When litigating insurance coverage issues, insurers are at risk of winning a battle, but losing a war. That is, an insurer can prevail in a seemingly insular coverage dispute, but the outcome of that litigation can have far-reaching, unintended consequences for a carrier’s portfolio and the insurance industry at large.
Potential global impacts are readily apparent when litigating new-to-market policy forms or emerging coverage issues such as COVID-19 and climate change. However, the concerns can be far less obvious, but equally as potent, when litigating a mundane coverage dispute.
Regardless of a coverage dispute’s newsworthiness, counsel and claims professionals must be sensitive to how the position raised in a given lawsuit can affect far more than that individual litigation. Coverage attorneys and claims professionals can, and should, take steps throughout the life of a claim to predict and guard against carrier-wide and industry-wide ramifications.
It is vital for attorneys and claims professionals to develop a general strategy and direction as soon as a coverage dispute arises. Typically, this involves developing merit-based arguments unique to the facts of each individual claim. In doing so, counsel and the claims professional will examine whether the policy form is standard or manuscript; whether the issue has already been litigated, and in what jurisdiction; whether distinctions exist between the instant case and precedent; and whether there are “bad facts” that could cause an unfavorable outcome.
While a fact-specific analysis is an essential strategic tool for assessing a coverage dispute, attorneys and claims professionals can develop an infinitely more effective position when they approach the analysis more holistically and account for concerns beyond the factual confines of the claim itself. A truly powerful coverage dispute strategy must involve thoughtful consideration of a carrier’s portfolio risk, as well as industry-wide implications. For example, will prevailing in this particular coverage dispute better position the insurer against similar future losses? How will this insurance product be impacted by an adverse determination? What is the likelihood that litigating this particular dispute will open the insurer to intrusive discovery on issues such as drafting history or communications with regulatory bodies?
Attorneys and claims professionals must also pay heed to whether their strategy is consistent with the carrier’s arguments in prior litigation of the same coverage question. Contradicting a carrier’s prior position makes the instant argument less credible. More importantly, a carrier may be estopped from raising a position inconsistent with its prior legal arguments. Similarly, counsel and claims professionals also must be aware of whether a particular coverage question is currently being litigated and, to the extent appropriate, a similar approach to the coverage question should be employed. Failure to ensure consistency creates the risk of disparate results across jurisdictions. This can engender forum-shopping for coverage disputes, which carriers generally seek to avoid.
To the extent that the insurer wishes to contest coverage, attorneys and claims professionals must consider whether it is worth doing so. Certain low-value claims, especially those involving unsettled coverage issues, could be ripe for a reasonable compromise. Even large value claims may be good candidates for resolution without judicial intervention. Bear in mind that policyholders and their counsel will also consider whether the claim rests on settled law, whether the case has the potential to create precedent, and how much it will cost to get there.
Attorneys must also give thought to client conflicts, particularly on a portfolio level. For instance, is one carrier client asking your law firm to raise an argument that is inconsistent with arguments raised by another carrier client, or arguments detrimental to another client’s portfolio? Counsel must be mindful of these considerations when accepting the assignment and charting a strategy.
Coverage Litigation Considerations
If, after assessing the fact-specific and policy-specific arguments, counsel and the claims professional agree that the dispute should be litigated, they must decide on the forum. Sometimes, the insurance policy will require arbitration. Other times, it will require the litigation in a particular venue. When the policy is silent on forum, the carrier has the opportunity to limit or expand a coverage dispute’s reach. For instance, a case filed in federal court on diversity of citizenship will require a federal court to implement state law, or to predict it when there is none on point. A decision from a federal district court, as well as a circuit court of appeals, while persuasive, will not be binding. Conversely, a case decided by a state appellate court typically would have binding effect.
Beyond the precedential value of a particular decision, counsel and the claims professional should consider whether the particular venue will permit them to execute on their strategy. If the strategy involves a pre-discovery dispositive motion, consider whether the venue will allow it as of right or whether permission is required. If the strategy includes targeted documentary discovery or phased litigation, consider whether the venue is likely to accept that course of action. Even the best laid plans can go awry if these details are overlooked.
Once litigation commences, counsel and the adjuster should execute on their strategy, but not blindly. They must remain cognizant of the uncertainties of litigation. If discovery does not go as planned, and there are now “bad facts” that could implicate a portfolio risk, it may be time to reset the approach.
Although there are several moments in a litigation where an insurer must consider the impact of a coverage dispute on its portfolio, few are more important than deciding whether to appeal. When a trial court issues a carrier-adverse determination, an instinctual response may be to begin the appellate process. Sometimes an appeal is warranted. Other times, a carrier may need to cut its losses in order to limit the scope and reach of the adverse decision. In fact, even when a carrier prevails at the trial court level, attention should be given to the risk of an appellate reversal.
The strategy employed in a coverage dispute should support the desired result and exit plan. A fact-based and merit-based approach can be effective on its own, but attorneys and claims professionals must be mindful of the macro risks to the carrier and industry, and devise a strategy that contemplates those risks.