By Christine Spinella Davis
Christine Spinella Davis, senior associate in the Washington, D.C., office of Howrey LLP, is a TIPS Now! Fellow in the ABA Tort, Trial & Insurance Practice Section. She can be contacted at firstname.lastname@example.org
If you are a new litigator and work as a solo practitioner or in a large firm, there is a good chance that you will be asked to work on a liability insurance dispute. You even might defend a client in an underlying lawsuit where the client is seeking coverage from its insurance company (“carrier”) for the underlying suit ; for example, you may defend a client in a negligence action who is also seeking to establish insurance coverage for the action, whether in that action or another lawsuit.
As the policyholder’s lawyer, your actions in the underlying litigation could affect the policyholder’s ability to recoup insurance. Be prepared for your first liability insurance dispute by knowing the following key concepts and tips on protecting your clients’ rights to insurance recovery.
Insurance policies as contracts
Insurance policies are contracts between policyholders and carriers. They are interpreted generally based on standard contract principles, and the parties look to the policy’s language to determine obligations. The important difference between the interpretation of general contracts and insurance policies is the doctrine of contra proferentum (“against the author or proffer”), which courts follow in coverage disputes: If policy language is ambiguous and could reasonably be interpreted in favor of either party, it will be applied in favor of policyholders.
Common terms and concepts
Insurance terminology is quite easy to grasp. For example, insurance is either “first-party” or “third-party.” First-party insurance, such as health and disability insurance, protects the insured from its own loss . Third-party insurance is liability insurance, protecting the insured from loss arising from liability to a third party. Common examples of third-party insurance are homeowners policies, which provide liability coverage to the insured for accidents to visitors on the premises (and even conduct off the premises), and automobile policies, which provide liability coverage to the insured for claims brought by the injured driver of the other vehicle in the case of a traffic accident.
To activate or “trigger” an insurance policy, an event specified in the policy must take place during the policy period. It could be property damage, bodily injury, or the filing of a lawsuit. Usually, an event that triggers insurance policies is either the occurrence that leads to the lawsuit (occurrence-based policy) or the filing of a lawsuit (claims-made policy), which is particularly important for third-party insurance claims. Under the former, the policy is triggered if the underlying harm takes place during the policy period, regardless of when the third-party filed the lawsuit. Under the latter, the policy is triggered if the third party makes the claim during the defined policy period.
Policyholders often purchase multiple, vertical layers of insurance. The first level of insurance and the first policy to be triggered is called the “primary policy.” All layers above the primary policy are called “excess policies.”
Excess policies protect a policyholder from a catastrophic loss. An excess policy typically “follows form” to the primary policy, which means that it adopts most of the primary policy’s terms and conditions. A policyholder might, for a given period, have one liability policy that provides $10 million in coverage, then a policy above that provides coverage from $10 million to $30 million, and then another policy providing coverage between $30 million and $50 million. When defending a client, particularly a corporate client, inquire into its insurance coverage. Sometimes a policyholder may not even be aware of its right to, and amount of, coverage for particular allegations.
Carrier and policyholder duties
Insurance carriers and policyholders have duties under an insurance policy. A liability carrier has a duty to “indemnify” an insured party for liability to a third party if the liability falls within the terms of coverage. This determination requires analysis of all policy language. Liability policies also often obligate carriers to defend policyholders against third-party claims. This obligation can be either a duty to defend the insured or a duty to reimburse the insured for defense costs. The defense obligation is much broader than the duty to indemnify. A carrier must defend a policyholder if there is a “potential” for coverage based on a complaint. Courts generally interpret “potential for coverage” liberally to the policyholder’s advantage. A carrier generally is then responsible under the policy for all reasonable defense costs incurred by the policyholder.
In addition to paying premiums, a policyholder has a duty to provide notice of a claim to its carrier “as soon as practicable,” i.e., in a reasonable time. In some states, failure to provide notice in a timely manner may be a complete bar to coverage, or at least a bar to expenses incurred prior to the notice. In most states, failure to provide timely notice prevents coverage only if the late notice prejudiced the carrier. Either way, if the policyholder believes there is coverage, the policyholder should put the carrier on notice of the claim as soon as possible to protect recovery rights. If you are inexperienced in such disputes, raise the notice issue with the client or partner with whom you work to ensure preservation of the client’s insurance rights. You may even want to offer to assist the client with the formal notice.
A policyholder also has a duty to cooperate with the carrier defending a claim on its behalf. The policyholder must keep the insurer informed of all major case developments, respond to the carrier’s reasonable inquiries, notify the carrier, and attempt to obtain its consent before settling an underlying lawsuit. Failure to do any of these could result, in extreme cases, in the loss of the policyholder’s rights. As counsel, you should work with the client to keep the carrier in the loop and provide it with requested information; you also should consider and address with the client any potential waiver implications by such disclosures.
Knowing these principles will make it easier for you to jump onto a coverage case, research and analyze a coverage issue, and protect your client’s right to insurance recovery.