Insurance companies are not in the business of defending your company and paying claims. They are in the business of collecting premiums and avoiding paying the claims and the costs of defense. Forget the commercials touting the insurer being on your side. The insurance contract (the policy) and insurance laws form the basis of your relationship with your insurer.
I’m not being overly critical of insurers, but they are in business to make a buck, not to look out for you. Insurers have, literally, hordes of in-house and outside lawyers. The deck may seemed stacked against you, because it is. But some knowledge and the assistance of a qualified attorney can even the playing field (to mix the metaphors some more, you can put the shoe on the other foot).
Understand that you are required to promptly put your insurer on notice of any claim or potential claim. Failure to report a claim can give the insurer an argument that it has been prejudiced and thus can disclaim coverage. You also generally must to cooperate in the defense of the claim.
It’s great if your insurer assumes coverage of a claim. You likely won’t need to worry as much about the claim, other than assisting in the claim, so long as the coverage is adequate. The insurer will assign one of its panel attorneys from a local firm to represent your company in the suit. You will likely not get to choose the attorney. The insurer will pay any settlement it negotiates, or any judgment within the policy limits. Keep in mind that the costs of defense may diminish the policy.
However, the insurer could deny coverage altogether, and assert that it has neither the duty to defend, nor the duty to indemnify. In that scenario, you must promptly defend the case yourself with your own attorney before you the court defaults you. But don’t give up too easily. Insurers often deny coverage. A call or letter from your attorney familiar with insurance coverage issues may get the insurer to reverse its decision. It’s easy for the insurer to deny your claim if they have at least a colorable argument.
If you don’t challenge it, the insurer has saved tons of money, so it is in the insurer’s interest to deny claims when arguable. You can also file a Declaratory Judgment lawsuit to ask a Massachusetts Court to rule that the insurer has an obligation to defend and/or indemnify you. If you win that case, the insurer could be on the hook for your legal fees, as well as paying its own lawyer, and the lawyer who defended the original claim. It is a risky proposition for the insurer. Given that exclusions are strictly construed against the insurer, you may have a fair argument on coverage.
The insurer could also agree to initially cover you under a “reservation of rights.” This means that the insurer believes it might not have to defend and/or indemnify you, or that it acknowledges the obligation to defend only (the duty to defend is broader than the duty to indemnify). But it is covering the costs of defense until it can work through the coverage questions. The insurer may even file its own Declaratory Judgment action to have a court declare that it has no coverage obligations.
The reservation of rights does not come without consequences for the insurer. In Massachusetts, you will usually have the right to choose your own attorney, at the insurer’s expense. Some insurers are sneaky and will not inform you of your right to choose your own attorney. They will try to steer you toward their panel counsel, with whom they work on hundreds of other cases. Although the attorney will represent your business, will he be loyal to you, his one-time client? Maybe, but are you better off with a lawyer you choose who does not have an economic relationship with the insurer? You should at least consult with your own lawyer to make sure your company’s best interests are being represented.
As always, the above is meant for general information, and is not legal advice.
By Adam P. Whitney
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