Insurance Coverage for Business Litigation

Corporate executives, business litigators and in-house counsel should acquire a legal understanding of insurance law if they are involved in any type of litigation. Insurance coverage concepts and principles cut across virtually every field of litigation — business litigation, intellectual property, employment law, products liability, real estate, corporate disputes and a broad spectrum of other contexts. An executive or counsel who has insurance expertise is a powerful asset for any company. For example, if liability insurance coverage for a complex litigation lawsuit is triggered, it is like finding gold in the backyard.

In this article, I will summarize some of the insurance principles that arise in a wide variety of commercial litigation contexts. Properly applied, these principles can bring a company millions of dollars in insurance benefits.

1. Fundamental Insurance Principles for Commercial Litigation

Through a variety of insurance rules and principles, general liability insurance policies provide coverage for an incredibly broad variety of business lawsuits. The full spectrum of commercial litigation that is potentially covered by insurance is frequently misunderstood by even very sophisticated business people, many of whom view insurance policies in a very literal and one-dimensional manner.

The reality is that general liability policies can potentially provide coverage for virtually every type of commercial litigation lawsuit, through coverages such as advertising injury and personal injury. These include business litigation lawsuits such as copyright and trademark infringement, misappropriation of trade secrets, unfair competition and many others.

Even business lawsuits that center on allegations typically not covered by general liability policies - - such as breach of contract, fraud, shareholder or partnership disputes and wrongful termination - - nevertheless frequently involve secondary allegations of defamation, disparagement, invasion of privacy or related torts which do implicate insurance coverage. See Buss v. Transamerica (1997) 16 Cal.4th 35.

In addition, there is a wide plethora of specialized insurance policies that cover commercial litigation scenarios. These include Director & Officer, Error and Omission, Intellectual Property, Employment Practices Liability and numerous other types of policies.

In order to obtain full coverage for these claims and maximize insurance benefits, a company must aggressively pursue such benefits with a highly experienced defense counsel who has significant expertise and experience in maximizing insurance coverage. If a corporation does not aggressively pursue its insurance benefits, they will likely ultimately be denied or minimized.

2. Tender Early/Tender Often

It is black-letter law that an insurance company’s duties to provide coverage for third party liability claims are not triggered until the policyholder tenders the claim to the insurer. Thus, it is absolutely critical to tender all lawsuits, arbitration demands, regulatory complaints and other legal proceedings to all insurance companies. Even threats to sue or other contentious communications need to be reported to the insurance company as potential claims.

Ultimately, there are many negative things that occur because of a failure to tender, or a delayed tender.

First, the company will likely not be able to recover any defense fees incurred pretender.

Second, the policy may have “claims made and reported” deadlines which require notice within the policy periods or shortly thereafter.

Third, even if the policy does not have such reporting deadlines, a carrier may argue that it has been substantially prejudiced by late notice, and deny the claim.

3. Duty to Defend

The duty to defend is the most important concept in liability insurance. If there is one fundamental principle that corporate clients and their defense counsel must understand and appreciate, it is the duty to defend.

Black letter California law requires an insurer to immediately defend its insureds if the allegations in the complaint fall within, or may potentially fall within, the scope of coverage provided by the terms and definitions of the policy. Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263.

Triggering the duty to defend can result in a significant shift of power in litigation. It can provide a defendant significant leverage against a plaintiff, as suddenly a company’s defense fees are being paid by an insurer. For complex cases, such a benefit can be worth millions of dollars.

In light of the critical importance of the duty to defend, this issue frequently becomes the first battlefield between insurer and insured. Insurers file declaratory relief

actions seeking judicial resolution of difficult coverage issues, to try to terminate the duty to defend. Policyholders initiate bad faith complaints arising from the insurer’s wrongful refusal to defend.

4. The Insurance Magic of the Cross-Complaint

Many defendants in business litigation cases file cross-complaints against the plaintiff, often in a knee-jerk or mirror-image fashion. Corporations and their counsel must understand the profound impact such a cross-complaint will have on the litigation. When a cross-complaint is filed by a defendant, the plaintiff must immediately tender the cross-complaint to its insurance company for coverage. An insurance company has duty to defend a cross-complaint if the allegations are potentially covered.

By obtaining insurance coverage for a cross-complaint filed against it, a plaintiff can pay for and subsidize much of the attorney’s fees and costs it incurs for prosecuting its plaintiff’s case, as such fees and costs are inextricably intertwined with purely defense related fees. Moreover, all of the defense fees for the crosscomplaint are also paid for.

In fact, in many cases, a cross-complaint may not even be necessary to trigger the duty to defend of the plaintiff’s insurance carrier. A critical but rarely appreciated California Supreme Court opinion entitled Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 C.4th 189, 126 Cal. Rptr. 2d 908, stands for the proposition that certain affirmative defenses whereby a defendant seeks an offset against the plaintiff’s damages may constitute a claim under the plaintiff’s insurance policies, thereby triggering the duty to defend even when no cross-complaint is filed.

5. Independent Counsel

One of the most important principles in California insurance law is the right to independent counsel. A corollary of the duty to defend, California Civil Code section 2860 imposes a mandatory duty upon insurers to provide independent counsel when the resolution of a third party claim bears directly on the outcome of the coverage dispute between the insurer and its insured. San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 364.

Corporations and their counsel must recognize the situations under which the right to independent counsel is triggered, as well as the practices and procedures which are required to demand and obtain independent counsel. Further, after a company has successfully obtained the right to independent counsel, the real work begins. Outside counsel must act as both defense counsel and coverage counsel for the lawsuit. Having defense counsel with insurance law expertise is the very essence of the Cumis doctrine. Independent counsel must provide an aggressive and comprehensive defense of the third party claims while at the same time maximizing the insurance benefits available to the client.

6. Mediation and Settlement

A fundamental axiom of litigation is that insurance settles cases. Virtually every settlement of a lawsuit involves insurance and insurance issues. In fact, the large majority of settlements are paid by insurance money. Further, insurance coverage, bad faith, duty to defend and insurance defense issues are frequently the catalysts for settlement. The bottom line is that insurance frequently controls the settlement dynamic and decisions in mediation.

7. Conclusion

As demonstrated above, expertise in insurance law is an extremely powerful weapon for corporations and their counsel. Insurance issues and principles arise in virtually every field of commercial litigation. An executive or counsel handling litigation matters for a corporate client who is an also an expert in insurance law can bring millions of dollars of insurance benefits to their company.