As anyone with a large insurance practice knows, insurance companies sometimes reach out to outside counsel not to request the defense of a lawsuit against an insured (or perhaps the insurer itself), but instead to ask for a coverage opinion. But as a judge once asked to me, "why does an insurance company need a lawyer (or, in the case of a declaratory judgment action, a judge) to tell the insurer what its own policy means?" Well, with apologies to the great Yogi Berra, "in [insurance], you don't know nothing."
Although requests for coverage opinions can be for property damage issues, coverage opinions are most frequently requested in casualty/liability claims. In such cases the insurer must determine whether a claim or lawsuit falls within the policy coverage such that the insurer owes a duty to its insured to defend and indemnify. In many cases the facts of the claim against the insured are so clear, the insurer can determine the claim is either covered, in which case the insurer will defend and indemnify its insured; or not covered, in which case the insurer will disclaim defense and indemnity to its insured. Most states follow some corollary of the 8 corners rule, which requires the insurer to make a decision on duty to defend based on the 4 corners of the complaint and the 4 corners of the applicable insurance policy. So what happens if the answer to the coverage question is not readily discernible from the 8 corners? This is when insurers sometimes turn to outside counsel to review everything and provide a formal written opinion as to coverage.
When the insurer decides to seek the opinion of outside counsel, there are critical things the insurer and counsel need to do. First, there must be credible and otherwise competent evidence of the facts forming the basis for the opinion. Accordingly, it is important for the insurer to provide all available evidence to counsel, whether thought to be of legal significance by the insurer or not. Counsel preparing a coverage opinion should keep an open mind, and not assume the claim should be denied or covered simply because the insurer/adjuster expresses an opinion one way or the other upon assignment of the coverage opinion. If additional investigation is warranted, counsel should request it from the insurer.
Counsel providing coverage opinions should (1) obtain all facts; (2) obtain the policy (believe it or not, I have seen litigation over coverage decisions where it turns out the lawyer who provided an opinion did not have or review the actual policy, and instead relied on emailed excerpts from the adjuster – big no-no!); (3) obtain all available investigation material; (4) thoroughly research the law; (5) recite the facts in the letter as identified by the attorney; (6) cite relevant portions of the policy; (7) state the issues involved; (8) come to a specific conclusion, if possible; and (9) suggest appropriate steps for the insurer to follow.
The key to a good coverage opinion is to guide the insurer with respect to its rights and responsibilities under the applicable policy to its insured. For counsel, remember to avoid overly legalistic language. A well-written coverage opinion should provide a clear map to the insurer on how to resolve the coverage issue in question. And for insurers, if a coverage opinion is received that is either unclear or difficult to understand, send it back and request clarification. Remember, a claim decision will be made based on the coverage opinion, and both the insurer and counsel may later (sometimes years later) be called to defend their actions. Of course, in many states, if an insurer denies a claim in reliance on the "informed advice of outside counsel," it can serve as a shield to bad faith, with "informed advice" being the operative language. This is why it is important for the insurer and counsel to collaborate fully to come to the correct decision as to coverage.
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