CONSTRUCTION L AW
The Relationship
Between the
Carrier and
Defense Counsel
From the Carrier’s
Perspective
By Marie Roehm
and Mary Ann Vorndran
The key word for all
aspects of these lawyerclient relationships,
including the
relationship of defense
counsel to the insured,
is communication,
preferably timely,
knowledgeable and
helpful communication.
This article surveys the relationship between defense
counsel and the defending carrier, also known as the
insurer, in the defense of an insured in one or more construction defect proceedings. This relationship is actually
three-sided, or tripartite, with the insured as the focus. Other articles address
the complex relationship created when an
insurer defends an insured using counsel selected, instructed, and paid by the
insurer. The rules and guidelines for that
relationship vary among jurisdictions and
are beyond the scope of this article. In this
article, we attempt to convey an insurer’s
perspective, expressing some of a carrier’s
concerns and interests. Here we give priority to the relationship between the defending lawyer and the carrier; however, the
article of course includes references to an
insured client and the paramount duty of
both to defend it diligently.
We consider three aspects of the defense
counsel-­carrier relationship: (1) its formation, (2) the defense of the insured in
a single set of claims and (3) the maintenance of the lawyer-­c arrier connection when the lawyer is retained by the
carrier to represent different insureds in
distinct proceedings. The key word for
all aspects of these lawyer-­c lient relationships, including the relationship of
defense counsel to the insured, is communication, preferably timely, knowledgeable
and helpful communication. For defense
counsel to perform well, she or he must
understand what the insured and what the
insurer each need and want and be able
Marie Roehm is claim supervisor and staff counsel for Blair & Company in Valencia, California, a thirdparty administrator and insurance services company. Ms. Roehm, a lawyer with extensive coverage
and claims handling experience, oversees claims management on multiple programs, handles complex
claims, audits and other projects, and provides legal advice. Mary Ann Vorndran is claims manager for the
Navigator’s Group, Inc., in Stamford, Connecticut, an international commercial property & casualty specialty
insurance company. Ms. Vorndran has over 24 years of commercial insurance experience, with an emphasis
on commercial construction claims and construction defect.
■ 50 For The Defense June 2014
■
■
to explain how she or he will take care of
each client.
This article is addressed to defense
counsel, although it may be of some interest or use to claim representatives and others as well.
receive assistance adequately in the event
of a personal distraction than a one person enterprise.
Upon learning of an actual or potential
construction defect claim, many targeted
parties give notice of the claim to the party’s insurance broker, which in turn notiFormation of the Defense
fies at least one insurer that issued a policy
Counsel-Carrier Relationship
naming that party and preferably tenders
When someone learns that she or he is the defense and indemnity of the claim
involved in a construction defect claim, to all policies known to have been purone of the first questions asked is “Do you chased by that party, usually asking that
have insurance?” The claimants and the defense counsel be appointed. A search
targeted parties—builders, sellers, devel- may also be undertaken for other insuropers, subcontractors, design profession- ance policies naming the party as an addials—all look for insurance as a source of tional insured or providing coverage to an
money for investigation and evaluation, indemnitor of the party so that those polfor repairs, for settlement, for damages icies may receive notice and invitations
awards, and for the lawyers that usually to join the defense. This practice reflects
become involved.
the fact that most commercial general liaA targeted party may retain its chosen bility policies issued to developers, buildlawyer and then, if it has applicable insur- ers and subcontractors include a duty to
ance policies, seek to have the lawyer con- defend and provisions giving control of
tinue as its defense counsel. Whether or the defense to the insurer. Professional
not a carrier agrees to this arrangement liability policies, D&O policies, and other
depends in part on the wording of the types of insurance policies may have difapplicable policy and in part on the quali- ferent provisions.
fications of the proposed defense counsel.
When a commercial general liability
For example, under California Civil Code carrier learns of a claim against an insured,
section 2860 (c), which allows an insured after its initial determination of potential
to select its own defense counsel under cer- coverage for the claim, the carrier usually
tain circumstances,
selects and assigns defense counsel. Many
[w]hen the insured has selected inde- carriers have a list of approved law firms or
pendent counsel to represent him or individual lawyers, sometimes known as
her, the insurer may exercise its right panel counsel, from which they routinely
to require that the counsel selected by choose firms or lawyers to defend insureds.
the insured possess certain minimum
How does a lawyer or law firm get
qualifications which may include that on such a list? First, you must somethe selected counsel have (1) at least five how acquire construction defect defense
years of civil litigation practice which experience, a support team, and profesincludes substantial defense experience sional liability insurance. Working for
in the subject at issue in the litigation, other construction defect lawyers or repand (2) errors and omissions coverage. resenting construction industry clients or
The insured seeking to have its brother-­ both are the usual paths to acquire some
in-law the criminal attorney represent it is expertise. Lawyers with a background in
unlikely to be as successful as the insured architecture, engineering, hands-on conasking the carrier to consent to a defense struction, or claims administration have
by an experienced civil litigator with some a head start.
background in construction. Yes, we have
Second, you must learn about each carseen such requests. A carrier may also rea- rier that you want to represent. Is it domessonably request evidence of professional tic or foreign? What kind of policies does it
liability insurance on the law firm and write? Does it have in-house claim adminsome type of support team or network. A istration or use a third-party administralawyer who is part of a law firm with other tor (TPA)? Who currently administers its
lawyers, paralegals, and administrative construction defect claims? Who selects
assistants can more reliably do the job and defense counsel? Claims handlers are the
daily contact point, but the people deciding which firms are approved are usually
higher up. What is that specific carrier’s
approach to claims handling? From the
practical standpoint, what hourly rates
will that carrier pay and what are its case
management guidelines, billing formats,
reporting timetables and other requirements? For example, does that carrier
Many carriershave a
list of approved law firms
or individual lawyers,
sometimes known as panel
counsel, from which they
routinely choose firms or
lawyers to defend insureds.
prefer flat fee billing? What, if anything,
can you charge for travel time? Then you
can again ask, do you want to work for
that carrier?
Third, you establish contact with the
appropriate people and promote yourself.
We leave the specific details to your imagination. Attending industry events such
as DRI seminars and meetings is one way.
Good communication will be very important during this process.
Learning a specific carrier’s structure,
operations and philosophy carries over
into the second stage of the relationship,
defending an insured on behalf of a carrier.
Sending a timely communication to an
insured telling it who will be its defense
lawyer for a claim marks the transition.
Counsel-Carrier Teamwork: Defending
a Claim Against an Insured
Most carriers have a formal or informal set of guidelines for defense counsel. The details will vary. But the concern
that certain timetables be met and certain
parameters satisfied are typical. Remember that such guidelines vary from carrier
to carrier and that you will not necessarily receive a printed list. Make it a priority
For The Defense June 2014 51
■
■
CONSTRUCTION L AW
regardless to find out what is expected of
defense counsel.
The time that each claim representative has to review reports and to conduct
an independent case analysis and evaluation varies from carrier to carrier and desk
to desk. Ask what information a carrier
wants and needs. Remember that the claim
representative will have documents and
Claims handlersare the
daily contact point, but the
people deciding which firms
are approved are usually
higher up. What is that
specific carrier’s approach
to claims handling?
information that you may want and need,
too. For example, ask about other claims
against the same insured.
On a more technical level, find out what
form of communication and what format
is preferred so communication is rapid
and clear. Does a carrier prefer e-mail, telephone calls, or letters? Make sure that your
software and servers can send and receive
the size and type of documents that the
carrier’s software and servers accept. Do
not have gaps in communications of substance because the form is incorrect or you
cannot handle the volume.
How to defend a construction defect
claim properly is beyond the scope of this
article. But in addition to doing your job
as a defense lawyer, there is much that you
can do to facilitate a carrier’s contribution
to the analysis and defense of the claim and
thus bring about a faster, more reasonable
resolution for an insured.
Other Insurance
When it becomes necessary to defend an
insured, all applicable insurance policies
should be identified, the proper contact
information for each obtained and tender
of the defense of the proceeding made on
52 For The Defense June 2014
■
■
behalf of the insured. If your carrier does
this and does not want your assistance, or
if someone has already done it, you still
must have a list of policies, tenders, and
responses, both to protect the insured’s
interests and so that you can prepare to
respond to typical discovery and inquiries
by mediators. Very possibly you will make
tenders in the insured’s name. If so, you
will need certain information from the insured, its insurance broker or brokers, and
possibly the carrier. From an insured’s policy application a carrier will have information about earlier or subsequent policies.
A carrier may also have information from
other claims involving the same insured.
You may have to coordinate reporting
and billing to more than one carrier, possibly using different billing software or
reporting formats. Further, you may have
to work with legal cost management vendors retained by a carrier. In these situations effectively communicating with your
claim representative or carrier contact can
make your life easier. Your billing staff may
have to track retentions, bill and collect different percentages of each bill from different carriers, or otherwise do more than
total up fees and costs and note amounts
paid. So they will need flexibility.
If excess insurance may become involved,
that carrier may monitor the case at first
and later become more directly involved.
Again, this may fall into your “to do” list or
be handled, at least during the monitoring
stage, by the claim representative.
Another task that a claim representative
or a defense counsel may do is to prepare a
“time on risk” matrix regarding available
insurance that calculates the percentages of
any settlement or judgment that each policy or carrier will pay or which claims or
homes are allocated to each policy or carrier. Further, if you represent a general contractor or developer, creating and using an
“additional insured” matrix will assist you
with tracking and creating reports on the
status of tenders and participation.
Policy Limits
Contemporary commercial general liability
policies often include defense expenses
inside the policy limits. In this scenario, if
your projected defense budget and the possible size of a claim may exceed the applicable policy limits, a number that you need
to ascertain for each participating policy,
you need to be aware of the costs associated with defending your client. Some cases
may require careful planning and evaluation to avoid spending money that you
will need for a settlement or a defense that
you might conduct effectively for less. You
have to gauge an insured’s and the carriers’ interests carefully in these situations.
When a formal settlement demand that
an insured receives exceeds the available
policy limits, each jurisdiction has procedures specifying how such a demand
must be treated. You must discuss with
an insured and the carrier or carriers the merits of the demand and how to
respond best. You need to know the specific duties of an insurer in this situation
in your jurisdiction.
Similarly, if multiple claimants make
demands that collectively exceed the available policy limits, you need to be aware
of the law of your jurisdiction guiding
carriers in such situations. Some states
allow insurers to settle multiple claims on
a “first come, first served” basis even if that
ultimately exhausts a policy, leaving later
claims partially or entirely undefended
and unpaid. Others call for a collective
approach. The case law addressing these
situations arose at a time when most policies paid defense costs separately from
the policy limits. Now that defense costs
are usually included in the policy limits,
acting in good faith when defending and
settling claims requires considering that
additional factor. So plan your settlement
strategy accordingly and be prepared to
explain it to your insured client and any
involved mediator.
Reserves and Settlement Authority
To meet regulatory requirements, estimate
the money needed to fund a settlement
or judgment, to run an efficient business,
and to pay the attorney bills, a carrier
must establish reserves, or projected estimated costs, for the defense and indemnity of each claim. These case reserves
will be based in large part on your reporting. A carrier appreciates your detailed,
thorough analysis of a claim and your
detailed budget, which will change as a
claim progresses.
Case reserves are important to defense
counsel because they relate to settlement
authority. Learn your carrier’s procedures
and timetables for setting reserves and
granting settlement authority, which normally does not exceed a reserve. Many carriers require that they review a request for
settlement authority for a settlement that
exceeds a certain amount for which the
claim representative has “desk authority,” which can mean that a supervisor or
higher manager and sometimes a roundtable of persons who meet periodically
will review the request to settle. A TPA is
often required to obtain authority above
certain thresholds from the insurer. This
takes time. How many mediations or settlement conferences have you attended
that stalled because certain parties had
inadequate or no settlement authority and
could not obtain it for days, weeks, or even
months? This wastes everyone’s time and
money: yours, an insured’s if he or she
must attend, and a carrier’s. This does not
mean that every mediation has to have the
potential to result in a settlement that day.
Many initial mediations benefit the parties by eliciting and sharing information
and arguments so that a reasonable evaluation can be made. It is prudent to prepare
the insurer for when the time comes to put
money on the table.
Although, carriers have different reserving philosophies and practices, a good rule
of thumb is to keep in mind that a carrier’s reserves most likely will be based on
the range of likely outcomes, not on your
best day in court. Similarly, your evaluation of a claim and your requests for settlement authority should take into account
the possibility that your arguments will
not all prevail or that the claimant’s testimony will be more convincing than your
client’s version of events. Your evaluation
of the case should be realistic. Every claim
representative has suffered the last minute scramble when defense counsel suddenly ups the amount recommended for
settlement by a factor of 2 to 10, due to
new information or a convincing mediator and whether an increase in settlement
authority is warranted to resolve the claim
and avoid the cost of a trial. By all means
believe in your case and project confidence
that an insured’s exposure is modest or nil
when dealing with opposing counsel and a
mediator or judge, but do not blind yourself
to the potential strength of the opposition’s
case or “blue sky” your evaluation to a carrier. A carrier that has inadequate reserves
and does not have time to follow normal
procedures for increasing a reserve is subject to criticism during an audit by the carrier itself, excess insurers and reinsurers.
This creates stress for the claims personnel involved, and you will not have made
friends in the process.
One strategy for addressing a gap
between your belief about an offer and a
settlement amount and a possible higher
amount is to be prepared in advance of final
negotiations and request that your claim
representative or carrier consider granting
some additional authority if you may later
need it. This allows you to include in your
settlement negotiation a step in which you
must go ask for more money, if warranted,
yet you attempt to hold the desired line. If
additional authority is arranged as needed,
you may still protect the carrier but the
carrier is briefed about unanticipated and
unreserved increases.
The Insolvent or Absent Insured
Defense counsel should be up to date on the
law of the jurisdiction and venues related
to the representation and appearance of
insolvent insureds, whether they are simply out of money or formally bankrupt,
or absent insureds, whether they are dissolved or missing and undetectable. If you
need to appear or to intervene on behalf of
a carrier, to possibly file a notice of a bankruptcy stay, to possibly submit discovery
responses compiled without input from an
insured without incurring sanctions, or
otherwise take such extraordinary extra
steps, you should be prepared.
Medicare Reporting for
Bodily Injury Claims
Bodily injury claims from construction
defects are uncommon, fortunately. Mass
accidents such as the Hyatt sky bridge collapse in Kansas City are rare. We see only
a few homeowners unlucky enough to be
next to the cabinet that falls off the wall or
under the dropping candelabra. However,
the number of claimants alleging claims
from moisture, mold, spores, fungi, and
similar sources continues to grow. We also
see some claims for physical symptoms
from emotional distress allegedly due to
the construction defect or the claim pro-
cess, such as when any destructive testing
might cause a heart condition.
Federal law, and in particular Section
111 of the Medicare, Medicaid and SCHIP
Extension Act of 2007 (Section 111),
imposes on insurers mandatory reporting
requirements and possible federal liens
on claim payments with respect to certain claimants who receive compensation
from liability insurance with respect to
medical expenses or a release of medical
liability for medical expenses. Carriers are
required to identify which claimants have
received benefits or are eligible for benefits from Medicare or Medicaid. Whenever a construction defect claim includes
a bodily injury or medical component, the
carrier must comply with the applicable
laws and regulations. The initial reporting
and screening process usually takes 60–90
days. Then if eligibility is confirmed, the
claim and any settlement or award will
have further reporting requirements. The
carrier and its representatives face liabilities and penalties if this is not done.
As a result, you may be asked to obtain
each claimant’s Social Security number and other relevant information that
claimants often do not want to provide.
This information, especially the Social
Security number, needs to be handled
with care and protected from casual disclosure and misappropriation. Special
reporting and data storage procedures
may be needed. Some carriers contact
claimants directly to get this information; others use defense counsel. Some
defense counsel have standard discovery
requests for this purpose. Keep in mind
that if this information is requested and
not provided, a carrier may be unable to
authorize settlement on other than a conditional basis, subject to receiving and
processing the information.
Bodily injury and medical claims also
often involve coverage issues distinct from
the property damage claims. Different
policies or years or limits of coverage
may be involved, since the time when
the claimant suffered an injury, which
often triggers coverage, may differ from
the time when the alleged property damage occurred.
Depending on the circumstances, “Coverage C, Medical Payments” may offer a
source of limited settlement funds that can
For The Defense June 2014 53
■
■
CONSTRUCTION L AW
resolve or ameliorate some claims without
needing to be paid under the formal Bodily
Injury limits. Found in many commercial
general liability policies, Coverage C provides, more or less, depending on the policy form, that a carrier
will pay medical expenses as described
below for “bodily injury” caused by
an accident:
You may have to
coordinate reporting and
billing to more than one
carrier, possibly using
different billing software
or reporting formats.
Further, you may have
to work with legal cost
management vendors
retained by a carrier.
(1) On premises you [the insured]
own or rent;
(2) On ways next to premises you
own or rent; or
(3) Because of your operations;
provided that:
(1) The accident takes place in the
“coverage territory” and during
the policy period;
(2) The expenses are incurred and
reported to us within one year
of the date of the accident; and
(3) The injured person submits to
examination, at our expense,
by physicians of our choice as
often as we reasonably require.
b. We will make these payments regardless of fault….
ISO Form CG 00 01 10 01.
This “Medical Payments” amount available under Coverage C is usually about
$1,000–$5,000 per person. Check the specific policy for the premises involved and
54 For The Defense June 2014
■
■
the amount of the policy limit. If an insurer
does pay under Coverage C and does not
obtain a complete release of liability, be
sure to have the claimant sign an acknowledgment that this payment is not an admission of liability or coverage.
Coverage Issues
Defense counsel should not be caught
between an insured and an insurer when
there is a reservation of rights or partial
denial of coverage or any situation other
than total coverage with enough policy
limits to defend and pay. However, you cannot keep your head in the sand. To know
how to advise an insured about the limits
of insurance coverage via your representation and about an insured’s possible exposure to liability that a policy may not cover
and to be able to negotiate with claimants
effectively, you need to have some grasp of
coverage issues involved in a claim when
you defend one. You can ask your claim
representative to participate in negotiations if necessary or to explain some issues
to an insured, but you need to know what
is going on. Read the “reservation of rights”
letter sent to an insured if one issued and
is available to you, read the policy, and get
a grasp of the issues. If coverage counsel
becomes involved for an insured or a carrier or both, communicate with them.
Representing Multiple Parties
You may be asked to represent both a business and its principal or chief executive.
You may be asked to represent both a tile
installer and a fence builder. Whether you
are governed by the ABA Model Rules, the
California Code of Ethics, or another set of
professional standards, representing multiple parties requires careful analysis of
actual and potential conflicts and often
the execution of waivers or consent forms.
Undertaking this analysis is your responsibility as defense counsel and deciding
whether or not you can properly represent
more than one party ultimately is your
decision to make. An insured with multiple parties often prefers joint representation, and most carriers welcome the cost
savings. However, your ethical duty is to
your clients, the insureds and the carrier.
This means that you must decide whether
you can do this. Again, good communication will help you analyze the situation
well, make the decision, and then explain
the result to your clients.
Educating a Carrier in General
Whether the subject is the procedural
options for an absent insured, the requirements for responding to a demand in excess
of policy limits, the grounds for a motion
for summary judgment, or some other relevant issue, be ready to explain the law and
practice in your jurisdiction and venue to
your claim representative. She or he may
or may not be familiar with ins and outs
of particular proceedings. Many claims
representatives deal with claims across
multiple jurisdictions. Despite diligently
satisfying their continuing education
requirements and experience in some settings, your claim representative may not be
familiar with the issues or rules that apply
to a claim. Determining the degree of education or explanation needed or wanted is
another function of good communication.
Maintaining the CounselCarrier Relationship
Once defense counsel has done a good job
and satisfied a carrier defending one insured in one proceeding, getting a second assignment becomes easier. If that
sequence evolves into becoming approved
or panel counsel, a book of business may
result. The process for becoming panel or
approved counsel varies from carrier to
carrier; again, find out the requirements
and personnel of the carriers that you
serve. You never stop checking in with a
carrier to be sure that you satisfy them
while appropriately defending your client insured.
Defense counsel still must do a competent job for each insured, but now, without
compromising the commitment to each
individual insured, defense counsel must
also keep the big picture and a carrier’s
interests in mind.
Ideally, defense counsel consistently follows a carrier’s claims handling guidelines
and matches or exceeds the performance
of other defense counsel. You do not want
insureds to complain that you ignored
them or did a poor job. Yes, we know that
every insured that you represent contends
that he or she did a perfect construction
job and resents having to pay the deductible and being accused of poor workman-
ship, but that is not your fault. Settlements
are usually reasonable and verdicts may
not be excessive. Indeed sometimes they
are even favorable. Claims representatives
will like to work with you because you
make their jobs easier. You understand
what they are trying to do. You treat them
with respect. Management sees good numbers on audits, and they look good because
they have properly reserved files with reasonable defense to indemnity ratios. You
have or your supervising partner has good
communication with the carrier personnel
running the claims department and selecting counsel. The number of unpleasant
surprises has been minimal, and in hindsight they were unpredictable or unpreventable events. Much of this, again, rests
on doing your homework and keeping
in touch.
One common means of improving your
relationship with a carrier is doing a presentation on relevant law and procedure
for the claims handlers. Another is visiting with the claims handlers or management. Offer to do this and see the response
that you receive. Management of a nationwide claims operation will not have time
to entertain visits from defense counsel if
counsel from all 50 states visited annually
and thus may discourage such visits. However, a local claims staff may benefit from
a lunch presentation for which you can also
receive CLE credit. Communicate and find
out what benefits a carrier.
Assuming quality standards are met—
and we have seen an impressive number of
excellent defense counsel over the years—
sooner or later money becomes a central
topic of discussion. You would like to be
paid appropriately; the carrier wants to be
sure that it is not paying too much. In concluding, we recommend again research and
communication so that you each meet your
goals. May you have good results in all your
assignments and a good relationship with
your carrier clients!
For The Defense June 2014 55
■
■