• Home
• People
• Practice Focus
• Our Firm
• Join Us
• Events
• Publications
• Contact Us

When a statement of claim is served on your company seeking large sums of money as damages, your first response might be to consult legal counsel about defending the lawsuit. Quite often the company spends considerable amounts of money on legal fees without inquiring if the claim is covered by insurance.

Many businesses and professionals have liability insurance that may cover some or all of the defense costs, and even provide indemnity in respect of a judgment against the company. Before incurring legal expense, it would be prudent to first review the available insurance policies to determine what insurance coverage may apply to the litigation.

Generally, liability insurance policies cover claims for damages arising from negligent acts or omissions. The type of damages usually determines the type of insurance that applies. Claims for bodily injury or property damage are generally covered under a Comprehensive General Liability (CGL) policy, automobile policy and homeowners policy. CGL policies also contain “personal injury liability” coverage for malicious prosecution, trespass to property, libel and slander, and invasion of privacy.

Claims for certain economic losses that do not arise from bodily injury, personal injury or property damage may be covered under Directors and Officers liability insurance (D&O). For example, many D&O policies include “employment practices liability” such as wrongful dismissal claims.

Claims that are made in connection with professional services (lawyers, accountants, engineers and health professionals) are generally not covered by CGL or D&O, but by professional liability (errors and omissions) insurance.

Note however that with the sole exception of automobile policies, each liability policy is different and one must review the wording of the specific policy before deciding what is covered.

Liability insurance does not cover claims for breach of contract unless liability may be found in the absence of a contract, such as negligence. It does not insure, for example, claims for unpaid goods and services, warranty claims or claims for specific performance requiring a party to comply with the terms of an agreement.

Once a company has identified its available insurance policies, the claim must be immediately reported to the insurance broker or directly to the claims department of the insurer. A broker may be useful in explaining your rights and obligations under the policy, and can even assist in communicating with the insurance company to verify or settle any issues. Failure to report the claim promptly could result in forfeiture of coverage if the insurer’s ability to investigate and/or defend the claim is prejudiced by the delay.

Once the claim has been submitted to the insurance company, they have an obligation to investigate and to inform you of any coverage issues. It is common for an insurer to have its insured sign a non-waiver agreement or to send a reservation of rights letter while it is investigating the claim. This simply allows the insurer to continue its investigation, hire legal counsel and enter into settlement negotiations with the claimant, and still preserve its rights under the policy to raise coverage issues and even deny coverage at a later time. Insurers have an obligation to act in good faith, and to conduct itself in a way that will not prejudice the rights of the insured in the litigation. The insured has a duty to cooperate with the insurer. The insured is entitled to know the insurer’s coverage position promptly so that the company can take steps to protect its interests and hire its own counsel in the event that there is a coverage issue.

If the claim is covered, most liability policies will require the insurer to defend the claim. This is referred to as the "duty to defend", which is triggered when the substance of the allegations in the claim falls within the coverage terms. The duty to defend does not depend on the merits of the case. The insurer must appoint defence counsel to represent the company. While the insurer will pay the lawyers' fees and usually has an ongoing business relationship with its defence counsel, the solicitor-client relationship is between the defence lawyer and the company. The lawyer has to represent the insured’s interests in the litigation. In most cases the company's interests are the same as those of the insurer. However there are instances where potential conflicts arise between the insured and insurer which result in the need for independent counsel.

Conflicts normally arise where:

1. The insurer denies coverage for part of the claim;
2. The insurer reserves its rights to deny all or part of the claim depending upon certain conditions arising in the litigation;
3. There are insufficient insurance limits to cover a potential judgment against the company

In these cases, the insurer must advise the insured to retain its own counsel to protect its interests at the company’s own cost. It is recommended that the company retain counsel who practices in insurance law. This counsel will step in whenever the company faces potential liability for which there is no or inadequate insurance. Quite often the insurer also engages its own coverage counsel who is different from the defence counsel representing the insured.

The role of the insured's independent counsel includes taking a coverage position on behalf of the insured to maximize the insured's rights. Where coverage is in dispute, either the insurer or the insured may ask a court to determine to what extent the insurance covers the claim. If the insured is successful against its insurer, courts generally award complete indemnification for the insured's legal costs because of the nature of the insurance contract.

Another role of independent counsel is to monitor settlement discussions in situations where the policy limit is not sufficient to cover the potential exposure. Suppose the company is insured for $1 million, and is sued for $2 million in damages. Generally, it would be in the company’s interest to have the insurer settle the claim within the $1 million limit in order to avoid being exposed to a judgment that exceeds its policy limits. Insurers have a good faith obligation to settle the claim within policy limits, and failure to do so could result in the insurer paying the entire judgment even in excess of the limit.

A less common type of liability policy does not require the insurer to defend its insured, but requires the insurer to advance defence costs. This is more typical of D&O liability insurance wherein the company retains its own counsel and is reimbursed by the insurer for the defence costs. In this situation, the insured's own counsel can also deal with coverage issues and good faith obligations without the need for independent counsel, since he/she was indirectly retained by the insured.

What if the insurer denies coverage outright? The company will receive a denial letter from the insurer explaining its position and the grounds for the denial. It is advisable to have the insurer's denial letter reviewed by a lawyer who has specialized knowledge in insurance contracts. In many cases, the denial is based on policy wordings that are technical or ambiguous. While a court will give a policy its plain and ordinary meaning, a court will interpret it strictly against the insurer if the words are in fact ambiguous. Courts have developed a large body of cases that interpret the meaning of terms used in liability policies.

Independent counsel may negotiate with the insurer for the best possible coverage position, or ask a court to determine the rights and obligations of parties. Once an insurer has denied coverage, if its denial turns out to be wrong and is ordered by the court to defend the claim, it may lose its right to choose defence counsel, and must pay for the insured's counsel of choice.

In conclusion, insurance contracts are technical documents, which have to be interpreted according to rules set out by courts, and have been given special meanings. They create special relationships of good faith and fair dealing between the parties. Defence counsel appointed by the insurer has to act in the insured’s interest, but can only do so if he is not in a position of conflict. The role of independent counsel is not only to assert the coverage rights of the insured, but also to position the insured’s interests within the insurer’s duty of good faith and fair dealing.

Ramon Andal
Insurance Lawyer
Tel: 905.276.0415
Email: randal@kmblaw.com

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.