United States: Five Things You Need To Know About General Liability Insurance: 4) Insurance Carriers Will Try To Improperly Limit Their Defense Obligation

Last Updated: July 20 2016
Article by Mark Miller

To see this video, please click here

Nothing in insurance is perhaps more frustrating to policyholders than being "nickeled and dimed" by an insurance carrier on defense of a covered claim.  Today we continue our Five Things You Need To Know About General Liability Insurance series with our fourth installment, where we address common strategies that insurance carriers employ to improperly limit what they will pay for the defense of covered claims.   When an insurance carrier agrees to defend a claim, policyholders rightly expect that the insurer will pay one hundred percent of that defense.  The reasons for this are well justified.  The duty to defend is like an on or off switch.  If the switch is on, the insurer has an obligation to defend, and they must pay for the entirety of the defense.  If, conversely, the switch is off, the insurance carrier has no obligations whatsoever.

Insurance carriers employ a number of tactics to try and avoid paying the full defense bill incurred by policyholders.

A common tactic that insurance carriers employ is to try and limit hourly rates paid to attorneys.  Insurers pay their general liability defense lawyers at pre-negotiated rates, which, depending on the specialty, tend to be far below market rates paid by policyholders.  Law firms that handle general liability defense work, in turn, set up their associate pay structures to profitably handle the large volumes of work delivered to them by the insurance carrier.  These practices can deliver excellent services for a slip and fall case, and their rates may be reasonable for that kind of work.  When the underlying claim is either complex, or high dollar, a defense cost issue may arise.

The way this comes about is the insurance carrier says, "$800 is an unreasonable hourly rate, as we only pay our defense lawyers $250 an hour."  For many specialties, $800 per hour is reasonable, and this tactic, if left unchecked, can result in a substantial undeserved discount for the insurer.

Another tactic is for the insurance carrier to say, "well, your policy covers two out of the ten counts against you, so we are going to pay one fifth of the total bill." Again, if permitted by the policyholder, this represents a huge savings to the insurance carrier.

In most instances, these tactics are improper and avoidable.  If the policyholder has the right to select counsel due to a conflict of interest, the "unreasonable fees" argument is invalid.  Similarly, the "we'll pay twenty percent" of the defense argument is illegal in most jurisdictions.

Insurance companies are great at controlling costs, but their desire to pay less oftentimes puts policyholders at risk.  This is why common law bad faith was created by the courts, and why virtually every jurisdiction has insurance claims practices statutes regulating insurance company conduct.

Please watch the video to see some of the strategies that we use to effectively counter these and other insurance company defense limiting tactics.

To read the transcript of today's video, see below:

Five Things You Need to Know About General Liability Insurance:

4) Insurance Carriers Will Try to Improperly Limit Their Defense Obligation

If you've got the insurance company defending, they're going to nickel and dime you on the defense. What do I mean by that? Well, they're going to find ways to try desperately to knock the number down. They don't want to pay four hundred dollars an hour for a general liability lawyer, a general liability defense lawyer. They certainly don't want to pay eight hundred, they want to pay much less.

What do they do? There's two common tricks for general liability. First is, they claim, "Well, that's not reasonable. Eight hundred and hour is not reasonable. We're not paying eight hundred an hour." Your response is, "Most of the lawyers we hire, that are at the highest level of their game, are charging eight hundred dollars an hour if they are in a big city." The insurance company says, "We don't care, we don't use them. You don't need them, so we're only going to pay a reasonable costs. That's two hundred dollars an hour, or three hundred." Whatever the number is, it's a negotiating thing. Quite frankly, the number usually doesn't go above three unless you're talking about some complex securities claim that's covered under D&O policy.

What you've got, is you've got a gap created and you need to narrow that gap. The way you narrow that gap is to understand your rights. If your right is to select your own council, great. You're fifty percent of the way there. After that, you got to look at all the arguments the insurance company is using to knock the rate down. If they're saying, "Well, it's unreasonable," that's one thing. If they're saying, "Hey, you know what? We looked at this pretty carefully, and maybe part of it's covered. Maybe we got two counts covered, maybe we got eight counts not covered. We're going to cover, what is it, two tenths now? We're going to cover one-fifth of your defense cost." That's another common thing that they use. If they pull that trick, the answer is it's illegal.

If you defend, it's a flip of the coin. You either got the obligation, or you don't. If it flips heads up, and you got the obligation, you pay. You don't say, "Oh, I'm only paying fifty percent." You pay the whole thing, because you have an obligation to defend. The rationale for that is, you can't look at a claim and say, "You, Mr. Lawyer, I want you to break out your time and how much you spend that's worthy of using on the covered part, and that should not be billed because it's on the uncovered part." The answer any lawyer is going to give the insurance company is, "I've got to do all of it no matter what the claims are. I can't do two-fifths, or one-fifth of it, or two-tenths, or three-tenths, or whatever you're telling me. If I'm in, I'm in. We got to produce the documents, we got to depose the witnesses, we got to depose the folks, and we got to build it for trial, and we have to win it."

The bottom line is, they should not be permitted to be nickel and diming under certain scenarios, but you have to recognize what those scenarios are. Once you do, you can use them to your advantage.

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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