Companies purchase liability insurance, often referred to as “litigation insurance,” to help manage the risk of lawsuits they may face. Most policyholders understand that they need to provide notice of claims, but there are a number of parts of the insurance claims process that are far less intuitive. In order to help facilitate resolution of your insurance claim, we will address five common issues that corporate insureds face on the road to an insurance recovery.
A. More Than One Policy Can Apply to the Same Loss
Losses and lawsuits frequently trigger coverage under more than one policy. This occurs when there are overlapping coverages (e.g., a directors and officers’ policy and a general liability policy both apply) or a long tail exposure (e.g., asbestos claims or environmental claims). For example, Bill Cosby obtained coverage for suits by sexual assault victims alleging defamation under both his homeowners and umbrella insurance policies. AIG Prop. Cas. Co. v. Cosby, 892 F.3d 25, 29 (1st Cir. 2018). As part of the notice process, each of your coverages should be reviewed for potential applicability so that all potential avenues for recovery are preserved. In addition, insurers accepting coverage often want to make sure that all other insurers that might have a coverage obligation are noticed. The bottom line is that coverage can be found in unexpected places, and your internal procedures should include a review of all coverages.
B. Billing Guidelines Are Not Part of the Insurance Contract
Insurers routinely insist that their billing guidelines be followed. The “guidelines” usually are treated by the insurers as mandatory rules for billing. They provide an overview of the litigation costs the insurance company will and will not pay. The guidelines can address everything from attorney billing rates to limitations on discovery and research. Insurers often insist that defense counsel agree to comply with the billing guidelines before the insurer will agree to the retention of counsel. However, insurer billing guidelines typically are not part of the policy. Furthermore, ethical obligations limit defense counsel’s ability to comply with billing guidelines that impair their representation. Many states have detailed opinions setting forth the boundaries of permissive billing guidelines based on ethical rules. See, e.g., Md. Bar. Assoc. Ethics Comm. Opinion 2000-23 (Apr. 25, 2000); Va. Legal Ethics Opinion 1723 (Nov. 24, 1998). Corporate insureds should not accept the insurer’s billing guidelines, but should instead offer to discuss specific issues (e.g., rates) or to use the insured’s own litigation guidelines.
C. Insurers May Seek To Avoid Coverage on ‘Public Policy’ Grounds
There is a common misconception that insurance policies do not provide coverage for intentional misconduct. In fact, insurance policies commonly cover claims alleging intentional misconduct. For example, directors and officers’ insurance policies provide coverage for claims alleging breach of fiduciary duty and securities violations. Likewise, commercial general liability policies provide coverage for claims alleging invasion of privacy and defamation. While insurers sometimes add exclusions for claims alleging dishonest or criminal conduct or exclusions for injuries that are expected and intended, these exclusions typically are limited in scope.
However, even in the absence of an express exclusion, many insurers have attempted to narrow their coverage obligations based on their contention that providing the coverage they sold would violate state public policy. Policyholders should not accept such arguments at face value. Some states, like Delaware, reject an insurer’s attempt to invoke public policy where the insurer failed to place an express restriction in the policy. RSUI Indem. Co. v. Murdock, 248 A.3d 887, 905 (Del. 2021). Even in those states that recognize some form of public policy limitation on coverage, courts typically will apply it narrowly so that it does not bar coverage for defense costs and does not apply in the absence of a finding that the insured acted with an intent to cause injury.
D. In Many States, Insurance Companies Are Required To File Their Policy Forms With State Insurance Regulators
In many states, insurance companies are required to file with state insurance regulators any policy forms that they use and sell in the state. This can be significant for several reasons. Insurance regulatory filings generally are publicly available, and insurance companies frequently include statements about how the insurance policy is meant to apply and the reason for specific changes to the policy. Thus, these filings can be an invaluable tool in insurance policy interpretation and can be used as evidence to prove coverage, rebut an insurer’s assertion of an exclusion, or show the policyholder’s interpretation of the policy is reasonable. Some states go a step further and may hold that an insurer is estopped from taking a position that contradicts a position it took in regulatory filings. See, e.g., Morton International v. General Accident Ins. Co., 134 N.J. 1, 629 A.2d 831 (1993). Moreover, in a minority of states, an insurer’s failure to file a policy form with state regulators can result in the unfiled endorsement being void. See, e.g., Bailer v. Federal Ins. Co., 214 F. Supp. 3d 1228 (N.D. Ala. 2016). Thus, an insurer may be barred from asserting an exclusion if it did not meet its regulatory obligations. Therefore, in situations where the interpretation of specific policy language is at issue, insureds should review state filings relating to the language.
E. Frustration and Delay Are Part of the Insurance Company Playbook
Many businesses find the insurance claims process, and the often accompanying delay, to be frustrating and maddening. Some insurance companies design the process this way. From a financial perspective, insurance companies make money from the delay in adjusting a claim and making a payment. As Warren Buffett colloquially put it in one of his shareholder letters, “[The] collect-now, pay-later model leaves P/C companies holding large sums–money we call ‘float’–that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit.” 2019 Berkshire Hathaway Shareholder letter, available at https://www.berkshirehathaway.com/letters/2019ltr.pdf.
Many policyholders also do not know that insurers can be insured under reinsurance policies for bad-faith claims made by an insured. For that reason, and because typically there is a high threshold for proving bad faith, the threat of bad faith claim standing alone may not be effective in motivating an insurer to pay a claim. To effectively exert pressure, businesses need to explore the applicability of statutes relating to unfair insurance practices or to seek to raise the insurer’s exposure in excess of policy limits.