Sunday, September 27, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 4

By John L. Watkins and Guest Contributor Henry Shurling

In our last post, we covered placing the insurer on notice in the event of an occurrence or a claim. Assuming that the insurer is on notice, this post will cover some of the things that may happen in the handling of the claim.

1. The Insurer Should Provide Written Acknowledgment of the Claim. An insurer should assign a claims professional and provide written acknowledgment of a claim very shortly after receiving notice. The claims professional is the person to whom communication regarding the claim should be directed. The acknowledgment will also include a claim number. It is important to reference the claim number in all future correspondence.

2. The Insurer Typically Must Provide a "Defense." Under most insurance policies, the insurer has two primary obligations: to defend and indemnify. As a practical matter, the obligation to defend means that the insurer must hire and pay for a lawyer to defend any lawsuit on your behalf.

Most policies allow the insurer to pick the lawyer. Sometimes, an insurance company will agree to use a lawyer proposed by the insured, particularly if the lawyer has some unique background knowledge or experience that will be helpful in defending the claim. The obligation of the insurance company to pay for the defense is often as important as the obligation to pay for any settlement or judgment, as legal fees can often be substantial.

There is one thing that is important for an insured to understand: Although the insurer may hire and pay for the lawyer providing the defense, the lawyer is the insured’s lawyer and owes primary professional responsibility to the insured and not the insurance company. Sometimes, "insurance defense" lawyers may forget this and will keep the insurer fully informed, but not the insured. If this happens, an insured should not be hesitant to remind the lawyer that the insured is the client. This is not to imply that insurance defense lawyers are not competent; in fact, many are excellent trial lawyers.

3. The Insurer May Make a "Reservation of Rights." Insurers will sometimes send the insured a "reservation of rights" letter. The purpose of a reservation of rights letter is to notify the insured of potential policy defenses or limitations to coverage. A reservation of rights letter typically says, in effect, that the insurer will provide a defense for the time being, but that it reserves the right to disclaim coverage in whole or in part at a later date. The insurer may also reserve the right to recover defense costs advanced by the insurer.

In Georgia, an insurer may reserve rights by unilaterally sending a letter. A reservation of rights letter is apparently often seen by insurers as a formality. However, from the insured’s perspective, it is a cause for concern. It is a good idea to have your lawyer (a lawyer you hire; the lawyer providing the defense cannot do this) review the reservation of rights letter to determine if there are any serious coverage issues.

In some other jurisdictions, the insurer will ask the insured to sign a "non-waiver agreement," perhaps because a unilateral reservation of rights letter is not accepted in that jurisdiction. A non-waiver agreement serves the same essential function as a reservation of rights letter, but requires the insured’s consent. Again, if you are requested to sign a non-waiver agreement, it is a good idea to consult with coverage counsel.

4. The Insurer May File a Declaratory Judgment Action Against You. Particularly if the insurance company believes there is a serious coverage issue, the insurer may file a declaratory judgment action against you. In such an action, the insurer is asking the court to determine whether or not it is obligated to provide a defense or, sometimes, indemnity. If this happens, you have no choice but to hire your own lawyer and defend the case or counterclaim for breach of contract and potentially other remedies.

Insureds should be aware that, although an insurance policy is a form of contract, there are rules of interpretation of insurance policy language that favor the insured. As a general matter, it must be clear that claim is not covered (particularly for purposes of providing a defense) before coverage will be denied. If there are ambiguities in the policy language, they are to be construed in favor of the insurance company. An insured should not conclude that there is no coverage because the insurer has contested it. Rather, the insured should have its own coverage counsel evaluate the situation carefully.

5. The Insurer May Disclaim Coverage. Insurers will sometimes simply deny or disclaim coverage. By this action, the insurer is saying that they will not provide a defense or indemnity. If this happens, you need to consult with insurance coverage counsel, who can advise you whether you should pursue litigation against the insurance company.

6. The Insurer May Settle the Claim. Many policies give the insurer the right to settle the claim, even without the insured’s consent. There are instances in which the insured may prefer to defend a case for reputational or other reasons, rather than settle. In such instances, the insured should have a frank discussion with the insurer’s claims representative. However, in most instances, if push comes to shove, the insurer has the right to make the determination.

Conversely, there may be other instances in which an insurer receives an offer to settle a claim within policy limits, but is unwilling to do so. Particularly if the insured believes that the risk of an adverse judgment (if the case proceeds to trial) exceeds policy limits, the insured should strongly consider putting the insurer on notice of its desire to settle and that, in the event of a judgment exceeding policy limits, the insured intends to hold the insurer responsible for the excess loss. This is usually best accomplished with the involvement of coverage counsel.

7. If the Matter Proceeds to Trial, the Insurer Should Pay Any Judgment. If the matter proceeds to trial, hopefully all will go well. However, if there is an adverse judgment, the insurer should, subject to any potential defenses to coverage, pay any judgment up to the policy limits. As noted above, if the insurer proceeded to trial in the face of an offer to settle within policy limits, it may be possible for the insured to hold the insurer responsible for the excess if the insurer made an unreasonable decision in failing to settle. If there was no opportunity to settle within policy limits and the judgment exceeds policy limits, the insured will be responsible for any excess. However, it may be possible to compromise and settle the result within policy limits due to the risk of the judgment being overturned on appeal.

We hope that this series of posts has provided you with information necessary to understand the basics of the often confusing subject of liability insurance. We note that this series of posts only covers basic concepts. Many liability insurance issues are very complex and are beyond the scope of this series of posts. We close by again noting that this discussion is based on Georgia law and general practices in Georgia. If you have a question about your liability insurance, or if you are in another jurisdiction, please consult an experienced broker or coverage counsel licensed in your jurisdiction.

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