Five Considerations for a CEO in Securing Insurance
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. Rarely are insurance concerns a priority for CEOs, but a CEO brings a unique perspective to the oversight of insurance acquisition and use. When apprised of litigation against the company, a CEO will focus on insurance as a significant asset in defraying litigation expenses. Its applicability may become a primary consideration. In some cases, insurance can be a “save the company resource.”
As an insurance coverage litigator for over 38 years, my experience representing policyholders throughout the United States in addressing a variety of complex insurance disputes has generated a number of insights that are often slow to reach a CEO’s attention. The perspectives I write about are best considered at the time of insurance acquisition, when I am brought in to assist policyholders in addressing claims, as I can only generate policy benefits based on insurance in place.
1. Avoid Policies With Narrow Coverage
Commercial General Liability (“CGL”) policies typically provide limited coverage for intellectual property claims. They have become less comprehensive over the last several decades. Even the broadest CGL policy form, Insurance Services Office (“ISO”), limits coverage to offenses:
(d) “oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, product or services”;
(e) “oral or written publication of material that invades a person’s right of privacy”;
(f) “use of another’s advertising idea in your ‘advertisement’”; and
(g) “infringement of copyright, trade dress or slogan ‘in your advertisement.’”
Companies purchasing non-ISO from insurers, such as Hartford, Great American, and Travelers, are often surprised to learn the limited scope of their intellectual property coverage. These insurers will require policyholders to pursue an insurance coverage lawsuit after having purchased a non-ISO policy at a premium price—as is the case for each of these referenced insurers.
Most CGL policies have 800 numbers that allow individuals to learn about broker compensation, while few policyholders explore the links which appear upon calling the 800 number in the policy they disclose of back-end remittance payments to brokers (called “spiffs”) for demonstrated loyalty to specific insurers that render them top producers for a particular insurer. It is surprising how many policies include a buried disclosure about these back-end spiff payments to the broker, encouraging them to sell policies with narrow insurance coverage.
An ISO CGL policy typically written on an “occurrence” basis should be supplemented by Advertising Media policies—a form of Errors and Omissions coverage written on a “claims made and reported” basis. These policies typically encompass a far broader range of intellectual property torts than the ISO CGL policy that includes trademark infringement, along with many forms of unfair competition/false advertising, as well as reputation damage torts such as libel, slander and disparagement.
These policies typically exclude patent infringement, trade secret misappropriation, and various antitrust related violations. Even non-media defendants may secure such coverage from a select group of insurers. Such policies can be enhanced by the acquisition of cyber coverage that can address tortious claims against an insured.
2. 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 keep aware of insurance potential arising from facts that come to light in the underlying lawsuit that could implicate potential coverage.
These facts are typical legal developments which may reveal potential coverage, including preliminary injunctive motions for summary judgment and pre-trial conference orders (which amend the pleadings as a matter of law).
These favorable forums include Illinois, Massachusetts, New Jersey, and New York, but not Texas, Florida or Pennsylvania. Extrinsic evidence forums also look to inferences from the facts, and in some instances, the potential for amendment of the facts to state a covered claim.
If this information, as revealed by extrinsic evidence, is not provided to the insurer before the underlying action is over, however, insurers will claim that it was too late. Even when received, they will contend that it is only from the point in time forward where that evidence came to light that their defense duty exits.
That perspective is too limited where the nature of the fact allegations could be anticipated by earlier claims, but are clearly articulated grounds for assertions of liability.
3. Know Your Unacknowledged Insurance Benefits
Insurers often include policy endorsements to coverage for “personal and advertising injury” which are already complex. As Judge Becker of the Third Circuit opined, this “offense” based coverage has “confounded courts for years.” The effect is to eliminate virtually all coverage for intellectual property claims. Close attention to what coverage is being eliminated, where its elimination is ambiguous or self-contradictory, can subject such policy provisions to attack for failing to advise a policyholder of what diminution in coverage otherwise available under the policy is purportedly accomplished by an endorsement.
The same effort by insurers to limit their exposure in employment cases is especially pronounced in seeking to avoid coverage for wage and hour lawsuits. This can be accomplished by a sub-limit for wage and hour claims often over a deductible or self-insured retention that is often inadequate to dispatch such cases typically written for defense fees and not settlement or indemnity reimbursement.
This limited coverage can only be rendered meaningful where a policyholder selects its own counsel. This must be negotiated at the time of the insurance coverage acquisition.
Otherwise, the only way to obtain right to independent counsel is to demonstrate a conflict of interest, which may not be as easily secured where the basis for showing such a conflict is the nature of wage and hour coverage itself.
In an appropriate case, the purported reduction in coverage may not apply and policyholders may have better policy benefits than the insurers acknowledge when recognizing a defense to some, but not all claims. 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.
Careful interaction between defense counsel and coverage counsel (which can be one in the same when they are independent defense counsel), can minimize the likelihood of a lack of cohesiveness in the structure of case resolution with insurance proceeds.
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. Media liability policies with minimal questions of that character may be appropriate candidates for acquisition in that context.
Similarly, umbrella policies, which may provide broader coverage than an underlying commercial liability policy may be procured after a cease and desist letter inception as the questions asked in connection with securing such coverage typically do not require reference to a “cease and desist” letter under some policy forms.
4. Proactively Consider More Coverage
CEOs seeking to secure coverage for a start-up operation must bear in mind the distinction between “occurrence” and “claims made and reported” coverage (which can be procured). A CGL policy is typically issued on an “occurrence” basis, so the triggering event is when liability arose. An Ad Media policy/Cyber coverage, concurrently with its CGL policy, is “claims made and reported” coverage, so that is when the circumstance arose that triggered a defense.
Otherwise, an insurer can contend a prompt denial of any claim asserting that the liability inducing conduct preceded the policy’s inception. The same is true of Directors & Officers programs that have breakout component elements including Ad Media Cyber coverage as well as the addition of Crisis Management Crime and EPLI for more significant companies.
A plethora of recently filed cases in New York, encouraged by Second Circuit case law, concluded that those afflicted with blindness are victims of discrimination because they could not access particular internet sites. If a company does not have Employment Practices Liability Insurance (“EPLI”), a typical CGL policy will not include discrimination coverage for the “personal and advertising” offenses (a) through (g).
The retrofit of the website to facilitate access by a blind person may be covered by a Cyber Policy where the change to the website was demanded by the party suing for its failure to have readily accessibility to blind persons. Defense fees incurred may be covered by a “discrimination” endorsement to a CGL policy so long as the claimant asserts emotional distress caused by the blind plaintiff’s inability to access a policyholder’s website.
5. When to Consult Coverage Counsel
Securing independent counsel at the insurer’s expense, subject to a right to reasonable fee reimbursement, is key to obtaining the full insurance benefits for which the policyholder has paid.
Conflicts can require a right to independent counsel in most jurisdictions. 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.
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. Negotiations with the claimant to assure that the policyholder’s business interests are protected is a key function of coverage counsel in such a matter.
David Gauntlett is the Principal of Gauntlett & Associates with 38 years of experience representing policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. David is the author of Insurance Coverage of Intellectual Property Assets, Second Edition (Wolters Kluwer ©2017), IP Attorney’s Handbook for Insurance Coverage in Intellectual Property Disputes (ABA Section of Intellectual Property Law, Second Edition 2014) and author of the Fourth Edition of CGL Policy Handbook (Wolters Kluwer 2019). 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.