Do not assume insurance coverage is unavailable
Today’s insurance market is complex. It encompasses a wide range of insurance policies covering all manner of events and circumstances. Beyond more traditional coverage for personal injury or property damage (under commercial general liability (CGL) policies), companies now routinely purchase Directors & Officers (D&O) policies, Errors & Omissions (E&O) policies, and Employment Practices Liability (EPL) policies, among others. These policies can cover everything from claims of wrongful termination (EPL) to breach of contract (E&O) to shareholder class actions (D&O). Further, many CGL policies are “occurrence” based. This means that if the loss occurred during the policy period, the policy may provide coverage even if the claim is not made until decades later (presuming you recently learned about the loss). Accordingly, when you or your company faces a lawsuit, never assume insurance coverage is unavailable.
Immediately notice the claim to all relevant insurers
Beyond identifying potential coverage under existing policies, it is important to promptly place the insurers on notice of the lawsuit. A failure to give timely notice could result in a waiver of coverage. Many policies require the insured to give notice “as soon as practicable” or even “immediately” after learning about the occurrence (e.g., accident harming another’s person or property) or claim (e.g., a lawsuit). These policies often treat delayed notice as a breach of a condition precedent to providing coverage under the policy. The insurer will likely then deny coverage based on this breach. While most jurisdictions require an insurer to show prejudice from a delayed notice of an occurrence, claim or suit, some do not. Providing prompt notice avoids what could be a costly dispute, especially if the insurers succeeds in avoiding coverage. Therefore, even where you believe a lawsuit will resolve quickly, it is still imperative to give timely notice (and, thereby, avoid forfeiting the coverage purchased).
Denials and reservations of rights
An insurer often responds to a notice of claim in one of three ways: (1) admits coverage; (2) reserves rights; or (3) denies coverage. In the first scenario, the insurer has admitted the claim is covered without qualification. In the second, most common, scenario, the insurer concedes a possibility of coverage but reserves its rights to deny coverage for a settlement or judgment based on certain policy exclusions or because the facts may not ultimately trigger coverage. In the third scenario, the insurer denies any obligation under the policy to defend or indemnify the insured against the lawsuit. When faced with the second or third scenario, it is important not to treat the insurer’s denial or reservation of rights as the final word. Insurers have an ongoing obligation to investigate, and you should be vigorous in communicating with the insurer about the grounds for coverage (whether based on new (or overlooked) facts or differing interpretations of the policy language).
Keep the insurers informed about the litigation
Where the insurer has not denied coverage, the obligation to keep the insurer informed does not stop after giving notice. Instead, many policies require (and it is best practice) to keep the insurer up-to-date about the status of the litigation. At minimum, this ensures there are no surprises about defense costs and the extent to which the insurer will cover them.
Always inform the insurer of any potential settlements
Many policies require an insured to obtain its insurer’s consent before settling a (potentially) covered lawsuit. These policies often disclaim any liability for settlements that were entered into without the insurer’s consent. Even where an insurer has denied coverage, it is important to notify the insurer representative of the insured’s intent to settle. This ensures that any later claim brought against the insurer to recover amounts paid in settlement is preserved. While the insured is required to inform the insurer about a potential settlement, the insurer, in turn, may not withhold its consent to a reasonable settlement. Where consent is withheld, the insured may have a claim for bad faith against the insurer, especially where the settlement then does not happen and the insured later suffers a judgment in excess of insurance limits.
Consult with coverage counsel
Insurance policies are complicated and hard to read. Insurance companies are equally difficult, often looking for any opportunity to deny coverage. Given these realities, coverage counsel can be instrumental in securing coverage for the litigation you or your company faces even where your insurer has denied the claim. In many cases, securing coverage after a denial or reservation of rights can be done without litigation and may be as simple as bringing certain facts (or legal obligations) to the insurer’s attention or as complicated as litigating coverage with the insurer.