to start setting the record for a possible bad faith claim.
You generally should not leave this task to the risk manager or broker unless a short form tender is all that you intend to send. Long form tenders usually include an analysis of the triggering events and the law, and typically have more force and effect when sent by an attorney. There may be reasons, however, to send a long-form tender over the signature of the risk manager or broker. First, you may not want to set a too-aggressive tone by revealing that you already have coverage counsel. Second, you may want the carrier to accept your existing attorney as defense counsel. Third, you may want to preserve defense counsel's credibility with the insurer for later on when you will have to rely on that defense counsel for analysis of the case as it affects coverage.
The timing of the tender can be critical and the best advice is: the sooner the better. Some policies, such as recent directors' and officers' liability policies, are written on a "claims made and reported" basis. These policies are triggered only if the claim is made against you and you report it to the insurer within the policy period. Failure to tender on time can void coverage under the policy. Moreover, virtually every policy contains provisions requiring notice "as soon as reasonably possible" (for example) or requiring the insurer's consent before incurring any expenses, and insurers will argue that they do not have to reimburse you for attorneys' fees incurred prior to notice to the insurer.
Follow Up On The Tender
Be persistent and patient. Don't scream bad faith at the first denial of coverage. The better long-term strategy is to treat claims representatives with courtesy and proceed on the assumption that they will do their job. Try to answer all questions and provide all the information the claims representative requests. Continue to write letters explaining why the insurer's refusal to defend the case is incorrect. Offer to meet with the claims representative and to make defense counsel available to answer questions.
Keep the insurer informed of the status of the case. Claims representatives must have the information to justify to themselves and their supervisors the kind of settlement authority you are requesting. The information can include copies or summaries of depositions, key documents, status letters or briefs from defense counsel, or key interrogatory answers. It should also include realistic analyses of the company's exposure in the case. It is also important to supply information on a regular basis because settlement opportunities can arise unexpectedly and you do not want a settlement to fail because you cannot get appropriate authority from the insurer.
Remember that it is often important to keep the insurer informed even if it has disclaimed any responsibility. A settlement conference in the underlying case is a good opportunity to put the pressure on the insurer to compromise on its coverage position. You want the insurer to have the information it needs to settle and to create a record of bad faith if it refuses.
You should communicate all settlement demands to the insurer, whether or not the insurer has agreed to defend or indemnify. If the insurer is defending, it has a right to know all settlement demands. If it is not defending, a settlement demand within policy limits creates pressure on the insurer to reconsider its position in order to avoid a bad faith claim.
Responding To a Reservation of Rights By The Insurer
An insurer's agreement to defend subject to a reservation of rights can (though not always) trigger your right to select defense counsel. This issue is now governed in California by Section 2860 of the Civil Code. Basically, the reservations, or handling of the defense, must create an actual conflict before independent counsel will be provided.
If your selected counsel is approved, talk to the claims representative early in the case about what to expect in terms of staffing, expenses and overall budget in order to avoid billing disputes down the road.
Insurers more and more frequently attempt to impose a set of "litigation guidelines" on independent counsel. These attempt to limit the types of services for which the insurer will pay (for example, office meetings among attorneys, work by more than one attorney on a case or parts of a case without prior approval, etc.). The insurer usually does not have a contractual right to impose any specific guidelines. The only limitation on defense counsel's activities is what is reasonable for the case. Make clear to the insurer at the beginning which of the guidelines you are willing to live with and which you are not in order to avoid disputes down the road.
Allocation of defense costs between covered and uncovered claims, and between covered and uncovered parties, is becoming more and more contentious. Under general liability policies, the law is clear that the insurer must defend covered and uncovered claims, and can seek reimbursement only where the expenses are clearly allocable. It is this area, more than any other, that has insureds demanding independent counsel or copies of carrier selected bills and status reports.
The law is less clear -- and the disputes more contentious -- regarding allocations between the covered individual officers and directors and the uncovered company under directors' and officers' liability policies. The trend, however, favors the insured so that you should consider carefully any proposal by the insurer to pay only 50% of the costs of defense as a reasonable allocation.
Resolving Coverage Disputes Without Litigation
If the insurer has denied coverage, or if it is defending under a reservation of rights to deny indemnity and to seek reimbursement of its defense costs, you need to begin planning at the outset how you are going to obtain the contribution you need from the insurer to settle the underlying case and how you are going to evaluate and respond to a potential contribution or reimbursement demand by the carrier down the line.
For a discussion of further implications of the above, please contact:
Ira James Harris, Esq. at 925-258-5100 or by e-mail at ira@iraharris.com.
These materials should not be considered as, or as a substitute for, legal advice and they are not intended to nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual situation. You should not take (or refrain from taking) any action based on the information you obtain from this document without first obtaining professional counsel and you should not send us confidential information without first speaking to one of our attorneys and receiving explicit authorization to do so.
January 1998
