An overview of insurance coverage issues for ligitators.

1. Insurance
Coverage for
Litigators
▪▪▪
The Nuts & Bolts
Belo Mansion
June 17, 2011

2. 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

3. Why is Coverage Important?
 And the #1 reason you need to understand the basics of
insurance coverage …

4. 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!

5. 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

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. “[The] so-called tripartite
relationship has been well
documented as a source of
unending ethical, legal and
economic tension.”
—Gonzales, J., dissenting
State Farm v. Traver,
980 S.W.2d 625 (Tex. 1998)

24. The Tripartite Relationship
Insurer
Insured
Defense Counsel

25. Conflicts in the Tripartite Relationship
Employers 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

26. Conflicts in the Tripartite Relationship
Employers 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 her
client of the conflict of interest that exists when the insurer
has reserved rights and its interests are adverse to those
of the client

27. 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?

28. 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).

29. 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.

30. 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.

31. 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

32. Allocation of Defense Costs
Covered & 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

33. 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

34. 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

35. 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.

36. Questions?

37. Thank you!

38. Contact
Information
amy@amystewartlaw.com
214.665.9550 (office)
214.316.2623 (cell)
Amy Stewart PC
3333 Lee Parkway, Suite 600
Dallas, TX 75219