Published Article

Two Perspectives, One Goal: Coverage and Defense Counsel’s Dual Responsibilities to Insured and Insurer

August 20, 2024

Being sued is not a pleasant experience. In some instances, the lawsuit triggers a requirement by the defendant’s insurance company to provide the defendant with a defense (i.e., hire and pay an attorney/law firm). This means that the insurance company will assign either an in-house attorney or one of its outside law firm panel counsel to represent the defendant in the lawsuit. While panel counsel has reporting obligations to the carrier with regard to evaluation of potential liability, defenses, and damages, their primary responsibility is to defend the insured in the litigation.

An inherent tension can arise between the carrier’s obligation to protect the insured by resolving the litigation and the desires of the defendant, who quite understandably may feel that they have been wrongly sued and would prefer to see justice carried out rather than to pay and settle the case. It is not uncommon for the defendant to hold the strong belief that the plaintiff does not deserve “one red cent.” This tension can cause a myriad of problems for the assigned panel counsel, especially when the lawsuit includes claims that are both potentially covered and/or potentially or clearly uncovered claims.

A hypothetical to consider that illustrates this point:

The Case of Plaintiff v. Insured

Joe Insured (Insured) is a member of the board of directors of a homeowners association in which Suzy Plaintiff (Plaintiff) lives. Plaintiff sues Insured for breach of contract, quiet title, and wrongful foreclosure. The claims stem from allegations that, when the association and the board of directors put a lien on Plaintiff’s home for failure to pay the monthly assessments (which led to the sale through foreclosure of Plaintiff’s home to a third party), the association and its board members, including Insured, failed to comply with the notice and lien requirements set forth in the covenants, conditions, and restrictions (CC&Rs) therein. Plaintiff’s alleged damages are in excess of policy limits, and, in addition to alleging covered causes of action, Plaintiff alleges intentional conduct by Insured that, if proven, would not be covered under his policy. As a result, Insured’s defense is provided by his insurance company pursuant to a reservation of rights.

Understandably, Insured is very upset at being named personally in the lawsuit by Plaintiff and adamantly believes that the lawsuit is not well taken against him. There may even have been some bad blood between Insured and Plaintiff, which ratcheted up the emotion on each side. Because of this, Insured insists that panel counsel defend him and clear his name.

Eventually, the court orders the parties to a settlement conference, either at the court or in private mediation. After a very long mediation and lots of negotiation, the mediator appears to have found settlement terms that are agreeable to the insurance carrier (who is indemnifying Insured and will be paying the entire settlement amount) and Plaintiff. Insured, of course, is not happy and is adamant that he does not want the case settle. He wants to be vindicated in court. In fact, Insured is so determined to have his day in court that he directs panel counsel not to move forward with further negotiations and/or settlement. Since Insured is panel counsel’s client, panel counsel must comply with this directive unless panel counsel can somehow change Insured’s mind.

Protecting Insured from Panel Counsel’s Perspective

Whether Insured believes it or not, resolving the litigation without any payment or other requirement from Insured is in his best interest. So, how can panel counsel achieve the goal of protecting the client in this situation? Admittedly, this is a tough situation for panel counsel, but some of the ways to try to change Insured’s mind (even if begrudgingly) include:
Dutifully explaining the considerable risks inherent in any trial, especially since juries are not very predictable.

Explaining the time and effort that will be demanded of Insured to continue the litigation and how it will likely negatively impact his life.

Deploying third parties like the mediator and Insured’s personal counsel as allies to reinforce panel counsel’s explanation of the perils of litigation and the considerable personal toll it takes on defendants and their families.

Success in these endeavors requires building and nurturing good rapport and trust with Insured. People in this position can be under tremendous stress over being named in a lawsuit, and they often respond to this stress in a manner that is out of character. Insured will look to counsel for support, explanation, and advice—some of which may take time for them to process and understand. The ultimate goal is always to get the Insured out of harm’s way, and the only outcome of litigation that can be controlled is a settlement.

In some instances, depending on the type of policy, the insurer’s coverage counsel may need to step in to get the matter resolved. This often hinges on whether the policy requires Insured’s consent to settle litigation, which can dictate counsel’s approach. Many policies do not require Insured’s consent to settle litigation. In that case, the insurer’s coverage counsel usually can take over the negotiations and/or settle the matter directly with the Plaintiff, even over the objection of Insured.

Protecting Insured from Coverage Counsel’s Perspective

In a liability coverage dispute, coverage counsel’s goal is to minimize the liability of the insurance company. However, that does not mean simply looking for any basis to deny coverage. In most cases, the most effective way to reduce the insurer’s exposure is to work with panel counsel to minimize Plaintiff’s recovery. If Plaintiff recovers nothing this obviously benefits both the insurer and Insured, but coverage counsel can also help in settlement negotiations. By asserting insurer’s coverage defenses, coverage counsel can make Plaintiff aware that even if she wins at trial, it may be difficult or impossible to recover her full damages from Insured.

Preventing the insurer’s exposure to extracontractual damages is also of paramount concern to coverage counsel. In most states, the insurer owes duties of good faith and fair dealing to Insured. This includes, where possible, paying a reasonable settlement for all claims within policy limits to avoid exposing the Insured to an excess judgment. Failure of the insurer to do so may result in a claim by Insured for consequential damages, bad faith penalties and other punitive damages.

Of course, while the insurer owes duties of good faith and fair dealing to Insured, Insured also owes the insurer the duty to cooperate. So, if Insured has a consent clause in the policy as described above, the insurer has options at its disposal to get a matter settled. For example, the insurer can begin by sending correspondence advising that if Insured does not consent to a reasonable settlement that the insurer is prepared to pay, Insured is placing himself at risk of a judgment which may not be covered. If Insured continues to unreasonably withhold consent to settle, the insurer can further advise that Insured risks waiving coverage altogether. In rare instances, insurers can even pull the defense altogether. However, such measures should not be taken lightly, and coverage counsel should first work with defense counsel to try to convince the insured that settlement is the best outcome for all.

Same Team, Shared Goals

Although not aligned on every issue, defense counsel and coverage counsel can work together to protect the insured from judgment. Keeping that shared goal in mind can help ease the tension created by their different perspectives.

Reprinted with permission from the August 20, 2024 issue of The Legal Intelligencer. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.