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Liability Claims 101: A New Insurance Lawyer’s Guide to Handling a Liability Insurance Claim

Andrea Lee DeField and Casey Lynn Coffey


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Liability Claims 101: A New Insurance Lawyer’s Guide to Handling a Liability Insurance Claim
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For new insurance coverage lawyers, liability insurance claims often present a minefield of potential coverage issues. This article addresses key steps in analyzing and handling a liability insurance claim, as well as some of the most common coverage issues that arise in handling such claims.

What Policy Applies?

Is this an occurrence-based or claims-made policy? “Occurrence” policies provide coverage “if the negligent act or omission occurs within the policy period, regardless of the date of discovery or the date the claim is made or asserted.”[2] These policies cover events that take place during a policy period even if they do not lead to lawsuits or claims until many years after the actual policy period.

In contrast, a claims-made policy is “a policy providing coverage that is triggered when a claim is made against the insured during the policy period, regardless of when the wrongful act that gave rise to the claim took place.”[3]

Occurrence-based policies: Common coverage issues. For occurrence-based policies, new practitioners should be aware of two frequently litigated coverage issues: (1) whether the conduct complained of is an “occurrence” or “accident” and (2) whether the bodily injury or property damage resulting from the “occurrence” took place during the policy period.

Does the conduct constitute an occurrence?

An occurrence policy generally covers bodily injury or property damage caused by an “occurrence” that takes place in the defined coverage territory and during the policy period.[4] First, practitioners should consider whether the facts alleged against the insured constitute an “occurrence.” “Occurrence” is often defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[5] While “accident” is not always defined, courts have considered the word to mean “injuries or damage that are neither expected nor intended from the standpoint of the insured.”[6]

A dispute about whether the allegations constitute an “occurrence” often arises in the context of alleged battery or sexual assault. Jurisdictions differ on whether sexual assault (or any other type of assault) is an “accident” sufficient to meet the policy’s definition of “occurrence.”

For example, in determining whether there has been an “occurrence,” Texas courts consider whether the alleged injury was intended by the specific insured seeking coverage.[7] In King v. Dallas Fire Insurance Co., King—the insured seeking coverage—faced allegations of negligent hiring, supervision, and training after his employee allegedly committed an assault.[8] The policy at issue covered “bodily injury” caused by an “occurrence” and defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[9] The policy also contained a separation of insureds provision and excluded “expected or intended injury from the standpoint of the insured.”[10] The insurer argued that the intent of insured’s employee should control in determining whether there has been an “occurrence.”[11] The Supreme Court of Texas rejected the insurer’s argument and refused to impute the employee’s intent to the company insured in determining whether there was an occurrence.[12] The court relied on the policy language, case law, and the history behind the commercial general liability policy form in concluding that the insured’s standpoint controls the analysis.[13] The court held, from the company insured’s standpoint, the injury was not intended such that the petition alleged an occurrence.[14]

Similarly, Florida courts have held that sexual assault may constitute an “occurrence” sufficient to trigger coverage for the employer under similar circumstances. Under Florida law, an “accident” is defined to include injuries or damages that are neither expected nor intended from the standpoint of the insured.[15] In Doe, the plaintiff sued the company for its employee’s sexual assault.[16] At the time of the assault, both the company and the employee were insured under a policy that covered bodily injury caused by an occurrence.[17] The policy also contained an expected or intended injury exclusion.[18] The insurer argued that the sexual assault was not an accident or occurrence under the policy because sexual assault is always an intentional act.[19] The court highlighted that in this case, the underlying complaint alleged the company knew or should have known of the danger.[20] Accordingly, the court held, “because the standard requires actual knowledge of current or past abuse, the Underlying Complaint does not support a sole finding that [the company] expected or intended the harassment. As a result, Plaintiff’s bodily injury arising out [the company’s] negligent hiring, supervision, training, and retention of [the employee] constitutes an occurrence.”[21]

Did the bodily injury or property damage take place during the policy period?

Second, with respect to commercial general liability policies, practitioners must ensure that the bodily injury or property damage took place in the relevant policy’s policy period. In many cases, determining when the harm takes place and thus what policy is implicated is simple—e.g., when a slip and fall, resulting bodily injury, occurred triggering coverage under a commercial general liability policy. However, where the injury is cumulative or the damage is continuing or progressive, courts will apply various trigger-of-coverage theories to determine what occurrence policy is implicated or how the loss is allocated among multiple policy periods.[22] Practitioners must take care to consider the law in the applicable jurisdiction to determine what policy period, and thus which policy (or policies), has been triggered by the event giving rise to coverage and resulting property damage or bodily injury.

Common claims-made coverage issues. Claims-made policies require that the “claim” (often defined as a demand for money damages, suit, or receipt of a request to toll the statute of limitations) be made during the policy period. While this seems like a straightforward trigger of coverage, various policy exclusions and provisions have an impact on this analysis. Prior acts, prior notice, and prior litigation exclusions can limit coverage under claims-made policies. For example, the prior notice exclusion precludes coverage for claims arising out of certain acts or facts for which notice was given under a prior policy. The prior litigation exclusion precludes coverage for claims that are pending at the time of the policy’s inception. Many prior acts exclusions preclude coverage for claims arising out of wrongful acts that were known at the time of policy inception and that an insured reasonably suspected would result in a claim. In addition, many claims-made policies contain “related claims” provisions that operate to aggregate claims arising out of the same or similar wrongful acts, transactions, or circumstances (depending on the policy provision) into a single “claim,” deemed made at the earliest such claim.[23] These provisions can have the practical result of aggregating a claim made now, during the current policy period, with a claim made in a prior policy period so that the current claim is no longer covered under the current policy period.[24] The factual issue of whether the claims are sufficiently “related” to trigger this provision, a prior acts exclusion, prior notice exclusion, or prior litigation exclusion, often leads to coverage disputes.

Another common source of coverage disputes under claims-made policies is the impact of a merger or acquisition on coverage. Many directors’ and officers’ liability policies contain subsidiary and change-in-control provisions that determine coverage provided for new subsidiaries acquired during the policy period and coverage for the insured entity itself if purchased during the policy period. For newly acquired subsidiaries, no coverage is provided for pre-transaction wrongful acts. When the insured company itself is acquired, the policy’s change-in-control provision may preclude coverage for claims made post-transaction, while a new policy for the post-transaction entity is likely to preclude coverage for pre-transaction wrongful acts. A solution to ensure coverage for pre-transaction wrongful acts is to obtain “tail” coverage for the post-transaction entity under the pre-transaction entity’s policy in effect at the time of the transaction. “Tail” coverage will, for an additional premium, extend coverage for a period of time (often five to six years) for claims made post-transaction for pre-transaction wrongful acts.

Was Notice Provided as Required by the Policy?

The insured is required to provide timely notice under the policy. Both claims-made and occurrence-based policies often require that notice be provided “as soon as possible” or “as soon as practicable”; however, the impact of late notice on coverage may differ based on whether the policy is an occurrence-based policy or a claims-made policy and whether the insurer must prove prejudice as a result of late notice in order to avoid coverage.[25]

Does the Insurer Have a Duty to Defend the Claim?

If timely notice is provided, a liability insurer’s defense obligations are likely triggered. Under true indemnity policies, the insured is responsible for the defense of the claim and the insurer is responsible for paying the claim against the insured once a judgment is rendered or a settlement is reached.[26] In contrast, under most liability policies, the insurer has the right and duty to defend claims against its insured, which in turn may provide the insurer the right to settle claims as well.[27] The defense costs incurred by the insurer in defending the claims will, under some policies, erode available policy limits available to pay any judgment or settlement, but under other policies, defense costs will be incurred outside of limits so that they do not erode the policy limits available to pay a judgment or settlement against the insured.

Liability insurance policies typically fall in one of two categories: (1) policies that provide for the insurer’s duty to defend and (2) policies that provide for the insurer’s duty to advance defense costs on a current basis while leaving the duty to defend the claim, as well as right to selection of counsel, in the hands of the policyholder. For example, many directors’ and officers’ liability insurance policies will state that the insured maintains the right and duty to defend; however, the insurer must advance defense costs on a current basis and the insured cannot incur defense expenses or settle claims in excess of a self-insured retention without the insurer’s consent, which should not be unreasonably withheld. In contrast, duty to defend policies obligate the insurer to defend the insured and usually provide that the insurer may select counsel.

The standard for determining whether the duty to defend exists is often litigated and varies by jurisdiction. That said, most jurisdictions follow the general rule that the duty to defend arises whenever a claim triggers the potential for coverage under the insurance policy.[28] To determine whether a claim has a “potential for coverage,” the court will typically rely on the allegations of the complaint and the terms of the policy.[29] The duty to defend typically lasts until the underlying lawsuit is concluded or until it is shown that there is no longer a potential for coverage, such as following an amendment of the pleadings.[30]

Below are exemplar cases from three states showing how they evaluate the duty to defend.

California. Under California law, an insurer “owes a broad duty to defend its insured against claims that create a potential for indemnity.”[31] To determine whether the insurer owes a duty to defend, courts will first compare the allegations in the complaint with the terms of the policy.[32] California courts may then look to facts extrinsic to the complaint in certain circumstances.[33] The insurer must defend the suit even if the loss is not ultimately covered and even if the suit is false, groundless, or fraudulent.[34] Any doubt about whether the facts give rise to a duty to defend is resolved in the insured’s favor.[35]

Florida. Under Florida law, the insurer must defend its insured if there is even a potential for coverage based on the allegations of a complaint.[36] Florida courts look only to the allegations asserted against the insured and compare those against the insurance policy’s terms.[37] Any doubts about the duty must be resolved in favor of the insured.[38] Further, “an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.”[39]

Texas. In Texas, an insurer’s duty to defend is determined by the allegations of the complaint and the language of the insurance policy. The so-called “eight corners rule” limits review to the four corners of the insurance policy and the four corners of the plaintiff’s petition in the underlying lawsuit.[40] Similar to courts in Florida, Texas courts are limited to the language of the policy and the facts alleged in the complaint in deciding the duty to defend. “[T]he court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition.”[41]

In applying the “eight-corners” rule, Texas courts resolve all doubts in favor of the policyholder and finding a duty to defend.[42] Texas courts will find a duty to defend even if coverage is not clear; the duty to defend is triggered if there is a mere potential for coverage.[43] The truth or falsity of the facts alleged, the facts developed in the process of the litigation, and the outcome of the suit have no bearing on the duty to defend.[44]

Is the Insured Entitled to Independent Counsel?

Typically, under duty-to-defend provisions, the insurer has a right to control the defense, including the right to select defense counsel for the insured. But there are times when the insured has the right to independent counsel notwithstanding these policy provisions.

The right to independent counsel varies by jurisdiction, and some jurisdictions have codified the right under the state’s statutory scheme. For example, Florida law provides that an insured may reject an insurer’s defense and retain its own attorneys when a conflict of interest arises in the representation.[45] Texas law also gives the insured the right to control the defense where a conflict of interest is present, but not all conflicts rise to the level of conflict to take away the insurer’s right to control.[46] For example in Davalos, the court concluded that a disagreement over venue was an insufficient reason to take away the insurer’s right to conduct the defense[47] but recognized that an insured may rightfully refuse the insurer’s defense in the following circumstances:

(1) when the defense tendered is not a complete defense under circumstances in which it should have been, (2) when the attorney hired by the carrier acts unethically and, at the insurer’s direction, advances the insurer’s interests at the expense of the insured’s, (3) when the defense would not, under the governing law, satisfy the insurer’s duty to defend, and (4) when, though the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend.[48]

Where the insurer has the duty to advance defense costs rather than a duty to defend, the policyholder has the right to select defense counsel, but disputes still often arise over defense counsel’s rate.

Does the Insurer Have an Obligation to Settle Claims Against the Insured?

Disputes about whether the insurer has an obligation to settle are often litigated. A related issue is whether the insurer has exposed itself to extra-contractual liability when it fails to settle a case against the insured that results in a verdict in excess of limits.

Duty to settle. In general, liability insurers have a duty to accept reasonable settlement offers within their policy limits subject to certain considerations.[49] Where an insurer refuses to settle for an amount within policy limits, the insurer may subject itself to extra-contractual (“bad faith”) liability should the case result in a judgment for an amount greater than the case could have settled for before judgment. Below, we address case law on the duty to settle in two jurisdictions, Florida and Texas; however, practitioners must take care to review the law in the applicable jurisdiction.

Florida Law

In Florida, insurers have the duty to “use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.”[50] For insurers, “[t]his duty includes an obligation to settle ‘where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.’”[51] In determining when a reasonably, prudent person would settle, the insurer must consider whether an excess judgment is likely.[52]

The Florida Supreme Court offered this explanation:

Third-party bad faith actions arose in response to the argument that there was a practice in the insurance industry of rejecting without sufficient investigation or consideration claims presented by third parties against an insured, thereby exposing the insured individual to judgments exceeding the coverage limits of the policy while the insurer remained protected by a policy limit. With no actionable remedy, insureds in this state and elsewhere were left personally responsible for the excess judgment amount. This concern gave life to the concept that insurance companies had an obligation of good faith and fair dealing.

Florida courts recognized common law third-party bad faith actions in part because the insurers had the power and authority to litigate or settle any claim, and thus owed the insured a corresponding duty of good faith and fair dealing in handling these third-party claims.[53]

The insurer’s duty to act in good faith encompasses several duties, including “to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same.”[54]

The insurer’s duty to act in good faith includes an obligation to settle “where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.”[55] In Florida, even in the absence of a settlement demand, an insurer may have an affirmative duty to initiate settlement negotiations when liability is clear and damages are so serious that an excess judgment is likely.[56]

The insurer’s duty to settle also applies when the insured faces multiple claims for competing policy proceeds. While some states may permit an insurer to institute an interpleader action in this situation, Florida does not.[57] Florida law, however, will permit an insurer to enter into reasonable settlements with some claimants “regardless of whether the settlements deplete or even exhaust the policy limits.”[58] Thus, in a multiple claimant situation, an insurer may enter into reasonable settlements with certain claimants, so long as the decision to settle is reasonable and made in good faith.[59]

Texas Law

In Texas, the Stowers doctrine shifts the risk of a judgment in excess of policy limits from the insured to the insurer only where there is proof that the insurer was presented with a reasonable opportunity to settle within policy limits and refused to accept the settlement offer.[60] A “Stowers demand” must meet four elements: “(1) the policy covers the claim, (2) the insured’s liability is reasonably clear, (3) the claimant has made a proper settlement demand within policy limits, and (4) the demand’s terms are such that an ordinarily prudent insurer would accept it.”[61] If any one of the four elements is lacking, a Stowers claim fails as a matter of law.[62] “A demand above policy limits, even though reasonable, does not trigger the Stowers duty to settle.”[63] In addition, the demand must be clear and unambiguous in order for it to be a valid Stowers demand. “[A]t a minimum . . . the settlement’s terms must be clear and undisputed.”[64] Importantly, the insurer must be defending and thus “in control” of the settlement negotiations for its Stowers obligations to be triggered.[65] There are several other coverage issues attendant to determining whether an insurer’s duty to settle under Stowers has been triggered. Thus, practitioners with cases in Texas should take care to familiarize themselves with the plethora of Texas case law on these issues.

Insurer’s right to control settlement. While an insurer has a right to settle claims under the duty to defend, an insurer can lose this right by breaching its contractual duty to defend. An insurer denies coverage at its own risk.[66] In many jurisdictions,


[i]f an insurance company breaches its contractual duty to defend, the insured can take control of the case, settle it, and then sue the insurance company for the damages it incurred in settling the action. . . . The damages incurred by the insured in settling or litigating the case are not limited solely to attorney’s fees because the insurer becomes liable for all damages that flow naturally from the breach.[67]

How Is the Insurer’s Duty to Indemnify Determined?

The duty to indemnify describes an insurer’s obligation to pay a claim against an insured. It is distinct from the duty to defend: “The duty to defend is measured against the allegations of pleadings but the duty to [indemnify] is determined by the actual basis for the insured’s liability to a third person.”[68] And in most jurisdictions, the insurer’s duty to defend is broader than the duty to indemnify.[69]

While determining coverage for a judgment, complete with factual findings, may be straightforward, insurers may balk at coverage for a settlement, where such factual findings are sometimes lacking. One thing for practitioners to consider is whether certain policy exclusions require a final adjudication of the prohibited conduct for the exclusion to apply. This arises in the directors’ and officers’ liability context where many exclusions require a final adjudication. For example, conduct exclusions and personal profit exclusions often require a final, non-appealable adjudication determining that the insured did indeed commit the prohibited act or gain an illegal profit. In those cases, courts will require a judicial determination in order for the exclusion to have preclusive effect. This is important because where the insured and claimant settle without any admission of a wrongful act or of illegal profit, the exclusion may not apply.[70]

What Level of Cooperation Is Required?

Policyholders are contractually obligated to cooperate with the insurer in the defense and settlement of claims. The cooperation provision requires an insured to cooperate in an insurer’s investigation of the claim, allows the insurer to associate in the defense of the claim, prohibits the insured from prejudicing the insurer’s rights, or some or all of these.[71] This obligation often gives rise to coverage disputes over whether the policyholder sufficiently cooperated or whether the insurer’s requests for such cooperation were reasonable (or both).

Consequences of breach of cooperation clause. In many jurisdictions, an insured’s failure to cooperate may relieve the insurer of its obligation to pay policy benefits where the insurer can show that it was prejudiced by the policyholder’s failure to cooperate.[72] For example, in Florida, only those failures to cooperate that constitute a material breach and substantially prejudice the rights of the insurer in the defense of the claim will release the insurer.[73] New York requires the carrier to show that it acted diligently in seeking the insured’s cooperation, that the efforts employed by the insurer were reasonably calculated to obtain the insured’s cooperation, and that the insured’s noncooperation was willful.[74]

Privilege issues generally. Among other issues raised under the cooperation clause is whether an insured has to share with its insurer information protected by the attorney-client privilege and work-product doctrine. Both insureds and their defense counsel may receive requests from the insurer for status reports, analysis of “hot documents,” strategy decisions, and other documents or information that make defense counsel or in-house counsel pause.

Whether such disclosure is required is far from settled and is typically considered by courts in coverage actions between the insured and insurer concerning discovery. In those disputes, courts around the country have reached varying results.[75] This is particularly true where the insurer is not providing a defense under a true “duty to defend” policy but is advancing defense costs under an indemnity policy or a directors’ and officers’ liability policy. This issue is further complicated when insurers have reserved their rights to assert various coverage defenses.

A common concern in this context is whether disclosure of work product or attorney-client communications to the policyholder’s insurer, particularly if required as part of the insured’s compliance with the policy’s cooperation provisions, waives privilege or work-product protection as to third parties, such as claimants. Most jurisdictions do not find that the insurer-insured relationship creates a de facto privilege; instead, the correct analysis is whether the insurer and insured are engaged in a joint defense or share a common interest so as to protect against a waiver of privilege or work-product protection.[76] Where the insurer has reserved its rights, rather than outright provide a defense, a common coverage issue is whether the common interest doctrine still applies given that the interests of the insurer and insured may not be entirely in line sufficient to create a per se common interest.[77]

In many jurisdictions, the common interest doctrine may be used as a shield to prevent disclosure of privileged or work-product information shared between the insured and insurer to third parties outside of the common interest relationship.[78] For example, the Northern District of Alabama quashed a subpoena to a defendant’s insurer seeking the disclosure of privileged communications exchanged between the insured, defense counsel, and the insurer.[79] The court held that “[a]s with any liability-carrier coverage, counsel representing the [defendants] share with the liability carrier information, opinions, assessments, and strategy related to the covered litigation [and] . . . [s]uch opinion work product documents, and attorney-client communications made as part of a joint defense, are almost certainly never subject to discovery.”

This is an evolving area of the law, and practitioners should take care to analyze the law in the applicable jurisdiction to ensure that disclosure of such documents between the insured and insurer does not result in a waiver of any privilege or work-product protection as against the outside world.

Importantly, while the cooperation clause may require disclosure of privileged or work-product documents to the insurer, policyholder coverage counsel should understand that the required disclosure should be limited to matters of common interest only. The policyholder may still assert privilege or work-product protection against its insurer for communications as to matters outside the scope of the common interest such as coverage issues.[80]


This article addresses only a few common coverage issues that arise in liability claims handling. In analyzing coverage, the policy’s terms and applicable law will control. Upon receipt of a matter, new practitioners should promptly review the policy, the demand or pleading giving rise to the claim, and applicable law, including applicable claims handling statutes and case law. Insurers and policyholders are best served by keeping each other apprised on all material case developments and trying to work together to minimize liability against the insured.