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Cover the bases: Get insurance involved
MICHAEL R. PANTER
Law Bulletin columnist
Published: June 19, 2018
Most of us start a case at the beginning and work forward. My friend Seth Lamden works backward.
Seth is a policyholder/coverage attorney. He also happens to be a competitive powerlifter. He approaches insurance mediations and lifting meets the same way.
“A powerlifting meet is scored by the total of the lifter’s squat, bench press and deadlift. Each lift lasts only a few seconds, but a lifter will train for many months before competing. A successful mediation is no different. Although the mediation may last a day and be decided in a few key moments before the participants have to catch their flights, preparation takes many months and a mediation without a lot of preparation will rarely succeed.”
Seth described the world of coverage. In the same way that Bill Clinton’s presidency hinged on the definition of the word “is,” Seth represents policyholders in cases where millions of dollars ride on the interpretation of a single word or two in an insurance policy.
For example, in some policies, a pollution exclusion doesn’t apply if the pollution is “sudden and accidental.” But what is “sudden and accidental”? Could it be gradual and unexpected? According to some courts, yes.
Although mediating a coverage dispute can be tricky enough, complications multiply when the case involves both a coverage dispute and an underlying case that the insured wants its insurer to settle. This often happens when the underlying plaintiff is seeking damages in excess of policy limits, or seeking damages some of which are covered and some of which aren’t. To settle a case like that means working to convince the insurer its coverage position is vulnerable and that settling the underlying case is the best way to limit its liability.
Preparation for a settlement like that means everyone has to be on board. According to Seth, “Often, liability insurance is the principal asset available to satisfy a judgment or settlement. Accordingly, a plaintiff’s attorney should be thinking about how to trigger insurance before even filing suit. Defense counsel and the defendant also need to be thinking about insurance from the beginning of the case. In most cases, if the plaintiff and defendant have paid attention to coverage issues, the case will settle on the best terms for the plaintiff and defendant.”
Too often, defendants are so focused on fighting liability they don’t think about how to get coverage. This is particularly problematic when an insured refuses to accept that things can go very wrong at trial.
“Representing policyholders, I work alongside really talented defense attorneys, but sometimes it is hard to get defense attorneys to talk candidly with insurance adjusters about weaknesses in a case until mediation is approaching.
“An adjuster can’t be expected to settle if she has only heard about what will happen on the best day of trial — you win every motion, the jury loves your tie, the sun is shining outside and they’re hanging on your every word. That obviously is so rare, it’s so unpredictable.
“What I need the adjuster to think about is what’s the worst thing that could happen to my client at trial? That is the exposure insurance is designed to protect against. I’ve had many clients tell their insurer they don’t want the insurer to settle on their behalf because they didn’t do anything wrong. I remind them that, unfortunately, judges and juries don’t always take the word of the defendant on that.
“Plaintiffs also fail to understand the importance of proper pleading to trigger coverage. This presents challenges to an insured when the underlying claim may be covered, but the insurer is contesting coverage based on the wording of the underlying complaint.
“Sometimes, the addition of just one word or two in an underlying complaint can be the difference between coverage and no coverage.
“For example, I was recently involved in a case where the underlying plaintiff only sought restitutionary relief, which the insurer contended was not covered. The plaintiff also had a strong claim for compensatory damages, but inexplicably did not include a request for compensatory damages in the complaint.
“Regardless of whether the insurer’s position was correct, had the plaintiff included a request for compensatory damages, we wouldn’t have had a coverage dispute. Same with negligence.
“For example, a case that pleads only intentional assault may not be covered. On the other hand, if the alleged assault actually involved the defendant’s accidentally pushing the plaintiff who then happened to fall on the street, that may be a claim for negligence and thus covered. Proper pleadings can unlock coverage.
“A lot of insureds who get sued aren’t thinking about insurance from the beginning and blindly trust their insurers to protect them, and that’s a mistake. I have been told by insurance adjusters, I don’t know if this is true, but I am told that 99 percent of insurance disputes or claims go smoothly. The insurance company steps in, they defend, they settle, they do the right thing and there’s no dispute. I’ve never seen one of those.
“Policyholders are often surprised by how aggressive insurers are in contesting coverage. No policy is perfect, but I see insurers raise a lot of coverage defenses that are simply not supported by the case law or policy.
“A broker friend of mine calls this the “million-dollar exclusion” — when the value of a case is high enough, an insurer will find a way to fight coverage. The problem that we face, more so than other jurisdictions, is Illinois does not really have insurance bad-faith law, so there aren’t always adverse consequences to an insurer that unnecessarily picks a fight with its insured.
“There is bad faith in the sense of an insurance company has a good-faith obligation to settle, but insurance bad-faith law doesn’t really exist where an insurance company takes positions regarding coverage that are not based on existing law or the policy language or willfully ignorant to certain facts.
“In some jurisdictions there is case law where the policyholder is entitled to recover attorney fees or punitive damages if the insurance company takes an unreasonable position.
“While we do have a statute, Section 155, relief is very limited and rarely granted. Illinois courts have a very heightened standard of what ‘vexatious and unreasonable’ conduct means.”
According to Seth, insurers have little incentive not to litigate coverage disputes, which, he feels, puts his policyholder clients with limited resources at a big disadvantage. Insurers are professional litigants, and an insured defending itself in an underlying case may not have the money to litigate a coverage dispute with its insurer at the same time.
However, Olympia Fields Country Club v. Bankers Indemnity Insurance Co., 325 Ill. App. 649, 60 N.E. 2d 896 (1945), demands that where an insurer can be liable for unreasonably refusing to settle within policy limits, can still be a powerful weapon.
Often, when the insurer refuses to pay, the plaintiff and defendant will enter into a consent judgment and assign all insurance rights to the plaintiff in exchange for a covenant not to execute against the insured’s personal assets.
The insured is protected by the nonrecourse assignment. If upheld, the plaintiff may be able to collect on the judgment which may be far in excess of the policy. Even if the full judgment is not upheld, the plaintiff may recover more than the policy. But a proper Olympia Fields demand takes months to set up, and an insurer’s duty to settle encompasses more than a policy limits demand.
“Hopefully at mediation, there’s nothing more to do. If everyone has focused on coverage issues and a realistic picture of potential liability from the beginning, by the time we’re at mediation the record has been appropriately developed and the stage has been set for the insurance company to settle.
“An insurance company needs plenty of time to be prepared. I try to get coverage disputes resolved before mediation, otherwise we’ll spend the whole day fighting about coverage disputes and not focusing on what’s the most important thing, which is settling the underlying case.”
Litigants who stroll into a mediation expecting it to settle, without resolving these issues ahead of time, are likely to be disappointed. Maybe if more of us worked from the end backward, as Seth advises, we wouldn’t have such a hard time trying to get where we’re going.
Hon. Michael R. Panter (Ret.) is a senior mediator at ADR Systems of America LLC. He previously served in the Law, Family and Municipal Divisions of the Cook County Circuit Court. He was a trial lawyer for 30 years. Share responses and comments at mikepanter.com.