Ten Recurring Questions on How to Use Policyholder Counsel
Ten Recurring Questions on How to Use Policyholder Counsel
By David A. Gauntlett[*]
PROBLEM 1.
Who is going to pay your bill if we use you to assist us?
ANSWER: Our firm’s blended hourly rate experience is $350–$400 for the pursuit of insurance coverage issues. We have, on multiple occasions, secured recovery of the lion’s share of our insurance coverage fees where the insurer’s denial of coverage evidences unreasonable conduct.[2]
There’s no fee for our preliminary review. A subsequent initial retainer is typically the amount required for an opening communication with the insured, which will inevitably vary based on the unique circumstances of each client.
PROBLEM 2.
I did not seek any coverage for intellectual property claims in my Commercial General Liability (“CGL”) policy. How can you obtain defense and settlement fee reimbursement for these claims under a CGL policy?
ANSWER: We identify pertinent fact allegations in the complaint, supplemented by extrinsic evidence in those forums which permit its use, that fall within coverage.
Your company’s present insurance policies may not provide coverage for the majority of intellectual property claims your business is likely to encounter. There may be other insurance policies available at comparable or perhaps better cost points that would address these concerns, such as those that cover Media Liability.[3]
Moreover, trade dress claims based on factual allegations in the complaint may be an avenue to coverage, even though not labeled, because trade dress infringement is covered despite trademark infringement claims being explicitly excluded.[4]
PROBLEM 3.
The insurer agreed to defend under a reservation of rights (“ROR”), but will not acknowledge the company’s right to retain “independent counsel.” What can we do?
ANSWER: We focus on persuading insurers why the right to “independent counsel” may arise.
Applicable law will make this challenging, requiring significant transaction costs as the client is not supposed to pay at this point. An insurer’s agreement to defend orally communicated to the insured does not mean that the insured’s needs are fully addressed, nor is it true they have no further need for our services.
An insured needs to clarify whether the “appointed counsel,” if such is to serve, are truly competent to handle cases of this character. If an insurer agrees “independent counsel” is permitted, we demand verification that the rates they are willing to pay are appropriate rates in light of the carrier’s true obligations in the applicable jurisdiction. Outside California, a reasonableness standard applies. Where the “independent counsel” rights are strong in forums such as New York, a preemptory declaratory relief action is appropriate in order to secure the best reimbursement opportunities.
PROBLEM 4.
I do not want to sue my insurance company.
ANSWER: Asserting your rights in a response letter can preserve your options if the facts develop in the lawsuit that cause an insurer to re-evaluate its denial of a defense.
The company does not need to litigate against your insurer until after the underlying action is resolved. We communicate with your insurer explaining why it owes a defense by bringing new facts and claims to its attention. In many forums, waiting to sue an insurer until after the underlying action concludes makes good economic sense.[5]
PROBLEM 5.
We have agreed to allow appointed counsel to handle the case because we want to minimize our expense. Why would your services be necessary?
ANSWER: Settlement funding may raise conflicts of interest that require our involvement.
“Appointed counsel,” also known as “panel counsel,” has different interests than “independent counsel.” They routinely receive referrals of new business from the insurers they work with and as a consequence charge those insurers lower rates to do defense work, including the defense of intellectual property lawsuits. Problems arise when the issues requiring resolution address business disputes between the parties. An insurer’s payment of a settlement in lieu of damages for past infringement does not address exposure for ongoing conduct by an insured that could create liability even after product redesign. Policyholders should resist insurer demands that they cease making products in a particular manner that the plaintiffs cannot demonstrate is infringing. These kinds of disputes may give rise to “independent counsel” rights.[6]
PROBLEM 6.
Although we don’t have any specific indemnity rights against third parties, we are in business relationships with our co-defendants. How should we address insurance coverage issues?
ANSWER: Agreements to defend can be sorely tested by mounting defense fees and settlement with or without insurer funding.
Many CGL policies require that a policyholder defend the party its indemnifying with the same lawyers defending its own action in order to obtain policy benefits. [7] The failure to do that may mean that the party indemnifying its own selected counsel can charge back their fees, often at higher rates and secured through larger firms representing corporate entities indemnified by an insured. The coordination that singular counsel bring to the enterprise is typically preferable and in cases we address we typically want the same counsel to represent both entities with any conflict issues addressed by waiver of conflict forms.
PROBLEM 7.
If the coverage is so evident that the carrier will agree to defend and provide “independent counsel,” why do I need you?
ANSWER: Insurers routinely ignore the right to a defense and fail to provide “independent counsel” that they owe their insureds even thought their ROR creates conflicts that require their retention.
Insurers must recognize an insured’s right to retain “independent counsel” where “appointed counsel” has the ability to prefer the insurer’s interests to those of the insured.[8] While certain jurisdictions like New York offer better pathways to that end, there is always resistance by insurers to both the retention of independent counsel and the rates they are entitled to recover. These transaction costs are ones that necessarily are to be incurred in order to secure the defense benefits that you are entitled to.
PROBLEM 8.
I’ll just wait for my insurance company to make a decision. If they deny coverage, then I’ll call you.
ANSWER: Help them say “yes” before they become wedded to a premature “no.”
I understand your desire to “wait and see.” Once an insurer issues a denial letter to you, it’s difficult to get them to admit they were wrong and agree that coverage exists. The process is then much longer, and you’re incurring defense fees along the way. The most effective and efficient process is for us to get involved immediately upon giving notice to the insurer of the lawsuit, explaining why they owe you a defense, while they are positioning themselves and before they issue the denial letter.
PROBLEM 9.
I did not receive policy benefits for an earlier case.
ANSWER: We analyze policies for potentially covered claims (“buried treasure”), where notice was provided (actual or constructive).
It may not be too late to look back at recovering all defense fees if the insurer declined a defense late in the case, especially in forums like New York and Washington.[9]
PROBLEM 10.
I need assistance with settlement and want my insurer to pay it.
ANSWER: We can take a look at all applicable policies and give notice to the insurer.
Where significant defense fees and monies paid in settlement arise in a lawsuit where the insurer denied a defense, we want to pay if prejudgment interest is recoverable. It accrues at 10% per annum from the date of each defense fee invoice under California law during the pendency of the underlying action. The 4-year statute of limitations is followed where an insurer denied a defense, so you must make a timely pursuit of the claim for it to be viable.
If you enjoy this content, you can find my full list of blogs here: https://docs.google.com/document/d/1N3YsMmn0Ii1GqHWSBEE1pPzh1jQbU6htkJZ2e55Y2eM/edit?usp=sharing
[*] 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, Arbitrator Rules Delay in Pending Defense Fees Constitutes Bad Faith, https://www.gauntlettlaw.com/news/arbitrator-rules-delay-in-paying-defense-fees-constitutes-bad-faith (Mar. 24, 2022).
[3] See David A. Gauntlett, Finding Appropriate Media Policy Coverage, https://www.gauntlettlaw.com/news/finding-appropriate-media-policy-coverage (Oct. 22, 2021).
[4] See David A. Gauntlett, Searching for a Unicorn: Unearthing Buried Trade Dress Claims, https://www.gauntlettlaw.com/news/searching-for-a-unicorn-unearthing-buried-trade-dress-claims (June 23, 2022).
[5] Browne George Ross LLP v. Lexington Ins. Co., No. CV 12-2148 SVW (PLA), 2012 U.S. Dist. LEXIS 199489, *5 (C.D. Cal. May 29, 2012) (“‘Relatedly, [defendant] contends that if [plaintiff]'s damages are not limited by § 2860, then [plaintiff] will be allowed a double recovery and will be placed in a position better than it would have been in the absence of any breach by [defendant]. . . . However, as discussed above, [defendant]'s argument is premised upon what would have happened if it had defended [plaintiff] subject to a reservation of rights.’” (Quoting Atmel Corp. v. St. Paul Fire & Marine, 426 F. Supp. 2d 1039, 1047–48 (N.D. Cal. 2005)) (alterations in original).
[6] See David A. Gauntlett, Disputes Over Control of Counsel Between Policyholders and Insurers, https://www.gauntlettlaw.com/news/disputes-over-control-of-counsel-between-policyholders-and-insurers (May 12, 2022).
[7] CGS Indus. v. Charter Oak Fire Ins. Co., 777 F. Supp. 2d 454, 464 (E.D.N.Y. 2011) (“Because the insurance agreement does not explicitly include coverage for defense costs as either consequential or incidental damages arising out of the insured's breach of warranty, the presumption of the American rule stands. Those damages of Wal-Mart for its legal fees in the underlying litigation are not covered by the insurance agreement.”)
[8] See David A. Gauntlett, When Does Appointed Counsel Not Discharge an Insurer’s Duty to Defend?, https://www.gauntlettlaw.com/news/when-does-appointed-counsel-not-discharge-an-insurers-duty-to-defend (July 21, 2022).
[9] See David A. Gauntlett, Settlement May Be Recoverable Against a Non-Defending Insured Without a Trial, https://www.gauntlettlaw.com/news/settlement-may-be-recoverable-against-a-non-defending-insured-without-a-trial (April 21, 2022).