Nothing in insurance is perhaps more frustrating to policyholders than being “nickeled and dimed” by an insurance carrier on defense of a covered claim. Today we continue our Five Things You Need To Know About General Liability Insurance series with our fourth installment, where we address common strategies that insurance carriers employ to improperly limit what they will pay for the defense of covered claims. When an insurance carrier agrees to defend a claim, policyholders rightly expect that the insurer will pay one hundred percent of that defense. The reasons for this are well justified. The duty to defend is like an on or off switch. If the switch is on, the insurer has an obligation to defend, and they must pay for the entirety of the defense. If, conversely, the switch is off, the insurance carrier has no obligations whatsoever.
Insurance carriers employ a number of tactics to try and avoid paying the full defense bill incurred by policyholders.
A common tactic that insurance carriers employ is to try and limit hourly rates paid to attorneys. Insurers pay their general liability defense lawyers at pre-negotiated rates, which, depending on the specialty, tend to be far below market rates paid by policyholders. Law firms that handle general liability defense work, in turn, set up their associate pay structures to profitably handle the large volumes of work delivered to them by the insurance carrier. These practices can deliver excellent services for a slip and fall case, and their rates may be reasonable for that kind of work. When the underlying claim is either complex, or high dollar, a defense cost issue may arise.
The way this comes about is the insurance carrier says, “$800 is an unreasonable hourly rate, as we only pay our defense lawyers $250 an hour.” For many specialties, $800 per hour is reasonable, and this tactic, if left unchecked, can result in a substantial undeserved discount for the insurer.
Another tactic is for the insurance carrier to say, “well, your policy covers two out of the ten counts against you, so we are going to pay one fifth of the total bill.” Again, if permitted by the policyholder, this represents a huge savings to the insurance carrier.
In most instances, these tactics are improper and avoidable. If the policyholder has the right to select counsel due to a conflict of interest, the “unreasonable fees” argument is invalid. Similarly, the “we’ll pay twenty percent” of the defense argument is illegal in most jurisdictions.
Insurance companies are great at controlling costs, but their desire to pay less oftentimes puts policyholders at risk. This is why common law bad faith was created by the courts, and why virtually every jurisdiction has insurance claims practices statutes regulating insurance company conduct.
Please watch the video to see some of the strategies that we use to effectively counter these and other insurance company defense limiting tactics.