In addressing these increasing risks, businesses understandably tend to focus on front-end loss prevention, and on engaging counsel and consultants to defend and minimize claims or other losses when they occur.
In addition, however, a business’s insurance coverage program can be a critical corporate asset, in helping to protect profitability, when substantial losses do occur. As a mainstream newspaper noted a few years ago when discussing then-emerging Chinese drywall litigation, “It may not be the sexiest of topics, but the intricacies of insurance policies may prove to be paramount in deciding who winds up footing the bill . . . .” See “Policies May Not Cover the Drywall,” Herald Tribune, June 6, 2009, at D1.
Insurance considerations go beyond actual recovery of insurance proceeds after a loss. These considerations start much earlier, before a loss even occurs. Some key examples include, but are not limited to: (1) planning against risks by ensuring that a business has the right insurance policies and provisions in place; (2) navigating the interplay between the defense of third-party claims and insurance considerations, such as the selection, control, and payment of defense counsel; and (3) structuring corporate transaction documents to ensure that insurance assets are treated in the manner that the parties intended.
Negotiating Favorable Insurance Terms
Disputes involving insurance coverage often turn on the interpretation of the language used in a policy. A single sentence or phrase can make the difference between an insured’s ability to recover from its insurer or being forced to foot the bill alone. For instance, during the aftermath of the terrorist attacks on 9/11, U.S. Airways and United Airlines both made business interruption insurance claims based on the closure of Ronald Reagan National Airport, and both airlines separately litigated their coverage rights with their insurers based on disputes over a particular provision of the airlines’ respective policies. U.S. Airways won its lawsuit, while United lost, based simply on a nuanced difference between the language of the provision at issue in the two policies. Experienced coverage counsel can help you negotiate language that could lead to a significant insurance recovery and avoid language that will leave your business without coverage.
Managing Third-Party Claims
Although insurance considerations may often seem separate from the defense of an underlying claim, they often are very much related. Even when an insurer agrees to provide coverage during the pendency of an underlying lawsuit, most insurers will do so by reserving their rights to later deny coverage. Thus, a business’s interests and its insurer’s interests are generally not identical.
There are several ways that defense considerations and insurance considerations overlap. For example:
There will be a need to determine when and how a business should give notice of a claim, or potential claim, to prevent the loss of insurance rights based on a mere technicality;
There may be issues regarding whether the policyholder or the insurer gets to select defense counsel, and who gets to direct defense strategy;
There may be issues regarding the insurer’s payment of defense counsel’s fees, such as insurer efforts to impose billing guidelines that might not be appropriate given the nature of the underlying claims;
There often will be a need to provide insurers with information about the claims and the defense effort, yet this must be done in a way that does not waive privilege as to third parties, particularly underlying claimants;
There may be a need to communicate with the business’s insurance brokers, but this likewise must be done carefully, with privilege considerations in mind; and
If and when an opportunity to settle an underlying claim arises, a business should handle that opportunity in a fashion that puts the business in the best possible position to secure insurance coverage for any ultimate settlement.
Experienced coverage counsel can coordinate with a business’s defense counsel to navigate these waters, e.g., by negotiating non-wavier agreements with insurers to protect privileged defense information, and by coordinating communications with brokers. The earlier a business involves coverage counsel in the defense of underlying claims, the better coverage counsel will be in a position to help coordinate these overlapping issues.
Over time, many companies find value in changing their corporate structure, including selling off business units. However, unless a business is careful in wording its corporate transactions, the insurance assets of the selling entity may not get treated in the manner intended. Courts may or may not, for example, find that insurance follows liability by operation of law, so if the intention is to transfer not only certain liabilities of the business unit, but also certain of the selling entity’s insurance assets to cover those liabilities, that intention has to be communicated in particular ways in the transactional documents, based on applicable case law. Insurance coverage counsel can advise you on key language to include in your corporate transactions to ensure that insurance rights are transferred during the corporate restructuring.
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Given the overlap between insurance considerations and the defense of claims and other loss-prevention efforts, insurance should be considered at the same early stages as those other efforts. Deferring insurance issues to a later point can have unintended and significant adverse consequences. Retaining insurance counsel early on can help prevent these consequences, and result in significant cost savings by reducing the potential for protracted disputes with insurers later.