United States: Five Things You Need To Know About D&O Insurance: 4) Improper Defense Tactics (Video Content)

Last Updated: June 16 2016
Article by Mark Miller

Our fourth entry in our series of Five Things You Need To Know About D&O Insurance is Improper Defense Tactics. Defense should be a simple issue. If the insurance carrier defends, they should pick up one hundred percent of a policyholder's legal fees. This, unfortunately, is not often the case. Carriers have a raft of ways to cover a claim, but limit how much they pay. This video addresses some of the ways insurance carriers attempt to justify paying less than 100 percent of total defense costs incurred.

The starting point for any defense is selection of counsel. If the policy requires selection from panel counsel, the good news is that panel counsel lawyers, at least for certain insurers, are excellent lawyers.

Even if a policyholder selects panel counsel, though, that does not mean that smooth sailing is ahead. Insurance carriers often raise coverage issues, putting panel counsel in a difficult position. Panel counsel, pursuant to arrangements with the insurance carriers, are not permitted to offer adverse insurance coverage advice. As a general rule, carriers permit panel counsel to provide coverage advice to policyholders, so long as that advice is consistent with the insurance carrier's position. Although the exact prohibitions vary from carrier to carrier, it is best not to put defense counsel in a position of offering advice, and consequently losing their designation as approved panel counsel as a result of providing that advice.

Another tactic that insurance carriers employ is limiting the hourly rate or amount, that they pay for the work. This tactic takes several forms, and we cover a few of them in the video. In short, carriers are highly incentivized to reduce defense costs paid, and policyholders are unnecessarily picking up the tab.

If an insurance carrier has agreed to cover a claim, one might think that the hard work is done. Massive cost cutting incentives faced by insurers have made getting full defense coverage a challenge. Policyholders need to recognize improper defense tactics, and they need to approach insurer cost cutting measures with outrage and a steadfast position on full and complete coverage. If you believe you're your organization may be facing any of these challenges, or if you think that your case is being mishandled by the insurance carrier, feel free to contact us to review your situation.

We have included the transcript below:

Five Things You Need To Know About D&O Insurance: 4) Improper Defense Tactics

So, when D&O insurers do defend they don't always do it correctly. Now let's think about that, you think it's pretty easy. You either defend or you don't. By that they step up, they pay your lawyers. I mean that's the way it should be, it should be that simple but it's generally not that simple. Now first the good news, under D&O insurance polices the lawyers that are listed as panel council, that are approved by the insurers, they are generally pretty good.

Case in point, securities lawyers under the AIG D&O Policy, all this firms or most of this firms that are on panel council, AIG has them basically agreed to certain parameters. Those parameters are you can't give coverage advice. If you do you, you can't sue us. And if you do, and at all costs, even if you get a waiver from us and you can sue us, you certainly can't assert bad faith.

So, there's a whole series of, sort of I would say, road blocks that are used to control panel counsel so they can't really be adverse to their carrier and it makes sense. I mean panel counsel should not be adverse to the insurance carrier because they are taking tens if not tens of millions of dollars or more every year from that carrier. And your loyalty is, of course to the client on defense of the claim but when it comes to the money being paid, some courts hold that there is a tripartite relationship and you have to respect the insurer as well.

So, we don't fault the fact that AIG has put a lot of barriers and other carriers put barriers on panel council. We would just like policy holders to consider, or just be aware that, don't put your defense counsel in a difficult position by saying, "Hey can you sue AIG ?" or "Hey what do you think about this claim, do you think it's covered?" Because really they are in a difficult position and they probably don't want to be there and they can't really answer that question even though they would like to.

What if the insurance company does pick up the defense? That's where we were going here. If they pick up the defense, what are they going to do? So, one trick they might use is, so D&O advertises, D&O coverage, some of the carriers advertise oh we'll pay this high falutin New York firm whatever they charge, there is a discount, but basically whatever they charge to defend this claim. So, you go into it and say, I am going to pick a lawyer off this list. You pick a list and you pick a lawyer and the lawyer is $800 an hour, a good lawyer, and then you start paying the lawyer.

Then AIG are supposed to come back and reimburse you. Well, 6 months later AIG says, "You know what? We are going to cover it but we are going to cover it on different part of the policy, you know there are some unemployment type allegations there so, we are going to pick it up under the employment practices liability section of policy," and your like, "That's cool, whatever, its fine, I don't care."

And they say, "You know what, the issue is, our rates for those counsel are $250 an hour because that's what we pay them and that's what they have agreed to. So, then you got an $800 an hour lawyer and you tell them, "Well, AIG is only going to pay you $250″ and he or she is upset and he or she is not going to work for you anymore.

So, that's just one example, a more common example is through the use of something called an allocation clause. These are in D&O policies, they are probably most onerous clauses that you can find. The insurance company is required to look at each and every count and see if it's potentially covered.

If it's potentially covered under the policy, then under a typical policy they would have 100% defense obligation. But under a D&O policy, it doesn't always work that way, sometimes it does, but it doesn't always. The carrier will come back and say, "Well look, we got ten counts, five are covered we think, and five are not covered, therefore we are only going to pay you $50 cents on the dollar and again you got $800 an hour lawyer and you are only getting only reimbursed $400.

That's a problem. And they do this in a number of different ways but the bottom line is you need to push back on that. Let's say there isn't a panel that you have to pick from. But, you pick your own lawyer. Or let's say that the insurance company has defended under a reservation of rights, which means that they are giving you some money for now, but they want to take it back later and they might want to change their mind later and they are reserving their right to do that, quite common.

If an insurance company defends under a reservation of rights, well you have the right, in most situations, to pick your own lawyer. So, you say, "Look, I am picking a big law firm down in New York that specializes in this because this is a make or break the company situation and I want the best possible counsel, which is always a good strategy to follow, pick the best possible council.

So, if you pick that that council and you tell the insurance company, and they come back and they say, "Yeah, we are okay with that, they are good, they are good, but by the way, we only pay reasonable attorney's fees and reasonable is only about $250 dollars an hour, to us."

And you're like, "This one is worth $850 an hour, and people that work with them nobody is under 500 an hour, which is very reasonable for what they are doing." Now, but the AIG comes back and says, "Okay, so we will pay the partner $350 and will pay the associates $225, what do you think of that?" Anyway, it's just another strategy to knock the cost down once they have agreed to defend. It's good to recognize these things because you can approach some of them with a little bit outrage and a little bit of push back to get them reversed.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. .

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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