United States: Keep Your Friends Close, But Your Insurers Closer: Tips For Securing Coverage When Your Company Is Sued

Last Updated: April 2 2015
Article by Roland Chang

Don Corleone: We have known each other many years, but this is the first time you've come to me . . . for help. I can't remember the last time you invited me to your house for a cup of coffee, even though my wife is godmother to your only child. . . .

Bonasera: I didn't want to get into trouble.

Don Corleone: I understand. You found paradise in America. You had a good trade, you made a good living. The police protected you and there were courts of law. So you didn't need a friend like me. Now you come and say "Don Corleone, give me justice." But you don't ask with respect. You don't offer friendship. You don't even think to call me "Godfather." You come into my house on the day my daughter is to be married and you ask me to do murder – for money.

* * *

Bonasera: How much shall I pay you?

[the Don turns away dismissively, but Bonasera stays on]

Don Corleone: Bonasera, Bonasera, what have I ever done to make you treat me so disrespectfully? If you'd come to me in friendship, this scum who ruined your daughter would be suffering this very day. And if by some chance an honest man like yourself made enemies they would become my enemies. And then, they would fear you.

—The Godfather (1972)

Insurers offer a different kind of protection than that provided by Don Corleone. In the Godfather, Bonasera sought protection in the form of revenge against two young men who had brutally beaten his daughter. Insurers protect companies from a different kind of harm—the often enormous costs of civil liability. Even non-meritorious lawsuits can cause the company to incur substantial defense costs, and it's often in the company's best interest to pay a settlement rather than leave the outcome in the hands of a judge or jury. So companies buy insurance to protect against these risks. But like the Don, insurers want to be treated with respect as a condition of providing protection. For Don Corleone, respect meant hospitality and friendship. For insurers, it means prompt notice of claims, status updates, and requests for their consent to retain lawyers or to settle.

The Godfather was ruthlessly loyal to those who paid him respect. But will your insurance be there when you need it?  It's bad enough to have to divert company resources to defending and settling a lawsuit. It's even worse to find out that the insurer—to whom your company has paid substantial premiums—refuses to cover the loss because, the insurer contends, your company has not complied with a "condition" to coverage. There are important steps you can and should take to avoid this situation.

Taking a step back, there are three basic parts to every insurance policy: (1) the insuring agreement (what the policy covers); (2) the exclusions (what the policy does not cover); and (3) the conditions (what the insured is obligated to do to obtain coverage). Failing to comply with a condition is like giving your insurance company a gift—a reason to deny a claim even if it falls squarely within the insuring agreement and no exclusions apply.

Courts often are reluctant to allow insurers to avoid paying a covered claim based on a technicality. In most states an insurer cannot escape its obligation to pay a covered claim based on the policyholder's failure to comply with a condition unless the insurer has been "prejudiced"—meaning it has been made worse off. But the fact that a policyholder might later be able to convince a court that the insurer has not been prejudiced is no reason to ignore the conditions to coverage. Putting aside the expense and time required to successfully litigate the coverage issue, there are plenty of instances where courts have allowed insurers to escape paying a claim based on a policyholder's alleged failure to comply with a condition. Within the past month alone, at least three different courts—including one state supreme court—upheld an insurer's denial of coverage because the policyholder didn't give timely notice under so-called "claims-made and reported" policies. Craft v. Philadelphia Indem. Ins. Co. (Colo. Feb. 17, 2015); Ashland Hospital Corp. v. RLI Ins. Co. (E.D. Ky. Mar. 17, 2015); XL Specialty Ins. Co. v. Bollinger Shipyards, Inc. (E.D. La. Feb. 26, 2015). And a fourth court rejected a policyholder's coverage claim based on late notice under an occurrence policy, finding that timely notice was a "condition precedent" to coverage under the policy. See, e.g., Anco Insulations, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA (5th Cir. Feb. 25, 2015).

These cases merely emphasize the obvious—it's better to comply with policy conditions than to hope a court won't enforce them. Moreover, as a practical matter, it is easy for an insurer who has received late notice or wasn't told about a settlement to point to the condition section in the policy as a basis to deny coverage. It is much more risky for an insurer to refuse to pay a claim when all the conditions have been met.

Rather than give insurers a reason to say "no," give them an opportunity to say "yes." Here are steps a company can take to preserve its claim and improve its prospects for coverage:

  • Give prompt notice. While policyholders often are sensitive to the need to give notice, they still often do not do so for a variety of reasons, including uncertainty that the claim is covered, a belief that the claim is too small to exceed an applicable self-insured retention, or concern that giving notice will drive up premiums. These reasons seldom outweigh the risk of losing coverage for an otherwise covered claim. Simply put, when in doubt, give notice. If the claim is not covered or does not exceed the retention or deductible, then "no harm, no foul." But if the claim does fall within coverage and turns out to be worth more than originally anticipated, increased premiums may be the least of the company's worries.
  • Obtain the insurer's consent to retain defense counsel. When a company is sued, it needs to retain lawyers to defend itself. Liability policies often require the policyholder to obtain the insurer's consent to retain counsel, but such consent may not be unreasonably withheld. If the company asks the insurer to consent to the retention of counsel, the worst that can happen is that the insurer balks at the law firm's rates or wants to use a different firm. This is the beginning of a negotiation, not a denial of coverage. In contrast, if the company never asks the insurer to consent to the retention of counsel, the insurer has been handed the opportunity to deny coverage on the grounds that it was never asked for consent that it likely would have given.
  • Cooperate with the insurer. Policies typically contain "cooperation clauses" obligating the policyholder to provide certain specified information (such as key pleadings) and respond to requests for additional information about the claim. Policyholders often get tripped up by this requirement, as information requests are buried in lengthy reservation of rights letters, and responding to such requests can seem burdensome and distracting when the company is focused on defending itself. A solution to this problem is to put a procedure in place to automatically circulate copies of all pleadings and discovery to the insurer, even if that is more information than the insurer initially asked for. If anything, the insurer may complain that it is receiving too much information, but it can't say the policyholder didn't cooperate.
  • Obtain the insurer's consent to settle. Like retention of counsel, liability policies typically require the policyholder to obtain the insurer's consent to settle, with the caveat that such consent cannot be unreasonably withheld. Companies often are reluctant to ask their insurers for consent to settle because they don't want to lose momentum in settlement negotiations. But this is one instance where the old saying that it's "better to beg for forgiveness than ask for permission" does not apply. The safer course is to keep the insurer apprised of each step in the settlement negotiations, and to ask for consent to each offer or counteroffer. An insurer is much more likely to authorize a settlement—and quickly—when its consent is all that stands in the way of getting a deal done.

The path to obtaining insurance coverage often is a tricky one, requiring the policyholder to maneuver through a minefield of conditions. Each condition is a potential mine for the unwary policyholder, providing insurers with an opportunity to deny coverage of an otherwise covered claim. But policyholders can use the conditions to their advantage. To paraphrase Michael Corleone in The Godfather Part II, keep your friends close, but your insurers closer. By providing prompt notice, obtaining the insurer's consent to counsel, regularly providing the insurer with information, and keeping the insurer involved in settlement discussions, a request for consent to settle may turn out to be an offer the insurer cannot refuse.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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