litigation

Preventive Law Step #5: Insurance & Litigation Management

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“Step five! Don’t you know that the time has arrived.”
- Jonathan Knight, NKOTB

The Big Print Giveth, and the Fine Print Taketh Away

Acknowledging Bishop Fulton Sheen on that quote, sit down and take a close look at your business insurance policies, if you dare. You will find a labyrinth of legalese forms, replete with vague, ambiguous and confusing language understandable primarily by sophisticated lawyers.

Failure to negotiate or clarify this language up front can be dangerous, and you may find the coverage you purchased is not really working in your favor. For example, let’s say your company was one of the many victims of the May 2017 WannaCry global ransomware cyberattack, resulting in significant business interruption and losses. Fortunately, your company had a stand-alone cyber insurance policy in place that would cover this, right? Possibly not. Allow me to pull back the curtains a bit and explain.

Hidden away in many cyber policies is a “government actions” or “hostile/warlike action” exclusion, which will have some variation of the following language:

“This policy excludes coverage for claims based upon or arising out of any action or order by any foreign governmental authority to restrict access to, or provide access to, or intercept, confiscate, monitor or analyze, your network or any data, software or other information stored or processed on, or transmitted to or from, the network.”

Now, here’s where it gets interesting. According to a study by Carbon Black, a global cybersecurity vendor, 41% of its investigations involved events originating in either China or Russia.[1] Iran and North Korea are also known cyber event hotbeds, as are Pakistan and Vietnam. In fact, North Korea was alleged to be responsible for the WannaCry cyberattack mentioned above, while Russia was alleged to be responsible for one of the costliest cyber events in history, the global NotPetya ransomware attack.

You may see where I’m going with this. Given how broadly the above policy exclusion is written, every cyber event alleged to be “state-sponsored” (i.e., supported in some way, shape or form by a foreign government) could potentially be excluded from coverage. This is more than just conspiracy-theorizing. Mondelez International suffered over $100 million in losses from the NotPetya attack . . . and was then denied coverage by its insurer based on the alleged Russian backing.

Proactive insurance management means aligning your insurance program with appropriate business risk transfer. This also means identifying and then clarifying vague, ambiguous and confusing language up front, so you are not blind-sided by those hidden exclusions. For example, test the insurer on the language with a hypothetical similar to the above, and then see if it would be covered. If yes, get that confirmation in writing, as you may need that golden ticket later. If not, find out what you need to do to get coverage (even if that means going back to the market).

This is where Preventive Lawyers shine. They are skilled at sifting through the legalese jargon, identifying opportunities and areas of concern, and then working directly with your brokers and insurance carriers up front to ensure that the coverage you purchased for your business will actually react to a loss once it occurs.  And if you choose not to transfer certain risks to insurers, Preventive Lawyers can help you develop and implement processes to anticipate and respond to these risks before they materialize.

And Speaking of Taketh Away . . .

At some point, your business may find itself on the receiving end of a lawsuit. This could involve defending against a defective product claim, employment claim, cyber claim, commercial auto accident claim or some other claim covered under your insurance policy. Or it could involve a contract claim, intellectual property claim, environmental claim, union/labor claim, antitrust claim or some other claim that is not typically covered by insurance. Either way, you will likely have a litigation attorney representing your interests. Or so you hope.

Proceed cautiously, my friends. Do not simply hand the matter off to these attorneys and then wipe your hands clean. You should be directly involved in managing your lawyers, working with them to understand and develop strategies that are business-forward. Believe me, having been a litigator myself, as well as having managed litigators in insured and non-insured settings, I can speak directly to the importance of the company client being directly involved in the process (hint, this will ensure your company’s best interests are being protected, which isn’t always the case).

Failing to do so can result in strategies and outcomes you did not anticipate. Here are some examples where KEEFER managed litigation for clients after things had started going sideways with their counsel:

  • In an insured product defect lawsuit involving a death, the litigation attorney provided by the insurance company had given opinions and recommendations to the insurer resulting in massive defense and loss reserves that were significantly (and adversely) affecting our client’s upcoming insurance renewal. Following our engagement, we worked with that attorney and the claims adjuster to streamline the defense to focus on aggressively pursuing indemnity against a co-defendant under the contract between them. The strategy worked, and the insurer was able to settle for a nuisance-value sum, resulting in our client avoiding a substantial increase in premium at renewal.

  • In an insured commercial auto lawsuit involving brain damage claims, panel counsel had been recommending to the insurer to take the case to trial given favorable liability factors. Again, this strategy was not business-forward given: (1) high potential defense and loss reserves which could affect premium; and (2) an outlier risk at trial of a verdict in excess of the insurance limit. We worked with counsel and the claims adjuster to streamline the strategy to only what was necessary to pursue a meaningful mediation. The strategy worked, and the case was settled at mediation, favorably affecting renewal and further removing the risk of excess exposure in the process.

  • We were retained by a manufacturer on the eve of trial to manage a series of union/labor claims. The company had not managed these claims, simply handing them over to its law firm to defend. After two years of unmanaged litigation, the firm had racked up nearly $300,000 in legal fees. Even worse, the firm had been increasing rates and making questionable staffing and strategy choices without first discussing them with the company, resulting in significant risk exposure. We quickly replaced this firm with a more business-forward one, and then worked arm-in-arm with the new firm and company to: (1) settle the claims with minimal impact to the company; and (2) develop strategies to minimize the likelihood of this happening again. All of this worked, and the company was able to resolve the dispute amicably, and without the need for further costly and unnecessary litigation.

Proactive litigation management means understanding the strategies being considered by counsel throughout each stage of a lawsuit, as well as their consequences to your business, and then working directly with counsel to fine-tune and implement them. For example, spending $250,000 on attorneys’ fees to go through trial may not make business sense when you have an opportunity to settle early on for $100,000 (and adversely affecting your insurance premium).

On the other hand, taking a couple defensible product claims through trial may send a message to prospective claimants that they will have to make their own business decisions when deciding whether or not they should go after your business (thus minimizing the number of future claims and, in turn, future premium exposure). There is no hard and fast rule, and each case can and should be analyzed given a number of factors.  

As one of the nation’s only practices focused exclusively on Preventive Law, KEEFER is skilled at managing insurance, claims and litigation programs, providing business-forward strategies to minimize exposure. KEEFER is your ounce of prevention. Contact us to learn more.

[1] https://www.carbonblack.com/global-incident-response-threat-report/november-2018/

Some Advice Before Pushing That Nuclear Button . . .

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“Wouldn’t you prefer a good game of chess?”
Joshua, WarGames

I know what you’re feeling. You have a significant business loss you think should be covered by your commercial insurance policy. Given the amount you spent on premium at renewal, you’re thinking it had better be covered. You’ve notified the carrier, waited patiently for the investigation to be completed . . . but you still don’t have an answer.

“Enough!” you exclaim after a couple months of waiting, “I’m getting a lawyer!” So you do a Google search and find numerous lawyers willing to represent your business to recover those insurance proceeds, some of which will even do so on a contingency basis. “Perfect!” you say, “We’ll be able to keep litigation costs to a minimum!”

Your new aggressive lawyer sends a demand letter to the insurer, threatening a lawsuit complete with bad faith claims if insurance proceeds are not received within 30 days. The insurer balks so your lawyer files a lawsuit on Day 31 seeking everything but the kitchen sink, including claims for punitive damages to make an example of that no-good insurer. At a minimum, just the possibility of being hit with punitive damages should cause the insurer to curl up into the fetal position and finally pay up, right? “Eeeexcellent!” you cackle in your best Montgomery Burns impression. Just a matter of time now.

And then it happens . . . after two years of litigation you lose the lawsuit and in turn your coverage, after a judge sides with the insurer. Failing to take all pre-lawsuit opportunities to resolve the claim amicably may have lost you the opportunity for coverage. What could you have done differently to avoid this outcome?

WTF is A-OK

There may be understandable reasons for the insurer’s delay. For example, property insurers were hit particularly hard in mid/late 2017 due to natural disasters such as Hurricanes Harvey, Irma and Maria, as well as wildfires in Western states. Resources, such as claims adjusters, have to be triaged and deployed to those major losses at the expense of smaller claims, comparatively speaking. Notwithstanding, it’s perfectly acceptable to ask the insurer “WTF?!!?” Even better, hire a lawyer to assist you with resolving your claim amicably, as a professionally-worded “WTF?!!?” from counsel typically results in quicker engagement by the adjuster.

Continued patience, thoughtful strategy and focus on the ultimate goal—i.e., maximizing insurance recoveries—should take precedence over immediately pushing the nuclear button. Going straight to aggressive overtures and threats will simply result in the claims adjuster handing the matter over to the legal department for further handling. This is especially the case when the nuclear phrase “bad faith” is made, and even more so when that phrase is uttered by your lawyer.

Don't get me wrong, there is a time and place for such hostility, but not until after exhausting every amicable pathway available, and only if you have a solid basis for asserting such a claim (hint: now is not the time to lose credibility). And consider that the insurer’s in-house coverage lawyers may be more inclined to find opportunities to deny coverage outright than the previous claims adjuster, who at the time was interested in negotiating the claim. I know, because I’ve been that coverage lawyer inside the insurance company.

Know Your SOL, or You’ll Be SOL

While tapping into your rejuvenated patience, keep in mind there will be a statute of limitations effectively barring lawsuits filed after that deadline. These statutes can vary, not only by state but also by nature of claim asserted (e.g., contract vs. tort). Make sure to look at your policy, since there will likely be a provision further limiting such deadlines. In fact, many policies require a lawsuit against the insurer to be filed within one year of the inception of loss. Beware, that one-year period could begin to run from the date of the event of loss itself, not the date you discovered that loss.

If a delay by the insurer is running up on one of these deadlines, make sure to ask the insurer for an agreement to toll or extend them while the parties are amicably attempting to resolve the claim. There should be no problem getting this agreement, and absolutely do not wait until after the deadline to take action or else it’s over! Your coverage attorney should be well-versed in tolling agreements and capable to negotiating these with the insurer.

Assuming you have a tolling agreement in place, or otherwise still have several months to spare, it’s time to learn more about the insurer’s investigation, reasonably cooperating as required under the policy. Research cases which could be favorable or adverse to your position and evaluate the respective merits of each other’s positions. Listen and don’t be so quick to go on the offensive. Definitely don’t concede any positions from the insurer that could have adverse consequences later, especially in writing (hint: those will likely become exhibits if a lawsuit is filed). You should also review and consider potential litigation strategies and outcomes . . . just don’t let your insurer know that you are doing so!

By Failing to Prepare, You are Preparing to Fail

At some point, you will get the insurer’s final settlement position. Armed with this information, think about the following:

· Is the insurer willing to pay something now? If so, how much?

· How much will it cost to sue the insurer from a fees and costs standpoint through   different stages of litigation (e.g., motion to dismiss, motion for summary     judgment, trial, appeal)?

· What are the chances you could lose at each stage?

· What are the chances you could win, including chances of prevailing on a   dispositive motion?

· Assuming a win, what is the likely amount of recovery (hint: you are more likely   to win contract damages than bad faith tort damages)?

Consider the drain litigation could have on management time and resources, especially during the onerous discovery stage. Consider also the possibility of gaining a reputation as a litigious insured and burning bridges with insurers who tag you as a “problematic risk,” which could harm you upon renewal.

Balancing and evaluating the responses to these inquiries against the settlement opportunity in front of you enables sound business decision-making. And it is certainly less risky than just throwing up your arms, pushing the red button and then hoping you’re not part of the fallout radius. At the end of the analysis, you may find that the insurer has already offered you a best-case scenario from a net standpoint.

The decision to go nuclear should always remain the very last option, and only after all other options have failed and you fully understand the business consequences of doing so. As always, we’re here to help.

Why You Need to Manage Those Lawyers the Insurer Just Assigned to You

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"Let's take extra care to follow the instructions or you'll be put to sleep."
- President Business, The LEGO Movie

Let’s say your company makes products and is sued by a group of individuals claiming they were injured by one of those products.

If you’re like most companies, you would notify your insurance carrier and then hope you have insurance coverage for those lawsuits. Assuming you do, you get a letter from a law firm the insurance company hires for you and then periodically provide information and documents when asked . . . you may even give a deposition if you’re lucky! Otherwise, you stay out of the mix and let this lawyer represent your company’s interests until a letter comes notifying you the case has been settled. No worries, right? WRONG!

Behind the scenes, the insurer is paying the fees for your lawyer (known as “panel counsel” since they are chosen from a panel list acceptable to the insurer). The insurer is also controlling the defense strategy for your company, including when and how to settle the case. Your insurance policy permits the insurer to do this, and also requires your cooperation, so this is perfectly normal. However, if you are not managing this panel counsel, you could find yourself blindsided with higher premiums than expected at renewal.

A Brief Case Study

Let me give you an example based on a matter I recently concluded for a manufacturing client. This company was one of several defendants which had been sued by the estate of an individual who was killed in an accident. Fortunately, this company was insured, so it forwarded the lawsuit to the insurance carrier, which in turn assigned panel counsel to defend the company. So far, so good.

A couple months into the lawsuit, I was called by the head of the company after he received a copy of a 20-page status letter prepared by the panel counsel to the insurer. He was confused since his company had an agreement with a third party supplier, requiring that supplier to accept full responsibility for defense and any damages to the extent of any defect claims involving my client’s products. Given my background and experience with insurers and managing claims and litigation, he wanted me to review and provide guidance.

Here’s where it got dicey . . . panel counsel acknowledged the supply agreement in the report but buried it low in the list of “to-do” action items, recommending instead extensive discovery, at least 20 depositions, retaining and deposing multiple experts and then preparing and filing a couple motions for good measure. To make matters worse, panel counsel opined in the report that our mutual client could be found 15% – 25% liable for the death at trial, and that damages could well exceed $5 million.

Your Panel Counsel Can Adversely Affect Your Premiums

Let me tell you a little bit about how insurance adjusters generally set reserves. When a lawsuit comes in, the adjuster will set defense cost reserves (e.g., attorney fees, discovery costs, experts) based on panel counsel’s recommended strategy. The adjuster will also set loss reserves based on the anticipated settlement or trial value at different mile-markers in the case. Of course, the adjuster relies on panel counsel’s periodic status letters to determine these reserves.

In my client’s case, a reasonable adjuster could have reviewed panel counsel’s 20-page letter and, based on the suggested strategy and exposure, set initial defense cost reserves of at least $50,000 with another $250,000 to $500,000 in loss reserves. This, of course, in addition to the $10,000+ already spent in the initial review and preparation of that 20-page status letter. This was my client’s first claim related to an alleged product defect. Had the adjuster in fact reserved this way, my client’s insurance premiums could have skyrocketed for the upcoming renewal period.

Effectively Managing Panel Counsel

After reviewing the status letter, followed by a brief outburst of expletives, I calmed down and called panel counsel to introduce myself as managing counsel for the case on behalf of the company. We discussed the current strategy and exposure assessment in light of the exculpatory supply agreement. After explaining the harm that could potentially be done to our mutual client at renewal, panel counsel ultimately agreed that the best course would be to immediately tender defense to the third party supplier, performing only necessary discovery items afterward. In the event the supplier balked, it would be sued and we would seek summary judgment given the clear and unambiguous language of the contract.

Having agreed to this new strategy, I requested panel counsel forward the insurance adjuster a status letter downgrading anticipated loss exposure to $0 given indemnity. All of this was set in motion within 24 hours of that phone call, the case was tendered to the third party which was later brought into the case. As a “happily ever after,” the case settled at mediation with nothing paid by my client and minimal defense costs incurred in the interim. At renewal, the insurance premium increased only nominally as a result of the claim . . . things could have been a lot worse.

It's a Team Effort

Don’t get me wrong, the insurer’s relationship with panel counsel is important and necessary, as insurers need to be able to predict outcomes of lawsuits as much as possible in order to make business decisions on behalf of their insured businesses (and themselves!). However, if these lawsuits are not also managed by counsel solely representing the insured’s interests, this dynamic can lead to excessive defense costs, exposure to unnecessary strategies and improper liability and damages assessments.  All of this can lead to adverse reserving by the claims adjuster and, ultimately, skyrocketing premiums or worse . . . loss of insurance coverage altogether.

Long story short, don’t simply hand off your case to the insurer and then forget about it. Review status letters before they are sent to the insurer. Understand the litigation strategies being developed and implemented, as well as potential loss exposure. Don't be afraid to question how these things could affect your existing insurance coverage. In sum, manage the case with a critical eye and, if commercially feasible, retain a lawyer looking solely out for your company’s best interests to assist. As always, we’re here to help.