June 14, 2016

Five Things You Need To Know About D&O Insurance: 5) Indemnity Obligations

Today we conclude our series, Five Things You Need To Know About D&O Insurance with a discussion about Indemnity Obligations. This topic comes into play when a settlement is reached, or a judgment is entered, and the insurance carrier is asked to indemnity the policyholder for that settlement or judgment.  This is a big issue that is often raised under time pressures that can be difficult to navigate safely.  Insurers use this to their advantage, and insurers routinely fight hard to avoid paying what they owe towards indemnity. 

 Take this scenario for example.  A policyholder, after litigating a case for years, decides that it is their best interests to settle and put the case behind them.  The parties come up with reasonable terms for settlement.  The settlement agreement is sent off to the insurance carrier for consent, but the carrier comes back saying that it is only willing to pay twenty cents on the dollar. 

This may sound like a bad situation for the policyholder. But, the truth is that the insurance carrier is in a far worse situation, provided the policyholder knows how to respond. Watch the video to learn why.

We hope that you have learned some helpful pointers from our series Five Things You Need To Know About D&O Insurance.  At Miller Friel we focus solely on insurance coverage and represent only corporate policyholders.  We have earned our position as the preeminent boutique insurance recovery firm in the nation by delivering exceptional results for clients time and time again.  If any of these topics have piqued your interest, and you would like to learn more, please don’t hesitate to reach out to us. 

For a copy of the video transcript please see below

Number 5 relates to indemnity obligations, and that is don’t ignore an insurance company’s obligations to pay for the settlement. So you’ve gotten down the line, you’ve litigated for a number of years, you’re at the point where you’re like, okay this thing is ripe to be settled. Your defense counsel has said, we can settle this thing, you can get out, and it will be a good deal because I’ve done such a good job. I’ve really beat up the other side, they are tired. Their lawyers want us to drop this case, and I feel good about what I’ve done as a defense counsel and let’s get it done.

So you go on a mediation and you’re ready to settle, and you get a good number. Let’s say its $20m claim and you got $2m number or a $1m number, and you’re like okay we’re going to take it. The insurance company sits back and says, oh no, no you can take it, that’s fine but we’re only going to pay $100,000.

Well you’re in a bad situation at that point. Actually the insurance company is in a worse situation, but most policy owners don’t realize that, they just see that they’re in a bad situation because, of what am I going do? Insurance company is only paying $100,000 on a $2m settlement, what do I do. The knee jack reaction might be, well we got the money. It’s great deal, let’s just do it. Let’s get it done. It’s called pay and chase. You pay the plaintiff and you chase the insurance company. It’s usually a bad strategy but it’s often done.

When I say it’s a bad strategy, and why is it an opportunity when the insurance company is saying that you only get a $100,000, here’ s why, because the insurance company is in a very difficult place as well. They won’t let you know it, but they are. The place they’re in is what happens if you say no, you have a number on the table, that number is likely within their policy limits.

So you’ve got a $5m policy and you’ve got a $2m number, $1m number to settle. Tell the insurance company look, here it is, pay it. They’ve got a choice, pay it or I don’t. If they don’t pay it, send them a nice little letter saying , look you have an opportunity to settle for $1m, we’re holding you responsible for any liability beyond that amount, we’re certainly holding you responsible for liability beyond your policy limits.

The law supports that, you’ve turned the tide, and you’ve put the insurance company in a very bad position which is where they should be put in the situation, because they’re not offering enough money.

Now that being said, they may have a legitimate reason to pay only 90cents on the dollar, but they probably don’t have a legitimate reason to pay only 20cents on the dollar. So push back use different tools to get the insurance company to pay, and by all means don’t pay and chase, unless that’s your strategy.

The pay and chase strategy is one that can be used, and we’ve used it successfully but you need to be careful. If you’re going to pay and the insurance company is defending, you’re at risk and here’s why, because there’s a voluntary payment clause that says you’re not allowed to settle without the insurance company’s consent.

Well it’s sometimes ignored, and if it is ignored, the insurance company gets a free pass. Quite frankly what they’re hoping you do is give them a free pass, they want to get out of jail free card, so they’re going to talk to you, they’re going to say, oh yeah we think you should do it. We’ve got to go back to the main office. Maybe we will get some more money, why don’t agree to this now, it’s a good deal. I’m not sure if we can come up much more, but we will try, everybody is feeling good, everybody is friends, everything is working perfectly but you’ve been set up. If you take that deal, you’re going to lose, because you’re given the carrier, they get of jail free card.

Now there’s ways around that, if you know exactly what to ask for the insurance company may give it to you. You can ask for a waiver, the voluntary payment clause, there’s also series of other things you can do. But the bottom line is it’s a set up, and it’s a set up that happens every time a case is being settled where an insurance company is involved.

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