January 4th, 2017
Lions and Tigers and Reservation of Rights Letters, Oh My!
Your company has been sued. You have notified your insurance company which replies in writing. What’s your next step? There is a risk in trusting your commercial general liability insurance carrier to do the right thing. I don’t suggest that every insurance company acts in its own self-interests to the detriment of its insured. However, it’s not a bad idea to have a full understanding of the potential, inherent conflict between your company and your insurance company in the context of a construction defect lawsuit.
Close to Home
I often receive calls from frustrated glass, door and window manufacturers trying to figure out how to navigate the treacherous waters of liability risks. A few days ago, I received a call from a national manufacturer we’ll call “Insured Windows.” As is often the case, the company was under attack from “Duey, Cheatem and Howe,” a law firm with a reputation of putting manufacturers out of business. The CEO of the window company exclaimed, “I’m reading a letter from my insurance company reserving rights, disclaiming coverage, and discussing several potential non-covered claims. What does it all mean?!?”
After listening to several minutes of stressful venting, I figured out that the lawyers were threatening to sue over windows at a multi-million-dollar project that they claimed were not performing as represented. Letters and phone calls had already been exchanged. Demands were made to put Insured Windows’ insurance carrier on notice. The insurance company was now involved and provided a letter titled “Reservation of Rights” in response to Insured Windows’ request that its insurance carrier hire an attorney to defend the company. The CEO wanted to understand whether his company was indeed fully protected by the insurance company, and wanted our firm to serve as a watchdog and advise them on the insurance coverage issues.
“Depending on the specific state law that applied to the issue, you have a potential conflict or an actual conflict with your insurance company,” I said. My thoughts wandered for a moment. I recalled all of the glazing industry clients I have advised on how their insurance companies may make intentional or even inadvertent mistakes, jeopardizing insurance coverage and the insured’s personal interests.
There is a constant tension between glazing and fenestration companies and the insurance world. Of course, insurance doesn’t typically cover claims for product replacement, breaches of contract, breaches of warranty, punitive damages, etc. The truth is, when an insurance company accepts and cashes your premium check, it promises two things: (1) It will hire a lawyer to defend you and (2) it will pay any damages on your behalf that are covered under the policy of insurance. You may not fully appreciate that one of the most substantial values to your insurance policy isn’t the amount of insurance limits you purchased, it is the fact that the policy requires someone else to pay for your defense attorney or attorneys, experts and other litigation costs. Exposure to defense costs can soar to several hundreds of thousands of dollars in complex construction-defect litigation.
What many glazing companies do not realize is that when their insurance carrier reserves the right to potentially deny coverage down the road, perhaps several years after the litigation began, the manufacturer has the absolute right to choose its own counsel and control the case’s defense. This provides an opportunity to hire a seasoned attorney who is well-versed in the nuances of the fenestration industry. It is frustrating enough to be sued. It is even more so when you and your key employees have to spend countless hours educating the attorney hired by your insurance company on your business, your industry, your products, etc. Taking advantage of the right to retain an attorney knowledgeable about the fenestration industry and savvy to the various insurance coverage nuances provides your company with significant protections.
I explained to the CEO of Insured Windows the detailed ins and outs of the insurance coverage issues, strategies to maximize insurance coverage protections, and options to control the case’s defense.
The company CEO thanked me for the insight into the complicated world of insurance coverage issues and reservations of rights. We were then able to focus on the company, the underlying facts of the lawsuit, and the acute strategies to meaningfully defend against the claims, rather than getting unduly bogged down in insurance coverage issues.
While lions and tigers might be dangerous, they can be controlled under the right conditions. Reservation of rights letters can be managed by maximizing your rights under your insurance policy and the applicable law.
Addressing this critical issue at the outset of a lawsuit is important. In my experience, very few insurance carriers will push back against a manufacturer selecting an experienced fenestration defense counsel. If the insurance carrier is wrong in its coverage position and forced an unknowledgeable attorney who it personally chose into the mix, the insurance carrier may be found to have acted in bad faith.
Chip Gentry is a founding member of Call & Gentry Law Group in Jefferson City, Mo. He can be reached at firstname.lastname@example.org.