Tips for Reviewing a Liability Insurance Policy for a Recently-Sued Client
By: Gregory M. Jacobs
Being served with a lawsuit is a stressful and potentially panic-inducing time for our clients. As
litigators, often times we are relied on not only to zealously assert and defend our clients’ rights,
but also to act as a reassuring voice when they are the targets of allegations that potentially
could result in significant liability. In addition to providing an initial evaluation of the merits of the
lawsuit, a litigator can provide his or her clients with additional comfort by explaining to them the
nature and scope of the financial protections provided by their liability insurance policies. This
article provides some basic tips for a litigator seeking to navigate through a liability insurance
policy to determine the protections afforded to a client that has just been named as a defendant
in a lawsuit.
Request All Potentially Relevant Policies
Preliminarily, a litigator seeking to do an insurance coverage analysis for a newly-sued client
should ensure he or she obtains copies of all liability insurance policies in the client’s insurance
portfolio. Virtually every commercial client likely will have a general liability insurance policy in
place, which normally provides coverage for any property damage or bodily injury (and may also
include personal and advertising injury coverage) caused to third parties. Depending on the
nature and sophistication of its business, however, a client may also have insurance coverage
in place for more specialized types of liability. Common examples of more specialized liability
insurance are:
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Professional liability insurance (often referred to as errors and omissions insurance),
which provides coverage for any failure to perform, or negligent performance of,
professional services;
Directors and officers liability insurance, which provides coverage for the client’s
directors and officers (and most likely the company itself) for any liability arising from any
director or officer’s failure to perform, or negligent performance of, its business-related
duties;
Employment practices liability insurance, which provides coverage for claims that
employees may bring against the client; and
Automobile insurance, which provides coverage for any physical damage or bodily injury
resulting from an automobile accident arising within the scope of a client’s business
activities.
Depending on the amount of its risk exposure, a client may also have umbrella or excess
insurance policies, which generally are triggered once the coverage limits of an underlying layer
insurance policy are exhausted. When evaluating a client’s insurance protections, therefore, a
litigator should request and review a copy of every liability policy that the client has in place.
Review Policy Endorsements Prior to the Substantive Coverage Provisions
Most insurers issue liability insurance policies on uniform contract forms that contain standard
language establishing the scope of the coverage provided, which often also include a number of
endorsements that operate to amend or modify certain provisions to adapt the policy to an
insured’s particular coverage needs. Accordingly, it is not uncommon for some insurance policy
endorsements to materially alter significant portions of the coverage provided by the policy.
Due to this unique aspect of insurance policies, it is recommended that you begin your review
by briefly skimming any policy endorsements, which likely appear at the end of the policy and
will require you to review the pages out of order rather than front-to-back like you normally
would most other contractual agreements. By briefly reviewing the endorsements first, you will
have an idea of which provisions in the substantive coverage forms have been amended,
modified or even superseded, which in turn will help you more efficiently digest the scope and
nature of the coverages provided.
Identify Whether the Policy is Written on a Claims-Made or Occurrence-Based Coverage Form
Generally, liability insurance policies will provide either “claims-made” coverage or “occurrencebased” coverage. Claims-made coverage means that the policy will provide coverage for any
claim against the insured that is first made during the policy period, regardless of when the
actions that form the basis of the allegations allegedly took place. Occurrence-based coverage,
on the other hand, provides coverage for liability arising from alleged acts that took place during
the policy period, regardless of when the liability claim is first asserted. This distinction is critical
in determining whether the policy period, which should appear on the declarations page of the
policy, encompasses the relevant lawsuit. In most circumstances, the policy coverage form’s
insuring agreement will define whether the policy offers claims-made or occurrence-based
coverage. You also will want to review carefully a claims-made coverage form’s definition of a
“claim” or an occurrence-based coverage form’s definition of “occurrence,” which will impact
significantly the breadth of coverage provided.
Determine the Scope of the Insurer’s Defense Obligations
The overwhelming majority of liability insurance policies provide that an insurer has both a duty
to indemnify and a duty to defend its insured from a lawsuit. The duty to indemnify obligates an
insurer to pay for liability arising from a covered lawsuit, most likely by way of a formal judgment
against the insured or through a settlement between the insured and the underlying claimant.
The duty to defend, on the other hand, obligates an insurer to, at a minimum, pay for the fees
and costs incurred by an insured in defending against a lawsuit that could result in a judgment
or settlement that would trigger the insurer’s duty to indemnify.
In conducting an initial policy review for a newly-sued client, the scope of an insurer’s defense
obligations is going to be your client’s more immediate concern (as any indemnification
obligations will not be triggered until the lawsuit is ultimately resolved). While almost every
liability policy will provide some defense obligation, the scope of an insurer’s duty to defend can
vary. Some policies will affirmatively require the insurer to defend its insured from the lawsuit,
while others may only require that the insurer advance, or in some cases reimburse, an insured
for the costs of defending itself from the lawsuit. This distinction is important, as an affirmative
duty to defend a lawsuit will require the insurer to actively participate in the defense (for
example, by retaining and paying defense counsel on behalf of the insured), whereas a more
limited obligation to advance or reimburse the reasonable costs associated with defending the
lawsuit places the onus on the insured to retain defense counsel and defend the lawsuit.
Whether the insurer has an affirmative duty to defend the lawsuit usually is apparent from the
language used in the policy’s insuring agreement, which for example may state that the insurer
has “the right and duty to defend the insured,” or some similar language.
It is also important to communicate to your client that a liability insurer’s defense obligations are
broader than its indemnity obligations, especially with respect to exclusionary language in the
policy. Because an insurer’s defense obligation arises before an insured’s liability, if any,
arising from the lawsuit is determined, an insurer may only invoke an exclusion to avoid its
defense obligations if the allegations raised in the underlying lawsuit conclusively fall within the
scope of a policy exclusion. For example, if a lawsuit alleges liability against your client arising
from both intentional and negligent acts, an insurer may not invoke an intentional acts exclusion
in the policy to avoid its defense obligations, as it is possible that the lawsuit could result in
liability arising from your client’s alleged negligent acts, which would not be encompassed by
that exclusion. You should be sure to clarify with your client that it may still receive coverage for
the costs associated with defending itself against the lawsuit even if that lawsuit may not
ultimately result in liability that triggers its insurer’s indemnification obligations.
Determine the Amount of Coverage Provided by the Policy
Your client also will be interested in the amount of liability coverage its policy provides before it
is exhausted. The declarations page of the policy normally will state the policy’s aggregate limit
of liability, as well as any “per occurrence” or “per claim” limits that may apply. Policies also
often require an insured to pay a deductible or retention before an insurer’s coverage
obligations are triggered. A significant difference between a deductible and a retention is that a
deductible operates to reduce the amount of coverage available under the policy while a
retention does not. So, for example, if a policy has a $100,000 limit with a $10,000 deductible,
then the insured would be entitled to coverage for up to $90,000 for liability in excess of
$10,000. If that same policy instead had a $10,000 retention, however, then the insured would
be entitled to coverage for up to $100,000 for liability in excess of $10,000.
A liability policy’s coverage limits and/or deductible/retention amount also may apply only to an
insurer’s indemnity obligations and not its duty to defend. With respect to a liability policy’s
coverage limits, you should review both the insuring agreement and any limit of liability or
similar provision in the coverage form to determine whether there is language stating that the
applicable coverage limit is exhausted only by “payment of judgments or settlements” (or similar
language), which would establish that any payment of defense costs does not apply towards
exhaustion of the policy limits. Similarly, you should carefully review the policy’s
deductible/retention provision to determine whether it includes any language stating that it
applies only to the insurer’s indemnification obligations. For example, the deductible/retention
provision may state that it only applies to its obligation to pay “damages,” a term that may be
defined not to encompass defense costs, or otherwise may contain language establishing that
its defense obligations apply irrespective of any deductible or retention amount.
Understand the Policy’s Notice Requirements
All liability insurance policies will include a provision defining an insured’s obligation to notify the
insurer in a timely manner regarding any claim or occurrence that may potentially be covered.
Some policies may outline an insured’s notice obligations in specificity, including the manner in
which, and to whom, notice must be provided. You should carefully review this provision and
inform your client of exactly what it must do to satisfy its notice obligations so as not to
potentially jeopardize coverage for its claim.
When discussing the policy’s notice obligations with your client, you also should discuss
whether the client plans on using its insurance broker to provide notice to the insurer (or involve
its broker in any other aspect of the claim). If so, you should make clear to your client that
communications with its insurance broker may be discoverable by the insurer should a coverage
dispute under the policy escalate into formal litigation. While arguments can be made that some
internal client-broker communications are privileged if conducted at the behest of an attorney in
anticipation of litigation, the best practice is for your client to avoid communicating with its
insurance broker regarding any potential legal strategies or coverage theories under the policy.
Gregory M. Jacobs is an associate in the Washington, D.C. office of Kilpatrick Townsend where
he focuses his practice on representing corporate policyholders in insurance coverage matters
Published in the Winter 2015 Litigation Committee Newsletter – American Bar Association
Young Lawyers Division, ©2015 by the American Bar Association. Reproduced with permission.
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