litigation

Some Advice Before Pushing That Nuclear Button . . .

hydrogen-bomb-63146.jpg

“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

hamza-el-falah-367644-unsplash.jpg

"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.