Preserving the Delicate Balance

Countering plaintiffs' bar's attempts to fracture the tripartite relationship

April 16, 2024 Photo

In 1687, Isaac Newton published his seminal work, “Philosophiæ Naturalis Principia Mathematica,” which translates to “Mathematical Principles of Natural Philosophy.” There, Newton espoused his three laws of motion that, when applied in the legal context, can help preserve the delicate relationship between insurer, insured, and defense counsel to successfully resolve claims and limit excess exposure for all.

We all know the plaintiffs’ bar is well organized and coordinated—its members openly sharing information and strategies with one another. In recent years, post-pandemic, the result of such collaboration has been more frequent excess verdicts for the plaintiffs’ bar. In addition to leveraging polarization fueled by the post-pandemic world and social inflation, the plaintiffs’ bar attempts to divide and conquer the defense by destabilizing the tripartite relationship between the insured, the insurer, and defense counsel.

The Tripartite Relationship

The insured, the insurer, and defense counsel retained by the insured are in a delicate tripartite relationship that imposes on those parties numerous rights and responsibilities defined by the policy language and the laws of the jurisdiction. These can be seen as checks and balances.

  • The insured risks having an excess verdict entered against it if the case goes to trial. The insured may have rights to a defense and indemnity, but is responsible for timely notifying the insurer of the claim and cooperating with the insurer and defense counsel to try and resolve that claim.
  • The insurer has a right to be timely notified of a claim and to the cooperation of the insured, and has a duty to defend the insured and indemnify it for losses covered by the terms of the policy of insurance. Depending on the policy language, the insurer also may have a right to control the defense and resolve the claim within the policy limits. The insurer risks a claim against it by the insured if the insurer puts its interests above that of its insured.
  • Defense counsel has a right to obtain information necessary to defend the claim and owes an obligation to defend the insured and timely advise the insured and the insurer of the status of the claim or litigation. Defense counsel risks a malpractice claim filed by the insurer if it does not adequately defend the insured within the applicable standard of care. Defense counsel also risks losing the insurer as a client if the claim and defense are not handled adequately pursuant to the insurer’s defense guidelines.

In most cases, the parties work together toward the successful resolution or disposition of the claim against the insured with no adverse consequences to any party to that relationship, other than the insurer paying the claim and defense counsel. However, in certain cases, particularly those involving significant claims with or without clear catastrophic loss, the tripartite relationship may be an oversimplification. For example, one or more excess carriers may be added to the mix if the value of the claim or the demand exceeds the limits of the primary policy of liability insurance.

Like the primary carrier, the excess carrier has a right to cooperation from its insured. It also has a right to cooperation from the primary insurer and a right to be advised of potential excess exposure. These rights arise from the doctrine of equitable subrogation. The primary carrier owes the excess carrier a responsibility to fairly, and in good faith, resolve the claims within the primary limits when and where feasible.

Furthermore, it may be beneficial to consider the relationship between the defense and the claimant and their counsel. The opposing sides’ rights and responsibilities, vis-à-vis each other, are defined by the rules of civil procedure and professional conduct in their jurisdiction. Within and sometimes outside those rules, the plaintiffs’ bar developed and honed mechanisms seeking to disrupt that delicate balance of the tripartite relationship to obtain a strategic advantage over the defense. Defense counsel can apply Newton’s laws to prevent a strategic imbalance of power in favor of claimants.

Newton’s Laws in Practice

Newton’s first law of motion states that a body in motion, in a straight line at a constant speed (or at rest), will remain in that motion (or at rest) unless it is acted upon by a force. In the legal field, this principle may be applied as follows: A claim not presented remains at rest unless and until a demand is made. A claim denied remains denied unless and until an appeal is filed.

Newton’s second law of motion quantifies the changes a force can produce on the motion of a body, with momentum being equal to mass multiplied by its velocity. In law, a claim or suit is equal to the amount of the demand times the effort claimant’s counsel expends. Typically, claims with less momentum are more likely to be resolved pre-litigation through settlement, or simply expire on their own. Claims that do not resolve pre-litigation and those that justify pre-litigation investigation and analysis go to defense counsel, forming the tripartite relationship.

Newton’s third law of motion states that for every action there is an equal and opposite reaction. Applicable to claims, insurers and defense counsel must be aware of actions taken by claimants and their counsel so they can apply the equal and opposite, yet appropriate, reaction to restore balance to the relationship and allow the defense to bargain from a position of strength.

A claimant’s counsel often will serve the insured a policy limits demand as a matter of course in conjunction with, or shortly after, the letter of representation, and sometimes before the insurer discloses the limits of the applicable policy (or policies) of insurance (some states have laws requiring insurers to disclose the policy limits under certain circumstances). However, a policy limits demand can be sent at any time, including the eve of trial, and one sent early in the case, particularly prior to litigation, generally may demand something to the effect of a “tender of the limits of all available policies of insurance.” However, later in the case, counsel often will specify the limit of the available policies. [See Fed. R. Civ. P. 26(a)(1)(A)(iv) and corresponding state rules].

A similar tool used by the plaintiffs’ bar is the offer of judgment (see Fed. R. Civ. P. 68 and corresponding state court rules of civil procedure), which imposes a sanction, often requiring the other party to pay some or all of the offering party’s post-offer fees and costs if the other party does not exceed the amount of the offer at trial, or some percentage of the difference.

There are several schools of thought regarding the appropriate amount for an offer of judgment. Some claimants’ attorneys use it as a good-faith tool to try to settle for the amount the case is worth, often below the policy limits. But a claimant may instead serve an offer of judgment for the policy limits to disrupt the tripartite relationship in much the same way as a policy limits demand. Where the insured is covered by a tower of insurance, a savvy claimant’s counsel may indicate in the offer of judgment which policies they believe are implicated.

Acceptance of a claimant’s demand typically requires the insured to affirm it has no other insurance covering that loss. Policy limits demands can be economical for the claimant where coverage is limited; in small-policy cases, this prevents claimant’s counsel from working up the case and incurring substantial fees and costs.

However, in larger cases, claimant’s counsel knows a policy limits demand triggers obligations and communications between insurer and insured, and that if either of them fails to react accordingly, a rift may develop, tipping the balance in favor of the claimant.

Because the insurer owes its insured a duty of indemnification only up to the limits of the policy of insurance, the claimant’s demand of offer is an opportunity for the insurer to resolve the claim and avoid the risk and uncertainty of litigation and trial, including a potential excess verdict judgment entered against the insured. Equal and opposite reactions to an excess judgment can be problematic for the insured and may result in recorded judgments, foreclosure, garnishment, and bankruptcy. An insured’s equal and opposite reaction to an excess judgment may be filing suit against the insurer for unfair claim practices.

Claimants’ counsel serve policy limits demands because they hope an excess verdict can expose the insurer to claims by its insured for unfair claims practices, breach of contract, and bad faith if the insured can establish the insurer put its own interests ahead of the insured’s. Depending on the case, an insurer may try to protect itself by sending the insured an “excess verdict letter” advising the insured of its right to retain separate counsel at its own expense. Separate counsel, and sometimes defense counsel retained by the insurer, can react by sending the insurer a demand to settle letter. The insurer may respond by accepting the claimant’s policy limits demand, thereby resolving the claim and obviating any further exposure to any members of the tripartite relationship.

Conversely, under certain, rare circumstances, such as the desire to defend against a particularly frivolous claim or make new law, the insurer may send the insured an “agree to indemnify in excess” letter that protects the insured from the hardship of an excess judgment, protects the insurer from a potential bad faith claim, makes it easier for a claimant to collect on any excess judgment, and gives defense counsel peace of mind that the insurer is aware of the risks and uncertainty of taking that particular case to trial despite their zealous and meaningful defense.

If these steps are not taken and the case does not resolve, claimant’s counsel may follow up with a hammer letter to defense counsel, which not only demands settlement for policy limits, but also threatens a Damron or Morris agreement to avoid trial and the inconvenience and potential futility of trying to enforce the judgment against the insured. Depending on the circumstances, the excess carrier(s) may join this effort to encourage the primary carrier to resolve a claim by sending a hammer letter of their own to convince the primary carrier to resolve the case within the policy limits.

Such an attack challenges all three parts of the tripartite relationship.

  • In a Damron agreement, the claimant obtains a judgment against the insured by trial or stipulation and exchanges a covenant not to execute that judgment against the insured for a “chose in action,” i.e., the claimant’s right to pursue a claim against the insurer on behalf of the insured.
  • In a Morris agreement, the insurer is defending under a reservation of rights. The insured stipulates to a judgment, assigns their rights against the insurer to the claimant, and receives in return a covenant from the claimant not to execute against the insured.

If the case is realistically valued below policy limits, defense counsel can try to protect both the insured and insurer by sending claimant’s counsel a comprehensive response to policy limits demand detailing the law, facts and defenses belying claimant’s claims, and including a counteroffer.

Likewise, if a claim in litigation is evaluated to lack merit, defense counsel may consider filing a dispositive motion within the time prescribed by that court’s rules of civil procedure. While a victory may dispose of the case or allow reasonable settlement during or under threat of appeal, denial may limit or direct further discovery and serve as a talking point in further settlement discussions with claimant’s counsel or encourage the insurer to reconsider its position. The mere pendency of an effectively dispositive motion may create the uncertainty necessary to drive a successful settlement.

Otherwise, if the case has potential settlement value at or above policy limits, defense counsel should react by sending a hammer letter of its own to the insurer. This is a comprehensive, detailed analysis of law and fact supporting the valuation that accepting the policy limits demand is appropriate and in the insured’s best interest.

If the insurer agrees and resolves the claim, the tripartite relationship is preserved with no adverse claims asserted. If the insurer disagrees and the case goes to trial resulting in the dreaded excess judgment, defense counsel has done its due diligence and may be protected against a malpractice claim by the insured. Further, that detailed analysis may serve as a basis for the insurer to agree to pay the excess judgment, protecting both the insurer and the insured from further exposure. Of course, early analysis and frequent reporting should result in an amicable resolution prior to trial.

While artfully crafted writings by claimant’s counsel may be effective at disrupting the delicate tripartite relationship between insured, insurer, and defense counsel, the defense has equal and opposite tools to maintain the balance of power with claimant’s side while protecting the interests of the insurer and insured as well its own.

About The Authors
Multiple Contributors
Karen L. Bashor

Karen Bashor is partner at Wilson Elser.

Colt B. Dodrill

Colt B. Dodrill is of counsel at Wilson Elser.

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