Insurance Recovery Newsletter Vol. XVIII Winter 2017
Table Of Contents
The Limitations of Policyholder's Duty to Cooperate
Liability insurance policies have historically imposed on policyholders a duty to cooperate with insurers in the defense of actions. More recent policies have expanded this duty, obligating policyholders to cooperate in the investigation of claims as well. Insurers often investigate claims or defend actions under a reservation of rights which can create an adversarial relationship between the policyholder and insurer. As a result, courts have recognized limits on the duty to cooperate; protecting the policyholder’s right to select and control defense counsel and to have confidential, privileged communications with defense counsel regarding matters which could affect the coverage dispute.
In evaluating its obligations, a policyholder should first determine whether the duty to cooperate exists. Most standard form policies — particularly more recent ones — impose such a duty, although certain historic policies may not. If a policy purports to impose a duty to cooperate, then the parties must determine whether the insurer is fulfilling its policy obligations or whether the insurer is in breach.
Insurers can breach their obligations in a number of ways, such as by refusing to defend to the full extent required by the policy and applicable law; by taking positions on trigger, allocation, or deductible/retention issues that are unwarranted; or by issuing an improper denial of indemnity obligations, which would amount to an anticipatory breach. If an insurer is in breach, it cannot insist upon performance by the policyholder of any duty under the policy, including the duty to cooperate. If the policy imposes a duty to cooperate and the insurer is not in breach, then the parties must determine the extent of the duty and any limitations by focusing on the specific language in the policies.
Impact on the Selection and Control of Defense Counsel
Disputes often arise between the policyholder and insurer regarding the parties’ respective rights to select and control defense counsel. When an insurer agrees to defend under a reservation of rights, it generally loses the ability to select counsel, or to control the defense. These limitations on the insurer largely derive from the ethical rules that govern the conduct of defense counsel.
In situations where there is a dispute between the policyholder and insurer, the defense counsel must be careful to identify who is actually the client because this will guide the defense counsel in conducting itself within the rules of professional conduct and ethics. In most jurisdictions, courts have held that when an insurer has reserved rights and/or partially denied claims, the defense counsel’s client is the policyholder, not the insurer. Some of the rules that are particularly important in this situation require that: (1) the client gives informed consent; (2) the third party does not interfere with the attorney’s independence of professional judgment or with the client-attorney relationship; and (3) the information relating to the representation of the client is protected.
Defense counsel owes a policyholder an unqualified duty of loyalty and must at all times protect the policyholder’s interests, without being compromised by an insurer’s instructions. It is important that the attorney exercise independent professional judgment on behalf of his or her client and render candid advice. An attorney’s loyalty to the client cannot be compromised by allegiance to others or by the attorney’s personal interests.
It is not unusual for an insurer to provide defense counsel with certain litigation ‘guidelines’ that test the loyalty, zeal, and independent judgment of such counsel. Further, insurers may insist upon policyholder acquiescence in such guidelines on the basis of policy ‘cooperation’ clauses. Litigation guidelines, however, may impinge improperly upon applicable ethical rules, which are absolute, by attempting to impose restrictions upon the professional judgment of defense counsel. Generally, an attorney may comply with such attempted restrictions only to the extent they do not interfere with the attorney’s independent professional judgment in representing the policyholder and cooperation clauses cannot be used to force policyholders to consent to such ethical violations.
Impact on Privileged Communications
Insurers also may use the cooperation clause to test the limits of the attorney-client privilege between policyholders and their defense counsel. Ethical rules limit the extent to which an insurer may obtain information from defense counsel. As discussed above, when an insurer has reserved rights and/or partially denied a claim, defense counsel can function as counsel only for the policyholder. An attorney cannot reveal confidential information relating to the representation of a policyholder client unless the client gives informed consent or the disclosure is impliedly authorized in order to carry out the representation. Absent such consent or authority, the attorney must maintain in confidence information provided by the policyholder. Correspondingly, an attorney is forbidden from using information relating to representation of a policyholder client to the disadvantage of the client, unless the client gives informed consent.
The privilege analysis is complicated because in some respects an insurer is not a third party, usually in regards to the defense of the underlying claim. However, that common interest does not extend beyond the defense of the underlying claim and, in instances where the information being exchanged relates to the coverage dispute, there may be some issues.
A situation may arise when an insurer files an action seeking a declaration that there is no coverage for a claim and seeks production, based on the policy’s cooperation clause, of documents generated during the investigation of the underlying case. In these situations, courts have generally held that as long as the documents relating solely to the underlying claim are produced, then the duty to cooperate under the insurance policy has been fulfilled. Courts consistently have held, however, that policyholders need not produce documents or other communications concerning legal advice or other information transmitted with a reasonable expectation of confidentiality, such as communications between policyholders and their defense counsel relating to coverage disputes.
Cooperation clauses are common in liability insurance policies. Although it is important for both policyholder and insurer to review such clauses carefully to determine their precise, expressed scope, it also is important for the parties to recognize that ethical rules and decisional law may serve to limit the stated scope of any duty to cooperate.
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Sexual Harassment in the Workplace - Are You Covered?
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Commercial Real Estate Due Diligence: Premises Environmental Insurance Options
You found the right property for your project, the price makes sense, the purchase agreement is signed, and due diligence review is underway. There are two weeks until closing.
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Q & A: Cease and Desist
Q: I received a cease and desist letter regarding my use of a competitor’s trademark. Should I give notice to my insurance company?
Lawyer answer: It depends on your policy language. Practical answer: Yes. As advertising injury insurance has evolved, insurance companies have imposed additional requirements on policyholders to preserve coverage. One of these requirements is giving the insurance company notice of the potential for a claim, even if coverage is not yet triggered and the claim may never come to fruition. That is what one policyholder discovered in the recent case of Allstate Insurance Co. v. Airport Mini Mall, LLC, Case No. 1:15-CV-3086, 2017 WL 4280628 (N.D.Ga. Sept. 25, 2017). Although the court held that the policyholder was not entitled to coverage under the terms of the policy, the court continued its analysis and concluded that, even if the claim was covered, the policyholder failed to give timely notice when it received a cease and desist letter six months prior to the date the lawsuit was filed and that delay relieved the insurer of any duty to defend. The policy required the policyholder to give notice “as soon as practicable of an ‘occurrence’ or an offense which may result in a claim.” The court determined that this was a condition precedent to coverage and required the policyholder to give notice at the first indication of the potential for a claim. The cease and desist letter, according to the court, indicated a potential for liability related to an occurrence under the policy and the six-month delay between receiving the letter and providing notice to the insurance company was not “as soon as practicable,” as required by the policy. To the extent adopted by other courts, the decision imposes an additional burden on policyholders. Companies in highly competitive markets or that host third-party sellers may receive many cease and desist letters that are unsubstantiated and will never result in actual litigation. Requiring them to provide notice to their insurance company each time they receive a cease and desist letter could be a heavy burden in some instances. It is, however, a burden that some policyholders may need to meet to preserve coverage for their claim. Policyholders, of course, may be able to argue that certain cease and desist letters can’t reasonably be understood to “result in a claim.” And policyholders in most jurisdictions may still argue that the insurer has not been prejudiced by the timing of the notice, thus preserving coverage. Nevertheless, the best approach is to give notice to the insurer every time you receive a cease and desist letter to avoid a defense of late notice from the insurer.
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Christopher J. Carney, Clair E. Dickinson, Meagan L. Moore and Paul A. Rose were named to the Best Lawyers in America 2018.
Lucas M. Blower, Bridget A. Franklin, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Paul A. Rose and Anastasia J. Wade spoke at the Brouse McDowell 2017 Annual Insurance Coverage Conference on October 12, 2017 at Embassy Suites in Independence, Ohio.
P. Wesley Lambert spoke at the NBI Seminar titled “Construction Law: Advanced Issues and Answers” on December 5, 2017 in Cleveland, Ohio.
Kate M. Bradley, Christopher J. Carney, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Caroline L. Marks and Paul A. Rose were listed as 2018 Super Lawyers®through a peer- andachievement-based review conducted by the research team at Super Lawyers, a service of Thompson Reuters legal division.
Lucas M. Blower, Alexandra V. Dattilo, Gabrielle T. Kelly, Meagan L. Moore and Anastasia J. Wade were named 2018 Ohio Super Lawyers® Rising Stars™through a peer- andachievement-based review conducted by the research team atSuper Lawyers, a service of Thompson Reuters legal division.
Amanda M. Leffler was named in the Top 100: Ohio, Top 50: Cleveland, Top 50: Women Ohio and Top 25: Women Cleveland Super Lawyers Top List for 2018.
Alexandra V. Dattilo and Meagan L. Moore spoke at the Akron Bar Association Insurance Coverage Seminar titled “Environmental Liability Insurance: The Risks You Never Considered” on December 15, 2017.