Much of the law surrounding extra-contractual or bad-faith liability for insurance carriers centers on whether the insurer has properly discharged its duties to its insured early in a claim, such as by agreeing to defend the insured in a newly filed lawsuit.
A scenario that plays out much less frequently, however, is when the carrier is defending the insured, a trial date is approaching, and the remaining claims against the insured in the liability action include some that would be covered under the operative policy, and some that would not. When the carrier communicates to the insured that some portion of a potential adverse verdict may not be covered, the insured may respond with surprise, hostility, or even threats of a bad-faith claim against the carrier.
Through early identification and regular communication, claims professionals may be able to minimize the risk or severity of this kind of confrontation.
Identification Early and Often
One way to prepare for, and hopefully avoid, the above scenario is to identify—early in the claim’s life—allegations or causes of action that could result in a verdict with both covered and non-covered damages. When examining a new complaint for purposes of determining whether to defend and issue a reservation of rights, it may be helpful to identify causes of action that would not be covered should they survive through trial alongside covered claims. Complaints falling into this category may allege intentional conduct (for which most policies typically preclude coverage), as well as potentially covered negligence, either separate from or arising out of the same conduct giving rise to the claim of intentional harm. The recent Depp v. Heard case is one high-profile example of this situation: lawsuits alleging defamation often plead both intentional and negligent conduct on the part of the alleged tortfeasor.
As the claim progresses, discovery responses and motions should be scrutinized to determine if any claims have been added or dismissed. Covered claims and non-covered claims may be whittled down through motion practice. Closer to trial, motions in limine and resulting court orders may also provide a wealth of information to assist in figuring out what covered and non-covered claims will be presented to the factfinder. For example, even if a complaint alleges intentional conduct, and those allegations have not been dismissed via motion practice, one of the parties may still request that the court withhold evidence of such intentional conduct from the jury. If the court grants the motion, the absence of this evidence may affect an eventual verdict.
Keep Communication Clear
Communicating regularly with the insured regarding the above developments can help guard against any accusation that the insurer has failed to communicate that a verdict may include covered and non-covered damages. To the extent information is available at the time, the claims professional should spell out whether potential non-covered claims exist in early communications like the initial reservation of rights. As the claim progresses, the reservation of rights letter should then be updated to the extent potentially non-covered claims are identified in discovery and dispositive motion practice (or to the extent either covered or non-covered claims are dismissed through settlement or motion practice).
These events may not always be predictable from a timing standpoint. For example, it may be difficult to diary deadlines for updates to the reservation of rights letter. However, providing updates within a reasonable time after significant developments is a good target to aim for. In each letter, it is also helpful to include language reminding the insured that, while the carrier is defending the entire claim (and not just covered claims), there may come a time when any potential verdict must be apportioned between covered and non-covered claims.
Additionally, once potential non-covered allegations are identified (or covered claims are dismissed), making a note in the file may go a long way in communicating this potential issue and helping a future claims professional if the claim is transferred. This kind of note may serve as evidence in a future coverage action and could even counter an allegation that the non-covered claim was only identified on the eve of trial.
Know Your Obligations
When a potential verdict between covered and non-covered damages is an issue, it is important to learn the relevant responsibilities of the insurer and insured and plan accordingly. Early in the claim, it is important to recognize the carrier’s obligations, if any, to appoint independent counsel to defend the insured. These obligations vary by state.
Closer to trial, different states may also have different requirements relative to which party has the obligation to demonstrate what damages are covered. After the seminal case of Duke v. Hoch, 468 F.2d 973, 976 (5th Cir. 1972), which introduced the idea of informing the insured of the parties’ relative obligations, several states have found that the insurer’s duty is limited to notifying the insured of the possibility that a general verdict may include non-covered damages, and that the insured has the burden to ensure that any such verdict is properly allocated between covered and non-covered damages.
In at least some states, if the insurer is controlling the defense of its insured, it is up to the insurer to advocate for a special verdict or jury interrogatories at trial allocating covered and non-covered claims. Some states allow for an insurer to intervene in an underlying liability case for the purpose of submitting special interrogatories to a jury or clarifying coverage issues, but this varies by jurisdiction and is often fact-specific. A parallel declaratory judgment action may be appropriate to help clarify the issues.
By engaging with the possibility of a verdict with covered and non-covered claims early in the life of a lawsuit, claims personnel may be able to avoid the train wreck of issues that can occur at the time of trial when coverage issues are not clearly understood or communicated to the insured during the course of the case. Most importantly, claims professionals should stay informed of significant events in the lawsuit and communicate the potential ramifications of those events to the insured regularly. These steps may help stave off an extra-contractual claim against the insurer at the already stressful time when the case is approaching trial.