by Collin Hite
The hypothetical goes something like the following scenario. A customer or some third-party is severely injured as result of your alleged negligence. Maybe your employee causes a catastrophic car accident. Maybe a box falls on a customer’s head in your store. The victim has traumatic brain injury and goes through major medical treatment. The person will have trouble working for the rest of his or her life. He will need ongoing care or assistance. He has hundreds of thousands of dollars in medical expenses and the prospect of much more to come. Once the long-term prognosis is known, the person finds a lawyer, becomes a plaintiff and files a personal-injury case. You get served with the lawsuit and turn it over to your insurance company. This article looks at some important questions that follow from this point forward in the litigation.
You made the right decision so far turning the lawsuit over to your carrier. Most insurance policies require prompt notice of any claim, occurrence or lawsuit. You own insurance, and you have timely notified your insurer of the lawsuit. You bought $1 million in coverage for such problems like this case. Yes, that seems like a lot of money and should provide coverage for you in this serious case. But will it? The lawsuit was filed for $5 million. Who pays the difference if there is a verdict over your policy limits? You do. Plus, if your insurance defense attorney’s fees erode your policy limits, your $1 million may quickly start to disappear leaving your business on the hook for even more.
Next, your insurance company sends you a reservation of rights that lists a multitude of reasons why you may not have insurance coverage. It agrees to provide a defense but reserves the right to withdraw if it finds a reason to deny coverage. The insurer also notes that you will be responsible for the excess verdict over $1 million and advises you of your right to retain your own attorney.
Why should you hire your own attorney when the insurance company has provided an attorney to defend? You do not have to, but you probably should. The assigned insurance defense attorney regularly receives cases from this carrier. Whose interest will the attorney watch out for in the litigation? The insurer is in the business of making money, the less they spend on you the more they make this year. If you get a settlement demand within your insurance policy limits, only outside counsel can stand up for your interests if the insurance company refuses to settle and gambles on a trial. That is a gamble with your $4 million. Only an outside attorney can respond to the reservation of rights letter and address coverage issues that may arise.
In Virginia, retained insurance defense counsel is part of what in the legal world is known as the “tripartite relationship.” The three parties in the relationship are the defense attorney at the apex of the triangle, you in one bottom corner and the insurer at the other bottom corner. The defense attorney has certain duties to the insurer and also duties to you as the client. There is a natural tension in the relationship since in many instances the insurance company has the right and duty to defend the case, and to settle it or not without your permission. There may be reasons you want the insurer to settle, and it has its own reasons not to do so.
In this scenario, retaining “shadow counsel” is almost always in your best interest. This separate attorney’s sole concern is your best outcome in the case. The attorney can monitor the insurance defense counsel and warn you if it appears that the defense is being adversely affected by the insurance company protecting its own interests. The shadow counsel can also, if he or she has an insurance coverage background, directly deal with the insurer for you.
For example, this situation is most acute when there is a settlement demand within the insurance policy’s limits. You will need an attorney, independent from the insurer, to press for the settlement and explain why the case should be resolved so as not to expose your company to the excess in a bad verdict. Under Virginia law, the insurer must attempt in good faith to effectuate a prompt, fair and equitable settlement in any case in which liability is reasonably clear. However, due to the tripartite relationship your insurance defense counsel cannot get involved. The shadow counsel can in these circumstances be mindful of setting up a “bad faith” claim against the insurer if the adjuster handling your claim takes on the risk of trial and it leads to the excess verdict.
As noted above, your insurer may try to withdraw from its obligations of defending your company in the middle of the personal injury case. In most instances you learn about this decision when you are served with a lawsuit filed by the insurer seeking a declaratory judgment that it no longer owes a defense to you.
Now you are litigating two cases at the same time. In this instance, you will find your insurance coverage attorney that has been acting as shadow counsel invaluable. He or she can immediately step into the breach and handle the coverage case. In Virginia, most lawsuits filed by insurance companies in this type of situation are filed in federal court. These courts move very quickly in handling cases. In fact, in the Easter District of Virginia the federal court system is known as the “Rocket Docket.” Most cases in this part of the state are filed and completed within six months. It is obvious you will have precious little time to find counsel and get up to speed in fighting the insurance litigation. This is where shadow counsel can be a strategic advantage as well.
Is it fair that you have to hire a second attorney in these instances?- Maybe not. If you think so, you need higher insurance policy limits. Is it going to cost money out of your pocket on top of the insurance premium you paid for a legal defense? Yes. But when your business is faced with a catastrophic lawsuit and is on the hook for the excess verdict over the policy limits, it is shortsighted to view the attorneys’ fees for shadow counsel as an immediate negative. Use of such attorneys should be viewed by owners and in-house counsel as a strategic risk management decision to help mitigate the risk of the excess verdict and possible loss of insurance coverage during the underlying litigation. Compare those fees to the true exposure of the bad outcome and most owners will see there is a strong benefit to using the outside attorney in these situations.
Collin Hite is the leader of the Insurance Recovery Group in Hirschler Fleischer’s Richmond office. He handles insurance recovery and coverage litigation nationally in the areas of business interruption, all risk, construction, business torts, products liability, directors’ and officers’ liability, employee dishonesty, intellectual property, environmental matters and bad faith claims.Tweet
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