Reverse Coverage Suits: What Happens When Policyholders Agree to Defend and Indemnify Their Insurers

by Foley Hoag LLP - Environmental Law
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Increasingly, when settling coverage disputes,  insurers require policyholders to agree to defend and indemnify the insurer against any additional claims asserted against the insurer.  This produces the curious result that the policyholder and insurer functionally switch places.  For example, Hartford Fire Insurance Company recently sued its policyholder, Lanxess Sybron Chemicals Company.   Lanxess had settled a coverage dispute with Hartford concerning the Kearny Superfund Site in New Jersey.  As part of that settlement, Lanxess agreed to defend and indemnify Hartford against other claims involving the Kearny Site.  Hence, when Hartford was sued by another PRP at the Kearny Site (apparently an affiliate of Lanxess), Hartford sought to be defended and indemnified.  Lanxess, however, now playing the part of the insurer, declined to defend and indemnify, which prompted Hartford to file a “reverse coverage suit” in which the insurer sought coverage and the policyholder disclaimed any obligation to do so.  

Given that the desire for finality is typically claimed to be one of the key reasons to settle, it’s worth asking whether policyholders should be quite so quick to provide indemnities when settling with their insurers.  Moreover, if the policyholder cannot avoid giving an indemnity, there are steps the policyholder can take to minimize the likelihood that the indemnity will be triggered or that the amount will be larger than the value of the settlement achieved.  First, the policyholder should be careful to limit the scope of any indemnity to only claims that involve settled matters and that that arise under the policyholder’s insurance policies issued by the settling insurer.  Second, the amount of the defense and indemnity should be expressly limited to the settlement amount received by the policyholder.  Third, the policyholder should make sure to include in every settlement agreement with an insurer a provision in which the insurer agrees not to assert claims against any of the policyholder’s other insurers. 

In the end, policyholders should be mindful that providing indemnities to insurers has the potential to breed new generations of litigation.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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