Whether you own a home, engage in a business or exercise a profession, it is possibile that a lawsuit will be filed against you. To guard against this eventuality, you purchase a homeowner's insurance, or a business or professional liability policy. You pay good premiums in the hope that if it happens, you are protected from the high costs and serious consequences of a civil case.
You may choose to forego insurance coverage and simply hire an attorney to defend you against any actual lawsuit. The attorney will undertake the necessary task of protecting your personal assets from being seized should the other side win. But this can ultimately be very expensive. By buying insurance, you hope to protect your personal assets, limit your liability, and have in place a system that will defend you should you need it. Hence, the primary purpose of insurance is to give you peace of mind. However, a client of mine once asked: “When the big tsunami of a lawsuit hits, will the insurance company be there on my side?”
Sometimes, it will be. But sometimes, not.
Part of the insurer's duty is to defend its insured in any lawsuit. This means that the insurer must obtain and pay for an attorney to represent its insured in the lawsuit. The insurance attorney must attempt to settle the claim against the insured and, thus, limit the insured's exposure. The insurer has a duty to defend its insured as long as there is any potential coverage for the loss under the policy, even if there is only partial coverage. The insurer has a duty to defend its insured even if the case against the insured is completely false.
However, the insurer may defend its insured under a “reservation of rights.” This means that the insurer is not necessarily agreeing that all claims against its insured are covered under the policy. The insurer may argue that it is not responsible for defending against the insured's intentional acts or such other acts that are excluded under the policy. Hence, the insured may have to pay for some of the costs of defending the lawsuit.
While defending its insured in the lawsuit, the insurer may take a position that is adverse to its insured's interests. For example, a slip and fall accident at a home may have resulted in injuries valued at $250,000. The insurance coverage may only be for $100,000. This means the value of the claim is more than the limits of the insurance policy. A good faith insurer will pay the limits (i.e., all of the $100,000) in an effort to protect its insured against personal liability. However, there are times when an insurer will resist paying the full insurance limits. When this happens, the insured is exposed to the risk of personal liability. If a judgment at trial is obtained for the full value, the homeowner will have to personally pay the remaining $150,000.
The above situation can be avoided if the insured has a personal attorney independent of the insurance company. This attorney should be knowledgeable about the intricacies of insurance and civil litigation. Such an attorney can be very vital in cases where enormous amounts of damages are at stake.
Business owners who bought liability insurance will also need to watch out for so- called “diminishing policy limits” or “burning limits.” This occurs when the cost of paying the attorneys hired by the insurer to defend the insured reduces the coverage limits available to pay the claim.
A health care facility that provides care to developmentally disabled minors was sued because its employee allegedly sexually abused two minors in its care. The minors demanded the insurance policy limits of one million dollars. The insurer refused. The litigation dragged on for years but the facility owner was not advised that the huge expense of paying the insurance attorneys had reduced in half the one million dollar policy limits available to pay the claims. The value of the minors' claim would be more than $10M if the minors prove their case in trial. A judgment for this amount will drive the client totally out of business. Unfortunately, the insurance company did not care if this would happen, saying it is only minimally responsible for paying the claims against the facility.
The facility owner retained our firm to get the insurance company to pay and settle the case. When we were hired, trial was about to begin. We had to immediately request the trial judge to bring this matter before a settlement judge who was knowledgeable with sex abuse and insurance cases. Even with the limited time, we were able to thoroughly investigate and evaluate the insurer's unfair handling of our client's defense. We informed the insurer that if it did not settle the sex abuse case, our firm will aggressively prosecute an insurance bad faith case against it.
Because the facts and law were on our side, the insurer finally agreed to pay the claims in excess of the policy limits. The client was saved from the “tsunami of lawsuit” that would have surely washed away the family's livelihood. More importantly, our law firm was able to deliver the protection and peace of mind that insurance should have provided in the first place.
Dealing with insurance companies can be tricky. When faced with a lawsuit, homeowners, business proprietors, and professionals should take the extra step of seeking knowledgeable and independent legal help. That extra layer of protection may come in handy when insurers break their promises