WHAT A CEO NEEDS TO KNOW ABOUT INSURANCE
WHAT A CEO NEEDS TO KNOW ABOUT INSURANCE
By David A. Gauntlett*
INTRODUCTION
When is the last time you thought about your company’s insurance coverage? How broad is its scope? How might it address litigation which could arise out of the company’s operations?
Typically, a CFO or Risk Manager’s concern is the insurance portfolio. Insurance concerns are rarely a priority for CEOs. But, a CEO brings a unique perspective to the oversight of insurance acquisition and use. CEO involvement is inescapable where a Lawsuit becomes an “existential” concern for the Company. Internal conflicts arise where the company’s reporting structure gives the General Counsel oversight of this function and credit for insurance proceeds that defray litigation expense, but task the Risk Managers with securing insurance/coverage and keeping costs under control.
FIVE CONSIDERATIONS FOR A CEO IN ADDRESSING INSURANCE
1. Avoid Policies with Narrow Coverage
Commercial General Liability (“CGL”) policies typically provide limited coverage for intellectual property claims. They have become increasingly less comprehensive over the past several decades.[1] Be wary of insurers such as Hartford, Great American, Travelers, and Evanston. Their CGL policies severely limited their scope of intellectual property coverage. Broker promotion of these policies are problematic due to back-end remittance payments to insurance brokers (called “spiffs”) which can be disclosed with a call to an 800 number referenced in a policy endorsement.[2] They effectively require policyholders to pursue an insurance coverage lawsuit after having purchased a non-ISO policy after paying a solid price for extremely limited and often illusory coverage.[3]
Conflicts can require a right to independent counsel in most jurisdictions. An insurer’s failure to recognize this right or issue a retention of rights letter, often require the expertise and assistance of insurance coverage counsel. The conflict arises where the insurer’s appointed defense attorney could steer the case in a manner that has damages fall outside of policy coverage, benefiting the insurer in harming the policyholder.[4]
2. Proactively Consider More Coverage
A CGL policy should be supplemented by Media policies—a form of Errors and Omissions (“E&O”) coverage written on a “Claims Made and Reported” rather than “Occurrence” basis. Circumstances that may evidence potential liability must be promptly reported within the policy period to secure policy benefits.[5] Defense counsel who fail to assure receipt of claim[6] risk exposure to clients who forfeit policy benefits due to late notice to insurer.[7] These policies typically encompass express coverage on a broader range of intellectual property torts than the traditional CGL policy including trademark, and copyright infringement, unfair competition, as well as reputation damage such as libel, slander and disparagement.
These policies are often sold in conjunction with Cyber Insurance coverage which is best enhanced through the acquisition of separate Crime coverage to address increasingly problematic social engineering fraud attacks and malware attacks.[8] Tasking outside IT specialists to complete policy applications can avoid answers to policy applications that may paint too rosy a picture of the company’s risk profile for cyberattack.[9]
Moreover, in some instances, a “cease and desist” letter will not foreclose securing policy benefits under a policy secured after the receipt of such a demand where the policy application does not require its disclosure.[10] Media liability policies with minimal questions of that character may be appropriate candidates for acquisition in that context.[11]
3. Know Your Coverage Triggers
Once a claim is asserted and notice provided to an insurer, even if the initial response is denial, CEOs (and their counsel) should track developments in the underlying action that may implicate insurance coverage. Twenty states allow the incorporation of extrinsic evidence including California, Illinois, Massachusetts, and New York. Those forums consider inferences from the facts asserted, and in some instances, look to the potential for amendment of the complaint to state facts that evidence a potentially covered claim.[12] Information that is revealed by extrinsic evidence not provided to the insurer, however, may allow insurers to argue that the defense duty only arose from the date the extrinsic evidence was sent to the insurer. To avoid late notice arguments assure that pertinent extrinsic evidence is provided to the insurer as soon as it becomes available.[13]
4. Know Your Unacknowledged Insurance Benefits
Insurers often include policy endorsements that over-complicate coverage for “personal and advertising injury” which is already complex. These endorsements effectively eliminate all coverage for intellectual property claims.[14] Pay close attention to what coverage is being eliminated by ambiguous or self-contradictory endorsements. They often fail to advise a policyholder of what diminution in coverage otherwise available.[15]
Insurers also seek to limit their exposure in employment cases is especially evident in wage and hour lawsuits. Coverage often contains sub-limits for wage and hour claims over a sizeable deductible for defense fees and no indemnity.[16] Policyholder retention of its own counsel based on the retention of rights that trigger conflict of interest is key.[17]
5. When to Consult Coverage Counsel
CEOs benefit from consulting coverage defense counsel to secure broad coverage before pursuing complex litigation. Where a counterclaim is anticipated, policyholders can potentially obtain full reimbursement for defense fees for the counterclaims in pursuit of the complaint. Such pursuit may evidence legal work “conduct against liability” which is compensable. Insurance denials should be revisited. Greater policy benefits can often be secured when a coverage suit follows resolution of the underlying action. The same is true where “due diligence” in M&A acuity includes review of propriety of insurer coverage denial.[18]
Settlement of a lawsuit with insurance proceeds, especially in an intellectual property or employment matter, can implicate a plethora of business considerations that call for more than the payment of money. Reservations of rights, in addition to triggering independent counsel duties, may not eliminate the insurer’s obligation to fund a complete settlement where the nature of liability under the covered claims is sufficient to justify the payment of any settlement demanded by the claimant.[19] Negotiations with the claimant to assure that the policyholder’s business interests are protected is a key function of coverage counsel.[20]
CONCLUSION
Insurer policies have evolved standard forms of CGL policies to be more narrow especially regarding intellectual property claims. Unaware policyholders may not consider the coverage gaps or notice the traps within insurance policies that limit their coverage. It is best to evaluate your coverage policy carefully, and critically, when possible, seek coverage policy counsel to help acquire and negotiate the broadest coverage for businesses.
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* David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] See, David Gauntlett, Narrow, Narrower, Narrowest: The Insurer’s Playbook to Avoid Coverage. www.gauntlettlaw.com (Jul. 15, 2021)
[2] See, David Gauntlett, Opportunities and Pitfalls in selecting CGL/Umbrella Policies to Respond to Intellectual Property Risks. www.gauntlettlaw.com (June 2018)
[3] supra, David Gauntlett, Narrow, Narrower, Narrowest
[4] See, David Gauntlett, Policyholder’s Rights to Challenge Insurer Control of Counsel. www.gauntlettlaw.com (November 2021)
[5] See, David Gauntlett, Are “Claims Made” Insurance Policies Traps for the Unwary? www.gauntlettlaw.com (May 14, 2021)
[6] See, David Gauntlett, Avoiding Malpractice by Providing Prompt Notice of Intellectual Property Claims to Insurers. www.gauntlettlaw.com (May 20, 2021)
[7] See, David Gauntlett, Assuring Pre-Tender Fees Are Recoverable by Providing Proper Notice to Insurers. www.gauntlettlaw.com (May 27, 2021)
[8] See, David Gauntlett, Coverage or Malware Attacks – Cyberjacking and Ransomware. www.gauntlettaw.com (Dec. 2, 2021)
[9] See, David Gauntlett, Insurance Coverage for and IT Consultant’s Role in Media/Cyber Policy Application. www.gauntlettlaw.com (Oct. 14, 2021)
[10] But see, Frankenmuth Mut. Ins. Co. v. Hockey Cup, LLC, No. 18 C 8142, 2019 U.S. Dist. LEXIS 160278, *12 (N.D. Ill. Sept. 20, 2019) (Applying New York law, the failure to report a cease and desist letter to insurer precluded coverage regarding suit filed 16 months late despite its prompt tender to the insurer.)
[11] See, David Gauntlett, Securing Insurance Coverage Benefits Under Homeowner’s Policies for Partnership Disputes. www.gauntlettlaw.com (Jul. 1, 2021); David A. Gauntlett, Preferred General Liability (“GPL”) Policies for Private Equity Firms. www.gauntlettlaw.com (Sept. 23, 2021)
[12] Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005) (“[T]he duty to defend [arises] where, under the facts alleged, reasonable inferable, or otherwise known, the complaint could fairly be amended to state covered liability.”)
[13] High Point Design, LLC v. LM Ins. Corp., 911 F.3d 89, 98 (2nd Cir. (N.Y.) 2018) (“Turning to the merits, we agree with Liberty’s position. ‘[T]he insurer [must] provide defense when it has actual knowledge of facts establishing a reasonable possibility of coverage.”)
[14] See, David Gauntlett, Duplicitous and Overbroad Insurer Constructions of Exclusions Improperly Deprive Policyholders of Coverage Benefits. www.gauntletlaw.com (Jul. 22, 2021)
[15] See, David Gauntlett. Why Policyholders Should Retain Insurance Coverage Savvy Counsel. www.gauntlettlaw.com (Mar. 18, 2021)
[16] See, David Gauntlett, Ten Tips on Employment Practice Liability Insurance Coverage. www.gauntlettlaw.com. (Jun. 24, 2021)
[17] See, David Gauntlett, Policy Forms and Wage and Hour Coverage Case Law Analysis. American Bar Association Torts & Insurance Practice Section. (2014)
[18] See, David Gauntlett, “Buried Treasure” for Companies and Attorneys. www.gauntlettlaw.com (Mar. 11, 2021)
[19] See, David Gauntlett, Knowing Where and How to Look for IP Coverage in CGL Policies. www.gauntlettlaw.com (Jul. 8, 2021)
[20] See, David Gauntlett, Requiring insurers to Protect Policyholders in “Mixed Action” Cases as They head to Trial. www.gauntlettlaw.com (Jan. 20, 2022)