Practical Insights for Business Owners
Client Q&A: My insurer has refused to pay for my defense of a claim against me. What can I do?
My insurer has refused to pay for my defense of a claim against me. What can I do?
Defending a lawsuit can be an expensive proposition—the costs may even exceed the defendant's ultimate liability in the case. In some instances, the defendant's insurance carrier may be obligated to provide a defense for the lawsuit or otherwise to fund all or part of the costs of the defense. Although such coverage can be a godsend for a defendant, disputes may arise between the policyholder and the insurance company on a host of issues ranging from whether (or to what extent) the carrier is obligated to fund the defense, to the choice of defense counsel, to strategic decisions, including whether or when to consider a possible settlement. Since the availability of insurance coverage to fund a defense can be a game-changer for the defendant, these issues need to be handled carefully, and can sometimes result in a separate coverage litigation with the insurance company.
Duty to Defend or to Pay for Defense Costs
An insurance policy is a contract, and the precise duties of the carrier (and the insured) in a given case will depend on the specific policy terms. Typically, however, a general liability policy provides that the insurer has both the right and the obligation to defend a suit seeking damages covered by the policy. This "duty to defend" is broader than the insurance company's duty to indemnify the insured. In practice, this means that the insurance company must provide a defense if the complaint contains any facts or allegations that are even potentially within the scope of coverage. And even if the complaint does not clearly spell out a covered claim, the insurance carrier is required to look outside the complaint to the underlying facts to determine whether there is any possible covered claim.
Under a duty-to-defend policy, if there is any covered claim, the insurer must provide a defense to the entire lawsuit, including all non-covered claims. In one recent case, we successfully negotiated for our clients' general commercial liability carrier to cover over $500,000 in defense costs for a complex lawsuit in which there was only one covered claim—and many non-covered claims. Until the court dismissed the covered claim, the insurance company paid for our defense of all the claims, including all the claims for which there was no underlying insurance coverage.
In many general liability policies, defense costs are payable "outside of" the policy’s indemnity coverage limits. If that is the case, the insurer must continue to fund the defense until it pays a judgment or settlement amount up to the coverage limit, even if the fees exceed the coverage limits.
Specialized liability policies (such as Directors and Officers and Errors and Omissions) often do not provide for a duty to defend, but rather require the carrier to indemnify the insured for "defense costs," which are included within the policy's definition of a "covered loss." Courts have generally held that such a provision requires the insurance company to advance defense costs as they are incurred during the lawsuit, as opposed to reimbursing the insured after the fact, which would effectively leave many insureds without a defense. In these policies, coverage for defense expenses may be limited by the coverage amount.
Choice of Counsel
Generally, where the insurance company assumes the defense of a lawsuit under a duty-to-defend policy, the policy provides that it has the right to select counsel to handle the defense. This often becomes a bone of contention. The insured may want to hire an attorney with special expertise, or with whom he has a longstanding relationship to defend the case. But insurance companies often insist on retaining an "insurance defense" firm—a law firm that gets most or all of its business from the insurance company. Insureds may be concerned that such a firm will emphasize “efficiency” to keep costs down, rather than mounting the most aggressive defense.
What can the insured do? In some cases, it may be possible to negotiate with the insurance carrier to retain a law firm that is not on its official "panel," provided that the attorney is willing to accept the rates the insurance company customarily pays and comply with its billing policies.
In other cases, the insured may have the right to select counsel, regardless of what the policy says, if the insurance company can be shown to have a conflict of interest. Such a conflict may arise if there are both covered and non-covered claims. Because the duty to defend is broader than the duty to indemnify, the insurance company is required to provide a defense for all the claims. But it has no economic interest in defeating the non-covered claims. In such a circumstance, the insured may be entitled to independent counsel of its own choosing. In other cases, the insurance company may assume the defense, but reserve the right to disclaim coverage—and even recoup the defense costs it has paid—if facts are established at trial that trigger an exclusion from coverage. Such a reservation of rights creates a conflict of interest, since the insurance company may be better off economically if the insured loses the case. Again, in such a scenario, the insured may be entitled to choose counsel, even if the policy provides otherwise.
Insurance Coverage Litigation
Often disputes relating to defense coverage and choice of counsel can be resolved by negotiation—particularly where the insured is represented by experienced coverage counsel. Sometimes, however, the insured (or less often the insurance company) brings a lawsuit asking a court to determine the insurance company's duty to provide a defense. Generally, the underlying lawsuit will not stop while the coverage issues are resolved, so the insured needs to be aggressive in pushing the coverage lawsuit forward. Because the dispute often centers on the interpretation of policy language that can be construed by the court as a matter of law, it is often possible to get a relatively quick resolution by filing an early motion for summary judgment. In other cases, where there is a genuine emergency (for example an upcoming hearing or trial in the underlying lawsuit), it may be possible to get injunctive relief directing the insurance company to advance defense costs during the pendency of the coverage action.
Our firm has a great deal of experience representing policyholders in negotiating and litigating insurance coverage disputes. If you are named as a defendant in a lawsuit, we would be happy to assist you with evaluating your coverage options.