Beware of “Insurers Bearing Gifts”
Beware of “Insurers Bearing Gifts”
By David A. Gauntlett[*]
Introduction
Your insurers are not necessarily your friends. Their practical goal is to avoid paying money on any claim made by the insured. Despite the friendly, customer-first appearance they cultivate, many seemingly generous offers are often illusionary. A few common traps to be wary of are: (1) re-definition of policy terms which imbed limitations to coverage without expressly adding policy exclusions; (2) withholding of advice that an insured is entitled to independent counsel despite issuing a comprehensible reservation of rights that allows the insurer to change its mind about coverage as new facts come to light; and (3) reticence to truly pay defense fees or to advance payment of necessary sums to settle.[2]
Avoid Insurers Who Add Restrictive Exclusions by Re-definition
Insurers that provide coverage for a particular type of Loss but also explicitly exclude this Loss in the same policy renders it “illusory” coverage.[3] A policyholder left with no potential basis for coverage also arises where the policy language in one section contradicts revisions which appear to broadly extend coverage elsewhere, rendering coverage impossible.[4]
In Princeton, the insurer redefined “personal and advertising injury” coverage to include only offenses (a)-(c) of the full panoply of (a)-(g). As all “advertising injury” covered was set forth in (d)-(g), it effectively eliminated all “advertising injury” coverage by a sleight of hand redefinition endorsement without any contemporaneous notice to the policyholder that it had eliminated coverage for offenses (d)-(g). This endorsement modified “personal and advertising” coverage without any reduction in premium. The endorsement did not create ambiguity between differing perspectives or remove particular activities, it eviscerated all advertising injury it purports to cover.
As Princeton has explained, “insurance coverage is illusory when policy provisions, limitations or exclusions completely contradict the insuring provisions.” This heightened standard requires the policyholder to have no possible way of establishing coverage and receiving a return on their premium payments.[5] No reasonable policyholder would agree to pay premiums yet receive no coverage it paid for in return. “The doctrine applies when exclusions in effect allow the insurer to receive premiums when realistically it is not incurring any risk of liability.”[6]
Many Reservations of Rights Will Entitle the Insured to Independent Counsel
Insurers often fail to acknowledge the insured’s right to independent counsel where the reservation of rights creates a conflict of interest entitling a policyholder to select preferred counsel at the insurer’s expense.[7] That right arises whenever the attorney provided by the insurer could act in a manner preferring the insurer’s interest to that of the insured in making essential tactical decisions about the defense of a lawsuit.
For example, a policy might cover negligent acts but not intentional ones. The attorney’s decisions may favor the insurer over the insured as the insurer is its payor. The attorney is conflicted because the policyholder and insurer have different desires, so the attorney cannot ethically serve both parties.
Insurers Avoid Extending Authority to Settle
In many states, an insurer’s duty to defend includes where it is defending through independent counsel, an obligation to pursue meaningful opportunities to settle an underlying action which is potentially covered. Whereas questions of indemnity turn exclusively on what is (or is not) actually covered, these considerations can play no part in evaluating an insurer’s settlement obligation.[8]
The Johansen court explained that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as [1] the limits imposed by the policy, [2] a desire to reduce the amount of future settlements, or [3] a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.”[9]
Where insurance coverage disputes exist, policyholders should resist an insurer’s claim that the possibility of uncovered indemnity exposure requires a policyholder to contribute funds to any settlement negotiations. In California for instance, an insurer is liable for an excess judgment even if its denial of coverage is well reasoned and in good faith but simply wrong.[10] The insurer is obligated to pay whatever sums necessary to settle the case based on damage exposure subject to an appropriate calculation of the prospects for liability against the expense.[11]
Insurer Failures to Provide a Complete Defense Takes Many Forms
Failures to provide policy benefits due in the defense of a lawsuit can also be more subtle. For example, an insurer might delay payment of legal bills and eventually challenge them as unreasonable.[12] Or an insurer might fail to cover affirmative claims despite the obligation to do so when those claims are “strategically defensive” despite the fact that this duty reflects the majority legal position nationally.[13]
Conclusion
These are just a few examples of how insurers will try to take advantage of policyholders and avoid their duties. Knowing these potential pitfalls will allow you to insist on getting the coverage and defense to which you are entitled.
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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[2] See David A. Gauntlett, Duplicitous and Overbroad Insurer Constructions of Exclusions Improperly Deprive Policyholders of Coverage Benefits, https://www.gauntlettlaw.com/news/duplicitous-and-overbroad-insurer-constructions-of-exclusions-improperly-deprive-policyholders-of-coverage-benefits (July 22, 2021).
[3] Cherrington v. Erie Ins. Prop. & Cas. Co., 231 W. Va. 470, 490 (2013) (“To apply this exclusion to preclude coverage for the damages occasioned by the very same work that the policy expressly covers would render such coverage illusory and would be contrary to the policy's stated intention to provide indemnity for this specific loss.”);
[4] Princeton Express & Surplus Ins. Co. v. DM Ventures USA LLC, 209 F. Supp. 3d 1252, 1258 (S.D. Fla. 2016) (An endorsement containing a Field of Entertainment Exclusion excludes “advertising injury” from “personal and advertising injury” coverage.); see also David A. Gauntlett, Illusory Coverage – A Continuing Thorn in the Side of Policyholders, https://www.gauntlettlaw.com/news/illusory-coverage-a-continuing-thorn-in-the-side-of-policyholders (Oct. 7, 2021).
[5] Ellifson v. W. Bend Mut. Ins. Co., 312 Wis. 2d 664, 672 (Ct. App. 2008) (Coverage is not illusory when there are circumstances which the insurer will pay for, such as the conduct of a permissive user of the vehicle.)
[6] Taylor v. Sec. Nat’l Ins. Co., 2018 U.S. Dist. LEXIS 37863, *11 (D.S.C. Mar. 8, 2018) quoting Colorado Intergovernmental Risk Sharing v. Northfield Ins. Co., 207 P.3d 839, 843 (Colo. App. 2008).
[7] Limits on that reimbursement right may arise by statute. California Civil Code § 2860 measures the reasonableness of a particular rate by several factors, such as “the nature of the litigation, its difficulty, the amount involved, the skill required and the skill employed in handling litigation . . . [the attorney’s] experience in the particular type of work demanded . . . [, and] the intricacies and importance of litigation.” In re Marriage of Keech, 75 Cal. App. 4th 860, 870 (1999).
[8] Johansen v. California State Auto Ass’n, Inter-Ins. Bureau, 15 Cal. 3d 9, 16 (1975) (The insurer cannot consider coverage issues in evaluating the reasonableness of a settlement opportunity).
[9] Id.
[10] Id. at 15–16 (“An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured . . . .”)
[11] Miller v. Elite Ins. Co., 100 Cal. App. 3d 739, 756 (1980) (Summarizing an explanation of this duty by stating that “[t]he measure for determining whether the insured's interests were properly considered is whether a prudent insurer without policy limits would have accepted the settlement offer.”)
[12] Cunniff v. Westfield, Inc., 829 F. Supp. 55, 59 (E.D.N.Y. 1993) (“Maryland has been in possession of the pertinent legal bills for well over one year, and has failed to even assert a factual allegation which would suggest that the costs incurred were unreasonable in any respect. Accordingly, there is no basis for Maryland's request [for a hearing to determine the reasonableness of the legal fees incurred]”); see also David A. Gauntlett, Arbitrator Rules Delay in Paying Defense Fees Constitutes Bad Faith, https://www.gauntlettlaw.com/news/arbitrator-rules-delay-in-paying-defense-fees-constitutes-bad-faith (Mar. 24, 2022).
[13] Legion Partners Asset Management, LLC v. Underwriters at Lloyds of London, 2020 Del. Super. 2804 (Sept. 25, 2020) (Citing Hewlett-Packard Co. v. Ace Prop. & Cas. Ins. Co., 2006 U.S. LEXIS 109538, *27 (N.D. Cal. June 12, 2008)) (Embracing the same three-part test used in California to determine whether affirmative claims are “conducted against liability” and therefore defensive in nature).