Court Slams Defense Counsel For Not Being D&O Insurance Experts

Courts have been placing ever-increasing burdens on defense counsel relating to insurance.  Worse yet, some of the esoteric insurance issues that defense counsel are now expected to master fall far outside of traditional defense counsel areas of expertise.  The latest example of this is that defense lawyers can be personally sanctioned with monetary fines if they don’t correctly understand their client’s D&O insurance policies.  See Sun River Energy, Inc. v. Nelson, 800 F.3d 1219 (10th Cir. 2015) (“Sun River”).  This case serves as a wake-up call, both for defense counsel, who fail to recommend to their clients that they retain separate coverage counsel at the outset of any engagement, and for clients, who risk losing millions of dollars in insurance if they rely solely on defense counsel for insurance-related advice.

Court Sanctions Defense Counsel for not Being D&O Insurance Experts

Court Sanctions Defense Counsel for not Being D&O Insurance Experts

Appellate Court Sanctions Outside Defense Counsel

In Sun River, defendants in an action brought by Sun River asserted securities-related counterclaims against Sun River, but Sun River’s counsel did not disclose or produce Sun River’s D&O policy in the initial disclosure.  Only after defendants pressed the issue and filed a motion to compel was the policy finally produced, and, but by that time, it was too late to make a claim under the claims-made policy.  Defendants then sought sanctions against Sun River.

During the evidentiary hearing, the magistrate judge found that neither outside nor in-house counsel “ever took a serious look at whether there was applicable insurance” or even actually looked at the policy.  800 F.3d at 1223.  Rather, they “simply believed that, because no directors or officers (or any individual at all) w[ere] named in the counterclaim, the policy would not be relevant.”  Id.  The magistrate held that the lawyers were “significantly culpable” and had “exhibited deliberate indifference to the obligation of providing relevant information under Rule 26.”  Id. (emphasis omitted).  As a result, the magistrate issued a sanction of $20,435.

On appeal, the Tenth Circuit affirmed the sanction against Sun River’s outside counsel.  The court rejected Sun River’s outside counsel’s excuse that he assumed in-house counsel had reviewed the policy.  The court then ridiculed outside counsel’s second excuse that the policy need not be reviewed if coverage would be unlikely:

Mr. Csajaghy’s second excuse is even less persuasive.  Basically, he contends counsel need not bother to review the actual terms of an insurance policy (terms, we note, that were not buried in the fine print of some subsidiary provision, but included in the very title of the policy) before denying the existence of potential coverage, so long as he believes the existence of coverage would be very unlikely or unusual.  Just plainly framing this contention betrays its infirmity.

Id. at 1229.  As a result, outside counsel was required to pay the monetary sanction of more than $20,000.

Lessons from Sun River

There are several lessons from Sun River for defense counsel and for policyholders. First, it is very difficult for lawyers that don’t specialize in insurance coverage to meet the insurance burdens imposed by courts and expected by clients.  Indeed, contrary to counsel’s expectations in Sun River, D&O policies often provide coverage not only for individual officers and directors, but also for the company, or insured entity, as well.

Second, policyholders can lose coverage if proper notice is not provided to the insurer.   Given the complexities of notice under claims-made insurance policies, it is no surprise that improper notice is perhaps the leading reason for policyholder forfeitures of coverage.

Third, all policies need to be analyzed for coverage, preferably by insurance recovery counsel who have substantial experience and expertise in finding coverage for policyholders.  That is the best strategy to protect against sanctions and maximize insurance recovery for clients.

Miller Friel, PLLC specializes in providing policyholders with unbiased accurate insurance coverage advice.  If you have issues pertaining to some other area of law, we are not your firm.  If you are a corporation with an insurance claim or policy renewal issue, please consider us.  For additional information about this post, please call 202-760-3160.