insurance coverage for litigators

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Insurance Coverage for Litigators The Nuts & Bolts Belo Mansion June 17, 2011

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An overview of insurance coverage issues for ligitators.

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Page 1: Insurance Coverage For Litigators

Insurance

Coverage for

Litigators

▪ ▪ ▪ The Nuts & Bolts

Belo Mansion

June 17, 2011

Page 2: Insurance Coverage For Litigators

Your client who has been sued may need help identifying

all of the potentially pertinent policies

Most insurance policies require prompt notice of a claim

or lawsuit – delayed reporting can complicate things

even in situations where it is not a defense to coverage

Coverage issues may impact your case strategy – for

both plaintiff’s counsel and defense counsel

If there is a dispute over coverage,

your client may be entitled to

independent counsel

Better to involve coverage counsel

sooner rather than later

Why is Coverage Important?

Page 3: Insurance Coverage For Litigators

And the #1 reason you need to understand the basics of

insurance coverage …

Why is Coverage Important?

Page 4: Insurance Coverage For Litigators

Anatomy of an Insurance Policy

Declarations Insured

Policy Number

Policy Period

Limits of Liability :: Per Occurrence / Claim & Aggregate

Deductible or Self-Insured Retention

Coverages

Schedules

Policy Form(s) Insuring Agreement

Exclusions

Definitions – of critical importance

Conditions

Endorsements Can change practically anything – read them first!

Page 5: Insurance Coverage For Litigators

Common Liability Insurance Policies

Commercial General Liability

Commercial Auto Liability

Directors & Officers Liability (D&O)

Fiduciary Liability (ERISA fiduciaries)

Employment Practices Liability (EPL)

Professional Liability / E&O

Lawyers

Accountants

Banks

Real Estate Agents

Broker-Dealers

Architects & Engineers

Insurance Agents

Doctors, Hospitals, Other Medical Providers

Page 6: Insurance Coverage For Litigators

Common Liability Insurance Policies

Commercial General Liability (CGL)

Property damage

Bodily Injury

Personal Injury

False arrest, detention, imprisonment

Malicious prosecution

Wrongful eviction

Advertising Injury

Libel, slander in publication

Invasion of privacy

Use of another’s advertising idea

Copyright infringement (sometimes)

Page 7: Insurance Coverage For Litigators

Common Liability Insurance Policies

Employment Practices Liability (EPL)

Claims arising from “Wrongful Employment Practice”

Wrongful discharge, wrongful termination

Employment-related defamation, misrepresentation,

invasion of privacy, infliction of emotional distress

Sexual harassment

Violation of Title VII, Americans with Disabilities Act, Age

Discrimination in Employment Act, Civil Rights Act, etc.

Failure to employ or promote

Failure to adopt adequate workplace policies and

procedures

Page 8: Insurance Coverage For Litigators

Common Liability Insurance Policies

Employment Practices Liability (EPL)

Common Exclusions

Property damage | bodily injury (need CGL)

ERISA violations (need fiduciary)

Workers compensation, OSHA, Fair Labor Standards Act

Cost of non-monetary relief

Cost of providing accommodation

Cost of providing benefits

Page 9: Insurance Coverage For Litigators

Common Liability Insurance Policies

Professional Liability | Errors & Omissions

Claims arising from “Wrongful Acts”

Generally in the rendition of “Professional Services”

Definition of “Professional Services” often the key

Page 10: Insurance Coverage For Litigators

Litigation Scenarios that May Trigger Insurance

Case Facts: Your client, Albert Architect, was engaged by

an oil tycoon to adapt model drawings for 12 new

convenience store locations in Oklahoma. Albert is later

sued for copyright infringement by the architect of the

original plans.

CGL

May be covered under “advertising injury” or “personal and

advertising injury”

May exclude for professional services

May exclude for copyright infringement, but beware of

inconsistent endorsements that modify the policy

Architects E&O / professional liability

May also exclude for copyright infringement

Page 11: Insurance Coverage For Litigators

Litigation Scenarios that May Trigger Insurance

Case Facts: Your client, Bob the Builder, was hired to

design and construct the foundation for a new football

stadium, including all grading and prep work. The week

before the first game, cracks in the foundation suggested a

problem.

CGL May not provide coverage for Bob’s defective

installation, but collateral damage to other

property may be covered

May exclude for professional services

Architects & Engineers E&O /

professional liability May provide coverage for engineering errors

and omissions in the project design

Page 12: Insurance Coverage For Litigators

When is Coverage Triggered?

Claim, Occurrence or Offense during policy period

Occurrence => “accident”

Offense => personal and advertising injury

Claim is often defined in the policy :: the definition matters

Almost always includes a lawsuit or the filing of a petition

or complaint

Often includes a written demand for money or services

May include a governmental investigation – SEC or DOJ

May extend to a subpoena to give testimony or produce

documents (or insurer may elect to provide coverage in

order to mitigate risk)

Page 13: Insurance Coverage For Litigators

Notice & Cooperation

Give notice – as the first order of business!

If policy says “as soon as practicable,” insurer must show prejudice

If policy says “within X days,” will be enforced

Follow policy’s instructions

If help is needed, call the broker

Cooperation clause ::

Read the cooperation clause, follow it

Respond to requests for information

Don’t admit liability

Don’t make any commitments to pay

Don’t settle without carrier consent (unless coverage is denied)

Page 14: Insurance Coverage For Litigators

How Will the Insurer Respond?

Accept coverage unconditionally

Deny coverage

Provide a defense under a “reservation of rights” –

required to preserve defenses

When insurer provides a defense, it takes control :: if it

wants to deny coverage later, it must have identified its

coverage defenses in an ROR letter or those defenses are

waived

Page 15: Insurance Coverage For Litigators

How Will the Insurer Respond?

If insurer accepts coverage, celebrate!

If insurer denies coverage, your client should consult with its

broker and may consider calling coverage counsel for advice

If insurer sends an ROR:

Ask your client for a copy – even if you can’t advise on coverage, you

should probably know the issues

Respond to requests for information in a timely manner; lack of

cooperation could compromise coverage

If coverage defenses are based on misinformation or misunderstandings,

set the record straight

If coverage defenses overlap with the issues in the lawsuit, may be

entitled to independent counsel

Page 16: Insurance Coverage For Litigators

Insurer’s Obligations Under Policy

Provide a defense or reimburse defense costs – may be

inside or outside of limits

Indemnify the insured against an adverse judgment

Act reasonably in responding to a settlement opportunity

– Stowers

Page 17: Insurance Coverage For Litigators

Insurer’s Obligations Under Law

Insurance Code governs insurer conduct

Pay when liability is reasonably clear

Avoid unfair or deceptive conduct

Act in a timely manner to:

Acknowledge claim

Provide coverage position or request additional information

Consider additional information

Pay

TIP :: if you are the insured or defense counsel, forward defense

invoices to the insurer as incurred to trigger the 18% penalty

interest for failure to pay defense costs timely

Page 18: Insurance Coverage For Litigators

The “Reservation of Rights”

Insurer reserves its right to deny coverage in reservation

of rights letter (“ROR”) addressed to insured

ROR is based on the policy terms, limitations on coverage

that the insurer believes are applicable to the case at

hand

ROR preserves insurer’s right to withdraw defense at a

later time and to refuse to indemnify non-covered claims

Insurer assumes control of defense and settlement

Insurer selects and pays defense counsel

Insurer monitors litigation to determine whether duty to

defend exists and scope of duty to indemnify

Page 19: Insurance Coverage For Litigators

Purpose of Reservation of Rights

In Texas, the ROR is necessary to preserve the carrier’s

coverage and policy defenses

Allows the insurer to deny coverage even after it has

assumed defense of the underlying lawsuit

ROR is designed to put the insured on notice of the

insurer’s position regarding coverage

Allows the insured to identify potential conflicts of

interest and act accordingly

Page 20: Insurance Coverage For Litigators

Purpose of Reservation of Rights

When an insurer assumes the defense of an underlying

lawsuit, it is in a position to steer the case away from

coverage, to the insured’s detriment conflict of interest

To give the insured fair notice of the insurer’s position and any

associated conflicts, the ROR must be specific

“Insurer reserves all rights available to it under the policy and

under applicable law” is virtually worthless

This type of general reservation often appears in the

acknowledgement letter and may also appear as a catchall

phrase after specific reservations in a proper ROR

Such a general reservation itself has practically no effect

Page 21: Insurance Coverage For Litigators

Purpose of Reservation of Rights

CRITICAL :: the ROR gives the insured an opportunity to identify

conflicts of interest between it and its insurer

EXAMPLE

If an underlying lawsuit alleges negligence, fraud and breach of

contract (as may be the case not only in business tort cases, but

also in the professional liability context), negligence may be

covered, but breach of contract and fraud may not be covered

If the coverage issues or defenses overlap with the merits of the

underlying case, there may be a significant conflict of interest –

for example, the insurer may be motivated to demonstrate that

the insured’s conduct was intentional, not negligent, in order to

defeat coverage

Page 22: Insurance Coverage For Litigators

Adverse Interests … Potential Conflict

Insurer typically controls the defense under duty-to-defend

policy

Defense counsel has access to confidential, non-public

information from her client, the insured

Insurer’s interests are adverse to insured’s interests on

coverage issues

Defense counsel may have a financial

or business incentive to accommodate the

insurer (source of repeat business), which may compromise

duty of undivided loyalty to insured

Page 23: Insurance Coverage For Litigators

“[The] so-called tripartite

relationship has been well

documented as a source of

unending ethical, legal and

economic tension.”

—Gonzales, J., dissenting

State Farm v. Traver,

980 S.W.2d 625 (Tex. 1998)

Page 24: Insurance Coverage For Litigators

The Tripartite Relationship

Insurer

Insured

Defense Counsel

Page 25: Insurance Coverage For Litigators

Conflicts in the Tripartite Relationship

Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973)

Extreme facts = highlight the ethical problem

Insurer filed a declaratory judgment action against

insured, Joe Tilley, seeking determination that Tilley’s

late notice defeated coverage

When underlying lawsuit filed against Tilley, insurer hired

defense counsel to represent him

Page 26: Insurance Coverage For Litigators

Conflicts in the Tripartite Relationship

Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973)

While representing Tilley, defense counsel simultaneously

provided services to insurance company developing

evidence adverse to Tilley on coverage issues

Defense counsel did not advise Tilley of conflict

Insurer used evidence developed by defense counsel

against Tilley in the dec action

Appropriate? No, as confirmed by Tilley.

Ethics :: Defense counsel has an obligation to inform her

client of the conflict of interest that exists when the insurer

has reserved rights and its interests are adverse to those

of the client

Page 27: Insurance Coverage For Litigators

The Texas Supreme Court recognized at the outset that,

under certain circumstances, an insurer may not insist on

its contractual right to control the defense.

What are those circumstances?

Right to Independent Counsel

Page 28: Insurance Coverage For Litigators

Material overlapping conflicts independent counsel

ROR is key to identifying the conflicts

When is an insured entitled to independent counsel in

Texas?

General Rule: If the insured’s liability and the coverage

issues turn on the same facts, the insured is entitled to

independent counsel.

Northern Co. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685

(Tex. 2004).

Right to Independent Counsel

Page 29: Insurance Coverage For Litigators

“Every disagreement about how the defense should

be conducted cannot amount to a conflict of interest

within Traver’s meaning. If it did, the insured, not the

insurer, could control the defense by merely

disagreeing with the insurer’s proposed actions.

This is not at all what we contemplated in Traver.”

—Davalos, 140 S.W.2d at 689.

Right to Independent Counsel

Page 30: Insurance Coverage For Litigators

Right to Independent Counsel

Ordinarily, the existence or scope of coverage is the basis

for a disqualifying conflict. The reservation of rights letter

creates a potential conflict of interest.

When the facts to be adjudicated in the liability lawsuit are

the same facts upon which coverage depends, the conflict

of interest will prevent the insurer from conducting the

defense.

If, however, the insurer defends unconditionally – no

potential for conflict.

Page 31: Insurance Coverage For Litigators

Right to Independent Counsel

Independent counsel = Cumis counsel

ROR gives insured opportunity to evaluate conflicts

If the insured does not recognize the conflict and one arises,

defense counsel has an ethical obligation to raise the issue

and recommend independent counsel

Defense lawyers often more focused on the defense of the

case and getting a good result than on the coverage issues; in

fact, defense counsel may often be unaware of the coverage

issues

TAKEAWAY :: Insureds should raise the coverage issues with

defense counsel; if defense counsel senses a conflict, even a

business conflict, he should recommend independent counsel

or refer the insured to coverage counsel

Page 32: Insurance Coverage For Litigators

Allocation of Defense Costs Covered & Non-Covered Claims

Again – the unilateral ROR cannot create rights not in the policy

If the policy expressly permits allocation, policy terms control

If policy does not address allocation, current Texas law requires the insurer to defend the entire lawsuit (although contrary arguments exist)

Takeaway :: Insured should not agree to anything without the advice of coverage counsel

Page 33: Insurance Coverage For Litigators

Counsel for the Insured

In order to provide the best representation:

Understand the coverage issues – avoid recommending a

course of action that would defeat or reduce your client’s

coverage

For example, the insured’s interests might not be served by

taking steps to eliminate a covered claim through summary

judgment if it’s the only claim that triggers coverage; if you

succeed, your client may no longer have its defense costs

covered

If you can’t do this because you have a business relationship

with the insurer, you need to advise your client and make

sure you have consent to proceed notwithstanding the

conflict and inherent limitations on your ability to represent

the client’s interests vigorously

Page 34: Insurance Coverage For Litigators

Counsel for the Insured

In order to provide the best representation:

This conflict potential should be assessed early to avoid

prejudicing the insured by raising it too late in the game

If there’s a conflict, recommend that insured retain coverage

counsel to work solely on the coverage issues and consult

with you on the defense

Under appropriate circumstances, refer the insured to

independent counsel

Page 35: Insurance Coverage For Litigators

Plaintiff’s Counsel?

In order to provide the best representation:

Know the coverage issues; consult coverage counsel

for assistance with strategy to maximize coverage.

Understanding the dynamics of the tripartite

relationship also helps plaintiff’s counsel navigate the

dispute more effectively.

Page 36: Insurance Coverage For Litigators

Questions?

Page 37: Insurance Coverage For Litigators

Thank you!

Page 38: Insurance Coverage For Litigators

Contact

Information

[email protected]

214.665.9550 (office)

214.316.2623 (cell)

Amy Stewart PC

3333 Lee Parkway, Suite 600

Dallas, TX 75219