Protecting an Entity in Litigation Part 3: Insurance Considerations
Taking an entity to trial entails special considerations over and above litigation involving individuals alone. Among the matters to consider are the process of preparing 30(b)(6) witnesses, employee representation, insurance considerations, document retention, and funding litigation. Each of these matters might require a litigator to modify their approach to trial. In this Protecting an Entity in Litigation series, I explore the critical issues an attorney should consider when protecting an entity in litigation.
Insurance considerations in entity litigation can drive claim limits, settlement conditions, and overall protection for the involved entities. Attorneys on both sides of entity litigation have questions to answer to make sure those claims and settlement demands are aligned with any available insurance policies.
For attorneys making the claim, the issue is pegging that claim to a value just under policy limits. In a limited number of industries that have similar types of insurance contracts, this amount can be identified. For all other industries, though, knowing the right amount to claim may not be as easy, especially for attorneys who do not deal with insurance claims in legal matters every day. The exception here are large insurance defense firms, who specialize in claims against insurance policy limits and are experienced with how much to plead in a claim.
An attorney defending an entity wants to identify any and all insurance policies that could be extended to fully cover their client. This requires coverage counsel to complete an active investigation into every potential insurance policy for provisions that might apply, including officer and director insurance, property insurance, or other third-party insurance that might indemnify a party. Is there a policy in someone else’s name that might apply, such as a co-owner?
Larger insurance contracts often list additional insureds or add provisions extending insurance coverage. So, before filing a claim, an entity’s attorney will want to look through all of the facts about what this case is about and hone in on each potential policy with provisions that might be stretched to cover a defendant or their entity.
When drafting or defending against certain claims, be clear about the types of actions covered or the types that will avoid the insurance policy such as fraud and sometimes other willful activities that are excluded. The insurance policy will likely dictate the counsel who can be used, the rates she may apply per hour, the activities she can perform with or without direct permission from the insurance company, and how much time can be spent on any specific task. Deviating from the “rules” provided by the carrier can lead to termination of counsel or significant bill slashing.
Actively investigate any third-party opportunities and contracts where coverage might be broader than you think. Review any errors or omissions policies that might apply to the matter. There might also be director and officer policies that apply. Identify the limits for each of these policies, and whether any additional policies might kick in after a certain limit is reached in fees.
Eroding policies are another consideration when arriving at a settlement. These policies decrease the limit by the amount paid in attorney’s fees. So, a claim against a policy with a $10 million limit and $2 million in attorneys’ fees will leave only $8 million left to pay a claim.
While an attorney charged with managing policy covered is concerned with protecting his client by shaking as much out of the policy tree as possible, the same attorney may have reservations on rights and claims rejections. An attorney should use any opening that might apply to submit the claim to the insurance provider, even when counsel is on the fence about whether provisions apply. Only submitted claims can be approved, and multiple policies might provide broader coverage – a real estate type policy may cover one claim, a director and officer policy may cover another claim, and an errors and omissions policy, a third claim. Leveraging multiple policies could increase limits and potentially settle cases sooner.
Dealing with insurance coverage in entity litigation is never clean. It is a significant job and coverage counsel is often required. Report claims quickly and accurately. Failure to report can undermine the entity’s ability to receive coverage.
An entity’s counsel must watch for the way claims are pled by the opposing counsel. Defense lawyers have been known to call up a plaintiff’s lawyer to ask about a fraud claim: “Do you really want to plead around our policy?” Ninety-five percent of all civil cases are settled before trial, which is what an entity attorney wants. To get to this resolution, a plaintiff’s lawyer will want to watch how they plead their claims, forgoing alleging salacious reports of willful, wanton or reckless criminal behaviors, since these items are unlikely to be covered by insurance.
Finally, pay close and detailed attention to who you represent and whose wishes you are trying to serve. As the entity’s counsel, you represent the entity – not the insurance carrier. The difficulty arises when a certain firm or attorney works closely with the carrier on multiple, different clients and develops a very close relationship with the carrier. Often litigation clients are a one-off but the insurance carrier could be with you for your entire career. The draw to please the carrier over the client can be immense (and the carrier is deciding which of your bills to pay anyway). But be clear that your ethical obligation of loyalty is to your client and not the carrier throughout the engagement.
Insurance considerations play a pivotal role in entity litigation, impacting claim limits, settlement conditions, and overall protection for the involved entities. Attorneys must navigate complex insurance policies, identify applicable coverage, and strategically manage claims to maximize the available protection. By understanding the nuances of insurance considerations in entity litigation, attorneys can effectively safeguard the interests of their clients. Maintaining adequate coverage for the client through the suit is the goal.
This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.
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