InsuranceCoverage for Litigators ▪▪▪The Nuts & Bolts Belo Mansion June 17, 2011
Why is Coverage Important? Your client who has been sued may need help identifying all of the potentially pertinent policies Most insurance policies require prompt notice of a claim or lawsuit – delayed reporting can complicate things even in situations where it is not a defense to coverage Coverage issues may impact your case strategy – for both plaintiff’s counsel and defense counsel If there is a dispute over coverage, your client may be entitled to independent counsel Better to involve coverage counsel sooner rather than later
Why is Coverage Important? And the #1 reason you need to understand the basics of insurance coverage …
Anatomy of an Insurance Policy Declarations Insured Policy Number Policy Period Limits of Liability :: Per Occurrence / Claim & Aggregate Deductible or Self-Insured Retention Coverages Schedules Policy Form(s) Insuring Agreement Exclusions Definitions – of critical importance Conditions Endorsements Can change practically anything – read them first!
Common Liability Insurance Policies Commercial General Liability Commercial Auto Liability Directors & Officers Liability (D&O) Fiduciary Liability (ERISA fiduciaries) Employment Practices Liability (EPL) Professional Liability / E&O Lawyers Accountants Banks Real Estate Agents Broker-Dealers Architects & Engineers Insurance Agents Doctors, Hospitals, Other Medical Providers
Common Liability Insurance Policies Commercial General Liability (CGL) Property damage Bodily Injury Personal Injury False arrest, detention, imprisonment Malicious prosecution Wrongful eviction Advertising Injury Libel, slander in publication Invasion of privacy Use of another’s advertising idea Copyright infringement (sometimes)
Common Liability Insurance Policies Employment Practices Liability (EPL) Claims arising from “Wrongful Employment Practice” Wrongful discharge, wrongful termination Employment-related defamation, misrepresentation, invasion of privacy, infliction of emotional distress Sexual harassment Violation of Title VII, Americans with Disabilities Act, Age Discrimination in Employment Act, Civil Rights Act, etc. Failure to employ or promote Failure to adopt adequate workplace policies and procedures
Common Liability Insurance Policies Employment Practices Liability (EPL) Common Exclusions Property damage | bodily injury (need CGL) ERISA violations (need fiduciary) Workers compensation, OSHA, Fair Labor Standards Act Cost of non-monetary relief Cost of providing accommodation Cost of providing benefits
Common Liability Insurance Policies Professional Liability | Errors & Omissions Claims arising from “Wrongful Acts” Generally in the rendition of “Professional Services” Definition of “Professional Services” often the key
Litigation Scenarios that May Trigger Insurance Case Facts: Your client, Albert Architect, was engaged by an oil tycoon to adapt model drawings for 12 new convenience store locations in Oklahoma. Albert is later sued for copyright infringement by the architect of the original plans. CGL May be covered under “advertising injury” or “personal and advertising injury” May exclude for professional services May exclude for copyright infringement, but beware of inconsistent endorsements that modify the policy Architects E&O / professional liability May also exclude for copyright infringement
Litigation Scenarios that May Trigger Insurance Case Facts: Your client, Bob the Builder, was hired to design and construct the foundation for a new football stadium, including all grading and prep work. The week before the first game, cracks in the foundation suggested a problem. CGL May not provide coverage for Bob’s defective installation, but collateral damage to other property may be covered May exclude for professional services Architects & Engineers E&O / professional liability May provide coverage for engineering errors and omissions in the project design
When is Coverage Triggered? Claim, Occurrence or Offense during policy period Occurrence => “accident” Offense => personal and advertising injury Claim is often defined in the policy :: the definition matters Almost always includes a lawsuit or the filing of a petition or complaint Often includes a written demand for money or services May include a governmental investigation – SEC or DOJ May extend to a subpoena to give testimony or produce documents (or insurer may elect to provide coverage in order to mitigate risk)
Notice & Cooperation Give notice – as the first order of business! If policy says “as soon as practicable,” insurer must show prejudice If policy says “within X days,” will be enforced Follow policy’s instructions If help is needed, call the broker Cooperation clause :: Read the cooperation clause, follow it Respond to requests for information Don’t admit liability Don’t make any commitments to pay Don’t settle without carrier consent (unless coverage is denied)
How Will the Insurer Respond? Accept coverage unconditionally Deny coverage Provide a defense under a “reservation of rights” – required to preserve defenses When insurer provides a defense, it takes control :: if it wants to deny coverage later, it must have identified its coverage defenses in an ROR letter or those defenses are waived
How Will the Insurer Respond? If insurer accepts coverage, celebrate! If insurer denies coverage, your client should consult with its broker and may consider calling coverage counsel for advice If insurer sends an ROR: Ask your client for a copy – even if you can’t advise on coverage, you should probably know the issues Respond to requests for information in a timely manner; lack of cooperation could compromise coverage If coverage defenses are based on misinformation or misunderstandings, set the record straight If coverage defenses overlap with the issues in the lawsuit, may be entitled to independent counsel
Insurer’s Obligations Under Policy Provide a defense or reimburse defense costs – may be inside or outside of limits Indemnify the insured against an adverse judgment Act reasonably in responding to a settlement opportunity – Stowers
Insurer’s Obligations Under Law Insurance Code governs insurer conduct Pay when liability is reasonably clear Avoid unfair or deceptive conduct Act in a timely manner to: Acknowledge claim Provide coverage position or request additional information Consider additional information Pay TIP :: if you are the insured or defense counsel, forward defense invoices to the insurer as incurred to trigger the 18% penalty interest for failure to pay defense costs timely
The “Reservation of Rights” Insurer reserves its right to deny coverage in reservation of rights letter (“ROR”) addressed to insured ROR is based on the policy terms, limitations on coverage that the insurer believes are applicable to the case at hand ROR preserves insurer’s right to withdraw defense at a later time and to refuse to indemnify non-covered claims Insurer assumes control of defense and settlement Insurer selects and pays defense counsel Insurer monitors litigation to determine whether duty to defend exists and scope of duty to indemnify
Purpose of Reservation of Rights In Texas, the ROR is necessary to preserve the carrier’s coverage and policy defenses Allows the insurer to deny coverage even after it has assumed defense of the underlying lawsuit ROR is designed to put the insured on notice of the insurer’s position regarding coverage Allows the insured to identify potential conflicts of interest and act accordingly
Purpose of Reservation of Rights When an insurer assumes the defense of an underlying lawsuit, it is in a position to steer the case away from coverage, to the insured’s detriment conflict of interest To give the insured fair notice of the insurer’s position and any associated conflicts, the ROR must be specific “Insurer reserves all rights available to it under the policy and under applicable law” is virtually worthless This type of general reservation often appears in the acknowledgement letter and may also appear as a catchall phrase after specific reservations in a proper ROR Such a general reservation itself has practically no effect
Purpose of Reservation of Rights CRITICAL :: the ROR gives the insured an opportunity to identify conflicts of interest between it and its insurer EXAMPLE If an underlying lawsuit alleges negligence, fraud and breach of contract (as may be the case not only in business tort cases, but also in the professional liability context), negligence may be covered, but breach of contract and fraud may not be covered If the coverage issues or defenses overlap with the merits of the underlying case, there may be a significant conflict of interest – for example, the insurer may be motivated to demonstrate that the insured’s conduct was intentional, not negligent, in order to defeat coverage
Adverse Interests … Potential Conflict Insurer typically controls the defense under duty-to-defend policy Defense counsel has access to confidential, non-public information from her client, the insured Insurer’s interests are adverse to insured’s interests on coverage issues Defense counsel may have a financial or business incentive to accommodate the insurer (source of repeat business), which may compromise duty of undivided loyalty to insured
“[The] so-called tripartiterelationship has been welldocumented as a source ofunending ethical, legal andeconomic tension.” —Gonzales, J., dissenting State Farm v. Traver, 980 S.W.2d 625 (Tex. 1998)
The Tripartite Relationship InsurerInsured Defense Counsel
Conflicts in the Tripartite RelationshipEmployers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) Extreme facts = highlight the ethical problem Insurer filed a declaratory judgment action against insured, Joe Tilley, seeking determination that Tilley’s late notice defeated coverage When underlying lawsuit filed against Tilley, insurer hired defense counsel to represent him
Conflicts in the Tripartite RelationshipEmployers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) While representing Tilley, defense counsel simultaneously provided services to insurance company developing evidence adverse to Tilley on coverage issues Defense counsel did not advise Tilley of conflict Insurer used evidence developed by defense counsel against Tilley in the dec action Appropriate? No, as confirmed by Tilley.Ethics :: Defense counsel has an obligation to inform herclient of the conflict of interest that exists when the insurerhas reserved rights and its interests are adverse to thoseof the client
Right to Independent Counsel The Texas Supreme Court recognized at the outset that, under certain circumstances, an insurer may not insist on its contractual right to control the defense. What are those circumstances?
Right to Independent Counsel Material overlapping conflicts independent counsel ROR is key to identifying the conflicts When is an insured entitled to independent counsel in Texas? General Rule: If the insured’s liability and the coverage issues turn on the same facts, the insured is entitled to independent counsel. Northern Co. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004).
Right to Independent Counsel “Every disagreement about how the defense should be conducted cannot amount to a conflict of interest within Traver’s meaning. If it did, the insured, not the insurer, could control the defense by merely disagreeing with the insurer’s proposed actions. This is not at all what we contemplated in Traver.” —Davalos, 140 S.W.2d at 689.
Right to Independent Counsel Ordinarily, the existence or scope of coverage is the basis for a disqualifying conflict. The reservation of rights letter creates a potential conflict of interest. When the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense. If, however, the insurer defends unconditionally – no potential for conflict.
Right to Independent Counsel Independent counsel = Cumis counsel ROR gives insured opportunity to evaluate conflicts If the insured does not recognize the conflict and one arises, defense counsel has an ethical obligation to raise the issue and recommend independent counsel Defense lawyers often more focused on the defense of the case and getting a good result than on the coverage issues; in fact, defense counsel may often be unaware of the coverage issues TAKEAWAY :: Insureds should raise the coverage issues with defense counsel; if defense counsel senses a conflict, even a business conflict, he should recommend independent counsel or refer the insured to coverage counsel
Allocation of Defense CostsCovered & Non-Covered Claims Again – the unilateral ROR cannot create rights not in the policy If the policy expressly permits allocation, policy terms control If policy does not address allocation, current Texas law requires the insurer to defend the entire lawsuit (although contrary arguments exist) Takeaway :: Insured should not agree to anything without the advice of coverage counsel
Counsel for the Insured In order to provide the best representation: Understand the coverage issues – avoid recommending a course of action that would defeat or reduce your client’s coverage For example, the insured’s interests might not be served by taking steps to eliminate a covered claim through summary judgment if it’s the only claim that triggers coverage; if you succeed, your client may no longer have its defense costs covered If you can’t do this because you have a business relationship with the insurer, you need to advise your client and make sure you have consent to proceed notwithstanding the conflict and inherent limitations on your ability to represent the client’s interests vigorously
Counsel for the Insured In order to provide the best representation: This conflict potential should be assessed early to avoid prejudicing the insured by raising it too late in the game If there’s a conflict, recommend that insured retain coverage counsel to work solely on the coverage issues and consult with you on the defense Under appropriate circumstances, refer the insured to independent counsel
Plaintiff’s Counsel? In order to provide the best representation: Know the coverage issues; consult coverage counsel for assistance with strategy to maximize coverage. Understanding the dynamics of the tripartite relationship also helps plaintiff’s counsel navigate the dispute more effectively.