The Coverage Trap: Lack of Consent
Today, managing partner Brian Friel continues his series: The Ten Biggest Mistakes Made By Corporate Insurance Policyholders, addressing various consent and duty to cooperate issues that can arise with insurance claims. The coverage trap here is that policyholders may not tell their insurance carriers that they have hired outside counsel to defend the underlying lawsuit or that they have reached a settlement with the underlying plaintiff. This is a situation where the policy clearly covers the claim, but because of a policyholder’s failure to keep its insurer apprised of litigation developments, an insurer may refuse to pay some or all of the defense costs or settlement.
Tips on Maximizing Coverage
What we have seen over the years is that some companies and some defense counsel are not focusing enough on insurance, even in situations where notice is timely submitted and the insurance carriers have accepted coverage. Forgetting to inform your insurer of defense counsel invoices or an upcoming settlement meeting is like the functional equivalent of fumbling the football at the 5 yard line. You can still make a touchdown, but your claim is more difficult to make than it needs to be. In today’s video, Brian discusses how to avoid unforced errors. Watch the video to learn more.
For a transcript of the video, please see below.
The second mistake or most common mistake made by corporate policyholders and that is the failure to provide your insurance company with either prior notice of you incurring defense costs, or entering into a settlement, or just failure to provide any notice of you going out and hiring lawyers, or settling claims and then later on approaching those same insurance companies and asking them to pay for those attorney fees and for that settlement. This would be a mistake because most policies, in fact, all policies are going to have an obligation by policyholders to both cooperate with their insurance company on claims, that includes providing information on a real time basis in terms of the underlying litigation and also what we call the no voluntary payments provision.
Basically, every policy has a provision. Whether it’s worded it like this or not that basically in effect says, “We insurance company, will cover a claim, but we will not payout any payments, we will not make any payments that you voluntarily, you, policyholder, voluntarily incur.” Meaning, you don’t get our prior consent to incur those cost.
Let’s give you this scenario. You get a claim, you identify that’s the claim of the policy, and you provide timely notice. So far, so good. You’ve done everything correctly. You have underlying defense counsel. You have a lawsuit you have to defend. You hire that underlying defense counsel. Maybe you even notify your insurance company that you’re going to go and hire a defense counsel. They charge five, six, seven, eight hundred dollars or more an hour. They have monthly fees of forty, fifty, sixty, a hundred thousand dollars a month, that’s going on for many, many months.
You never tell your insurance company, right? That you’re spending this money. You never tell your insurance company you’re taking depositions. That you are going through document discovery that’s costing hundreds or thousands of dollars. Then you get a phone call from the plaintiff, they want to talk settlement. You then instruct your outside defense counsel to proceed with settlement discussions. You reached a settlement in principle four million dollars to settle the claim and get a full release.
You go to your insurance company and say, “Ha. Look at this great result we have. We spent a million two in defense cost through litigation so far, but we just settled this claim for four million dollars even on the exposure worth twenty million plus. Aren’t we great?” Insurance company says, “Fantastic. We’re not paying for it. You didn’t cooperate with us, you didn’t keep us involved in the litigation, and you never informed us about all these attorneys spent in defense cost, and you never informed us about the settlement agreement.”
For clients, we’ll give you two situations. They’ve done exactly the scenario I just played out. They’ve given notice, carries on board, but then they go on their own. Basically hire counsel, incur hundreds of thousand dollars if not millions of attorneys fees, and they reach the sum in their principle then they reach out to their insurance company. Insurance company denies it for failure to comply with the policy’s terms and conditions.
We then get a phone call as coverage specialist. What do we do? We have arguments like prejudice that carries weren’t prejudice. The money you spent on your attorneys was reasonable. What you did on litigation was reasonable. Even the settlement you reached was reasonable and the insurance company would have done the same, even if they were involved from day one. That can work, depending what state you’re in.
Scenario number two is we get involved in the middle of a litigation where there’s been notice to the carrier, there wasn’t initial information provided about your attorneys fees, and we get involved in the middle of the case. At that point, we will get the insurance company basically up to speed about what is going on. Typically, insurance companies will also make a defense or an argument that they won’t cover for the cost incurred before we got involved. It can be very, very material.
The lesson here is this is easy. This is company’s in-house counsel working with their outside counsel, just making sure that you keep an insurance company who’s onboard with you. Even on their reservation of rights, who’s willing to pay your claim, you have to keep them informed. It sounds easy. We see it just too often. Keep your insurance companies apprised and involved in your litigation. More information to them, generally, is better than no information or very little information. What we do as insurance coverage specialist is we often times act as the liaison between your defense counsel, who’s handling the underlying claim, and your insurance companies. We are the ones who are making sure that the information flow is going from defense counsel handling the case to the insurance company.
There maybe some privileges used that we have to deal with. For example, attorney bills. They may contain some very privilege information, in terms of the work they’re doing and maybe the insurance company has reserved rights and didn’t fully accept coverage and there maybe a little bit of a conflict of interest. There’s a little hesitation about sharing all this information. Unless you run the risk of waiving that privilege. We can handle that through redactions and providing them selective information, but enough information where the insurance company cannot argue that they didn’t have either knowledge or they were shut out of being providing consent.