Coverage issues arise in a variety of circumstances. An insurer may accept the tender from a possible additional insured, but only if it is ultimately determined that the loss “arose out of” the duties or obligations of the named insured. An insurer receives a complaint that asserts both compensatory and punitive damages against an insured. An insurer receives a claim involving a motor vehicle accident, whereby the motor vehicle was operated by the spouse of the named insured, whom the named insured claims was not authorized to drive her car.
Finally, an insurer receives first notice of a claim, via a lawsuit, 30 months after an alleged slip-and-fall. We have all encountered situations akin to the foregoing, and said coverage issues require further investigation and possible resolution of indeterminacy in the law, such as a declaratory action.
A treacherous quagmire lies between a claim with no coverage issues and a claim that is beyond the scope of the insured’s coverage. Should a claim involve a coverage issue, a partial disclaimer or reservation of rights letter lies in wait to trap both the novice and the experienced claims professional. To avoid said pitfalls, one must develop a systematic process of evaluating and handling such claims. CLM can help with its new training program, “Reservations of Rights and the Insured’s Right to Personal Counsel,” which is previewed below and promises to be an asset to you and your staff.
To be clear, claims without coverage issues will not be reviewed here. Such “straight handle” claims must be distinguished from those claims that may not trigger coverage under an insured’s policy, involve a later disclaimer of coverage, or warrant providing a gratuitous defense. Rather, there is a need to review the claims in which coverage either is owed for some but not all matters, or where coverage is either not owed at all or owed for everything depending on the facts that are determined.
Once the coverage issues are identified, a preliminary evaluation of the potential exposure should be explored to determine whether or not the coverage issue should be further evaluated or raised. Normally, a coverage issue is first raised by a claims professional and reviewed by a management team. The insurer then decides, based upon a cost/benefit analysis—including potential exposure of the underlying matter and the costs of raising and litigating the declaratory judgment action—the recommended course of action. However, an equally important factor is the real potential of losing the right to select counsel and to control the defense of the case when coverage issues are raised by an insurer.
Before evaluating the merits of a particular case, it is vital to understand what situations divest an insurer from controlling the defense. There are two independent but equally controlling areas that can cause the same result: 1) the duties that the insurer owes to its insured; and 2) the separate and distinct ethical obligations that defense counsel owes to its clients.
Thus, before substantive action can ensue, the law of a particular jurisdiction must be evaluated to determine whether the insurer has the right to select defense counsel and then whether defense counsel, despite the ability of the insurer to control the defense, has no conflict in his or her representation. From the perspective of the insurer, it may be beneficial to have defense counsel confirm, in writing, that neither the parties nor the then-known facts render the firm unable to accept the assignment.
A quick and dirty rule for an insurer to determine whether it has lost the right to control the defense is to query if there is a way to manipulate the defense of the underlying suit so that coverage will not apply. If the same can be accomplished, then the insurer will have to yield the right to select counsel and control the defense to the insured.
Does an insurer have a duty to advise the insured that, for a particular claim, the insured has the right to select counsel, with the insurer agreeing to pay the reasonable costs and expenses of the attorneys selected by the insured? One must look at the law of the relevant jurisdiction to answer that question. Additionally, please note that defense counsel may have a duty to advise the insured, even if the insurer does not.
Defense counsel is bound by ethical rules and, as such, they are almost always obligated to obtain the informed consent from a client whenever there is a conflict that courts have found can be waived. The failure to do so can result in disbarment.
Notwithstanding a lawyer’s obligation, once an insurer has decided to raise the coverage issue, then it must determine the necessary actions to prevail on such issue.
An insurer must verify the law that will apply to the coverage issue. Notably, said law, which may be from a state that is not where the underlying claim is being litigated, must be followed. Whether an insurer may proceed under a reservation of rights or must promptly disclaim on the coverage issue, while providing a defense for some or all other claims, controls how the insurer handles the claim.
Surprisingly, insurers may be able to reduce the risk of losing the right to select counsel, or at least modify the negative consequences of a loss. Decades ago, two federal courts upheld the validity of endorsements that addressed the selection of counsel when a conflict prevents the insurer from doing so in the normal course of business. In summary, the courts held that if there is a conflict, the insurer would give the insured a list of experienced defense firms with which it has no prior relationship. If those firms are not acceptable to the insured, then the insured provides a list of firms to the insurer. The promise to act reasonably in the selection process is stated.
To register for the CLM training course, “Reservations of Rights and the Insured’s Right to Personal Counsel,” go to TheCLM.org. It is offered at no cost to CLM members and fellows and provides adjuster CE credits, where applicable.
Questions about the course can be directed to Sydney Posner at email@example.com.