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 more than $100,000 in medical expenses and the prospect of more to come. Once the long-term prognosis is known, the person finds a lawyer, becomes a plaintiff and files the personal injury case. You get served with the lawsuit and turn it over to your insurance company. This article looks at some of the important questions that follow from this point forward in the litigation.
You made the first right step in turning the lawsuit over to your carrier. Most insurance policies require prompt notice of any claim, occurrence or lawsuit.
At this point, your carrier will review your coverage in comparison to the lawsuit. Your insurance company sends you a reservation of rights, listing 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.
Let’s say that bought $5 million in coverage for such problems like this case. While that seems like adequate coverage, if the lawsuit is filed, for example, for $10 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 $5 million may quickly start to disappear, leaving your business on the hook for even more.
The insurer notes that you will be responsible for the excess verdict over your policy coverage amount, 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, and here’s why.
The assigned insurance defense attorney regularly receives cases from this carrier. The insurer is in the business of making money; the less it spends on you, the more the company makes 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 — a gamble with your $5 million. Only an independent attorney can respond to the reservation of rights letter and address coverage issues that may arise.
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, as well as 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, but it may have 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 the insurance company protects its own interests to your detriment. The shadow counsel can also, if he or she has an insurance coverage background, directly deal with the insurer on your behalf.
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. Generally, 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 earlier, your insurer may try to withdraw from its obligations of defending your company in the middle of the personal injury case (or any case where insurance is providing a defense under a reservation of rights). 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 who has been acting as shadow counsel invaluable. He or she can immediately step into the breach and handle the coverage case.
Most lawsuits filed by insurance companies in this type of situation are filed in federal court. These courts can move very quickly in handling cases. In fact, in the Eastern District of Virginia, the federal court system is known as the “Rocket Docket.” It is obvious you will have very little time to find counsel who can quickly get up-to-speed in fighting the insurance litigation. Clearly, shadow counsel can be a strategic advantage here.
Is it fair that you have to hire a second attorney in these instances? Maybe not, but you should carefully evaluate your insurance policy limits and exposure to risk. At any rate, when your business is faced with a catastrophic lawsuit and is on the hook for the excess verdict over the policy limits, it is short sighted to view the attorneys’ fees for shadow counsel as an immediate negative. Business owners and in-house counsel should view the use of such attorneys as a strategic 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.