Lawsuits: 3 questions to ask when insurance carriers do not have your back

Here's how and why to protect your department when the insurance company's interest conflict with the fire department's.

By Donna Aversa

One day, the process server shows up with the lawsuit against your department. The lawsuit is 20-pages long and includes allegations of negligence and intentional acts by your department against the plaintiff.

You immediately deliver the lawsuit to your department’s insurance carrier. You expect the carrier to provide an experienced defense attorney and to pull out all the stops to exonerate the department from all wrongdoing — and if against all odds the department loses, to pay all the damages.

After all, that’s why the department pays all those premiums.

So what’s the deal when the department’s insurance carrier sends a letter saying its defense is tentative and conditional under a reservation of rights?

Reservation of what?
In a nutshell, a reservation-of-rights letter from the carrier puts the department on notice that coverage is defined by the insurance contract between the insurance carrier and the department as the policyholder. It is a warning that coverage does not extend to claims outside the scope of coverage.

For example, if you pull out your department’s policy right now, you can put your finger on the dollar amount it covers. That means a $6 million claim is $1 million outside the scope of a $5 million policy.

In addition, you probably can put your finger on a provision that excludes coverage for intentional acts. That means if your department purposefully perpetrated a fraud in securing an engine, that intentional act would be outside the scope of coverage.

The 1 percent
The good news is that most departments have strong relationships with their insurance carriers. Your department may be self-insured or have coverage through an insurance pool.

However, for the 99 times your department has a positive experience with the insurance carrier, there can be that one stinker of a time. Maybe the adjuster needs to be educated and develop an understanding of the department and the underlying incident. Or maybe there is a legitimate issue that could preclude coverage for all or part of the claims.

When this happens ask questions, get satisfactory answers and understand your department’s insurance policy. Do what you do best — be vigilant in protecting your department.

Here are three questions to get you started.

1. Can the department nail down the “what” and “why” of the reservation of rights?

As soon as possible, confer with your department’s general counsel (the attorney who generally represents the department) to address the reservation of rights. Your general counsel should be involved to protect the department’s rights (that’s the counsel’s job) and to make sure the department doesn’t inadvertently step in something smelly that would negatively impact coverage.

That means requiring the insurance carrier provide prompt clarification of the specific provisions of the department’s insurance policy in relation to the specifics of the claims asserted against the department. Clarification should define the scope of the insurance carrier’s warning of the reasons why the defense is tentative and conditional.

  • Is it the entire lawsuit?
  • Just one count of a multi-count lawsuit?
  • Isolated to a specific allegation within the lawsuit? Related to the amount of damages claimed in excess of coverage?
  • Or something else?

With this determination, the department can assess its risk and comfort level with the tentative and conditional defense provided.

2. What if the department disagrees with the reservation of rights?

Any disagreement the department has with the reservation of rights should be well documented by your general counsel. You don’t want silence to be interpreted as consent to the reservation-of-rights letter.

If your department does not get a satisfactory response, it may need to retain an attorney with specific experience in insurance coverage issues aptly called coverage counsel. Coverage counsel can press and monitor a reluctant insurance carrier, which has financial incentive to deny coverage. In extreme cases, an insurance carrier may be sued to provide coverage.

3. What should the department expect from a defense attorney appointed and paid by the insurance carrier?

Once the insurance carrier appoints defense counsel, consider having a pointed and well-documented discussion to confirm that the defense counsel owes its full duty to protect your department as the client.

Further, confirm that defense counsel will not disclose attorney-client privileged information to the insurance carrier. Be clear that any confidential or privileged information turned over to the defense counsel is only provided for purposes of defense. It should not be turned over to the insurance carrier.

For example, in defending a lawsuit involving allegations of negligence and intentional acts, any evidence supporting an allegation of intentional acts would support the insurance carrier’s denial of coverage for those alleged intentional acts. Another risk in providing privileged information to the insurance carrier is the potential waiver of attorney-client privilege.

In some cases, there may be a conflict where the insurance defense counsel potentially could prejudice your department’s defense. In those cases, the insurance carrier likely has an obligation to provide an independent counsel.

Disclaimer: Of course, this is written by a lawyer, so you saw this coming. This is article is general information for discussion and educational purposes. It is not legal advice

What do you think? What’s your experience? Continue the discussion in the comments section.

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