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Is This Claim Covered? (How to Analyze an Insurance Policy)

Cackhead Craig was driving his Monster Truck down the freeway when he encountered stopped traffic due to an   automobile accident. Crackhead decides to take the Monster Truck off road and drives across an empty field until he encounters a parking lot for an empty warehouse. Crackhead drives the Monster Truck up a ramp, through the warehouse, and out the back door off of a loading ramp. Unfortunately, Eggshell Eddie was driving by the loading dock after completing his inspection of the warehouse as a potential location for his exotic birds import company. Crackhead’s Monster Truck flies through the air and lands on the Honda Civic driven by Eggshell Eddie. Eggshell was severely injured. Eggshell retains his brother-in-law, Billy Greenhorn, to  represent  him.  Attorney  Greenhorn  had  recently  passed  the bar after completing a correspondence course from a law school that he learned about on the back of a matchbook cover. Attorney Greenhorn filed a complaint alleging one cause of action for battery against Crackhead. Crackhead notified his insurance carrier, Allsnake Insurance Company, of the claim. Allsnake denies coverage on the basis that Crackhead was engaged in off road activity at the time of the accident which is excluded by the policy and the complaint only alleges a claim for battery which is an intentional act. The policy does not cover claims arising out of intentional acts by the insured. Crackhead retains you to evaluate Allsnake’s coverage position

ANALYZING THE POLICY
Parts of the Policy.

An attorney evaluating coverage must read the entire policy. Clients frequently provide their attorney with only a portion of the policy, a summary of the policy benefits or simply a copy of the declarations page. The first thing you need to do is request the insurance carrier provide you with a certified copy of the policy or verify that what the client provided is a complete copy of the policy.

When you receive a copy of the policy, you want to review the various parts of the policy. The declarations page will provide you with the types of coverages, the identities of the named insureds, the policy period and will also identify the policy forms. You should verify that your client purchased the type of coverage that is needed to cover the claims against your client. Do not trust the understanding of your client as to the types of coverages that they possess. Clients frequently do not know the full extent of the coverages provided under their insurance policy. In fact, court opinions frequently recite the fact that most policy holders never read their insurance policy.

You should verify the incident in question occurred during the policy period and that the policy was in full force and effect at the time of the incident. If not already provided, you should ask the carrier to provide its coverage position in writing. The California Fair Claims Settlement Practice Regulations (10 CCR 2695.1, et seq.) requires insurance carriers to either accept or deny a claim in writing and explain, in whole or in part, the specific statute, applicable law or policy provision, condition or exclusion, upon which the coverage denial is based and explain the application of the statute, applicable law or provision, condition or exclusion to the claim. (10 CCR 2695.7(b)(1)) The coverage denial letter will allow you to verify that the coverage denial was not based upon cancellation of the policy for nonpayment of premium. It will set forth the legal basis under the law or the policy upon which coverage was denied. With that information, you can then analyze whether the insurance carrier’s coverage position was correct.

The declarations page will identify the named insured. However, the actual policy provisions will identify other persons who are insured under the policy. If a corporation is identified in a commercial general liability policy as the named insured, the “persons insured” provision in the policy ordinarily extends coverage to its stockholders, directors and executive officers acting in their capacities as such, and to employees of the corporation acting in the course and scope of their employment. Homeowner policies refer to the “named insured” and other “resident relatives” of the named insured’s household. Automobile liability insurance policies ordinarily include any person using the insured automobile with the named insured’s permission. Therefore, you should confirm that the policy covers your client as either a named insured or as one of the other persons who are covered under the policy. It will be your client’s burden to initially establish that he or she is potentially covered under the policy. Once that potential has been established, the burden of proof shifts to the insurance carrier to establish by undisputable evidence that there is no potential for coverage under the policy in order for the carrier to deny your client a defense. Montrose Chem. Corp. v. Superior Court (1993) 6 Cal.4th 287, 300.

The declarations page will also identify the policy forms. It is important that you confirm each of the policy forms that comprise the actual policy. Policy forms have numbers assigned to them which generally appear at the bottom corners of the policy forms. These form numbers are listed on the declarations page.  Insurance  companies  sometimes  erroneously  claim that coverage is excluded under as endorsement. However, unless that endorsement is listed as one of the forms on the declarations page, the endorsement is not part of the policy and will not apply to excluding coverage.

After you have confirmed that you have the actual policy, you should review the entirety of the policy. The first part that you should review is the coverage section. The insuring clause is the basic agreement by the insurance company to provide coverage to its insured. An insuring clause may be a single sentence or a series of sentences. Most policies contain several insuring clauses which provide “first party” or “third party” coverages, or both. First party coverages would typically be situations such as property insurance, medical payments coverage in an automobile policy, uninsured or underinsured motorist coverage, etc. Third party coverages provide coverage for acts by an insured for which liability may be imposed upon the insured to pay damages that are covered under the policy. The typical example would be liability insurance. An example of the insuring clause of a liability insurance policy would be “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages.”

After you have established that your client is a named insured, you must determine whether the insuring clause covers the claim. For liability insurance, an insurance carrier owes two separate and independent duties to its policy holders. It owes the duty to defend and a separate duty to indemnify. The duty to defend is broader than the duty to indemnify. The duty to defend is determined at the outset of the litigation whereas the duty to indemnify is determined at the conclusion of the case. An insurance carrier is required to provide a defense even though non-covered acts are also alleged in the third-party complaint.

In the situation of Crackhead Craig, he is being sued solely for battery. However, the facts giving rise to that claim would support a  claim  for  negligence.  Whether or not the insurer owes a defense will depend upon (1) the terms of the  policy;  (2)  the  allegations  of the third-party’s complaint against the insured; and (3) all facts known to the insurer from any source. Montrose Chem. Corp. v. Superior Court (1993) 6 Cal.4th at 295-296. The determination of whether the insurer owes a duty defend is typically made in the first instance by comparing the allegations of the complaint with the terms of the policy. A carrier is obligated to defend even groundless, false or fraudulent claims. However, the complaint need not allege a covered cause of action. If the complaint discloses enough facts to indicate a potential for coverage, the duty to defend arises so long as the facts alleged in the underlying complaint give rise to a potentially covered claim, regardless of the technical legal cause of action pled by the third party. Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 510.

In the Crackhead Craig situation, the complaint may or may not contain enough factual allegations to establish that the claim is covered. Most experienced attorneys would contact opposing counsel and explain the benefits of amending the complaint to more specifically plead a covered cause of action or would obtain more facts to provide to the carrier to trigger a potential for coverage and thereby obligate the insurer to defend. Most experienced plaintiffs counsel are sufficiently cognizant of coverage issues that they routinely plead facts and causes of action (e.g., negligence) that would be covered under an insurance policy. When analyzing the claim to find coverage for your client, you should expand the scope of your knowledge of the facts so that you can find a legal theory that could be asserted based upon those facts that would be covered under the policy. If it involves a business liability policy, you need to also explore those facts that would establish that the conduct of the officer, director or employee was sufficiently connected to the covered business that would trigger the duty to provide a defense on the basis that the alleged unlawful conduct was by a named insured or persons covered under the policy.

It is important to keep in mind that insurance policies typically do not cover breach of contracts. Consequently, you must look to some tort liability theory to help trigger coverage. In addition, you should also focus on the types of damages being sought, or potentially sought, by the plaintiff. Pure economic damages arising out of a breach of contract situation would not be covered. In contrast, if the insured was guilty of negligence and that negligence caused the claimant to suffer economic damages such as lost income, medical expenses, etc., those damages would be covered along with any bodily injury or property damages. Most liability coverage policies cover damages for bodily injury and tangible property. You should carefully read the allegations in the complaint. Pure emotional distress damages, without some resulting bodily injury damages, have been held by some courts not to constitute bodily injury. However, bodily injury damages can include emotional distress damages. Pure economic damages like loss of market value do not constitute property damages unless there has been physical damage to tangible property.

After obtaining sufficient facts to trigger coverage, you should tender the defense to the insurance carrier as soon as possible. The policy should be read to determine if there are particular locations that a tender of defense should be sent to notify the carrier. Many people utilize insurance brokers to place their insurance coverages. Insurance brokers who work with a multitude of insurance carriers are considered the agent for the policyholder and not the insurer for most of their acts. Eddy v. Sharp (1988) 199 Cal.App.3d 855, 865. If you have difficulty finding the location to tender the defense, call the carrier or the insurance agent for that information. The insured is required to provide notice to the insurer in order to trigger its duty to defend. The tender may be either formal or constructive notice to the insurer. Good practice suggests that a written tender of the defense to the insurer should be made in order to document that actual notice has been given. No tender of a defense is required if an insurer has already denied coverage of the claim. In such cases, notice of a lawsuit or service of the lawsuit is excused because the insurer has already expressed its unwillingness to undertake a defense. Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 883. An insurer who denies a defense based upon late notice of the claim will bear the burden of establishing that it was substantially prejudiced by the delay in being provided notice of the claim. Select Ins. Co. v. Superior Court (1990) 226 Cal.App.3d 631, 637. That has proven to be a difficult burden to meet. Substantial prejudice has been found not to exist even when a default judgment was entered before notice was given.

Most policies will also contain general terms and conditions that impose obligations on a policy holder during the pendency of the defense of a claim. You should review those general terms and conditions to insure that any special provisions that apply to your situation have been met. You do not want to provide the insurance carrier with a technical excuse to justify its denial of coverage or withdrawing its defense.

In business situations, certificates of insurance are frequently provided to third persons. Certificates of insurance simply establish  the  existence  of  coverage  but  do  not  necessarily prove that the certificate holder is covered under the policy. A certificate of insurance can also name the certificate holder as an additional insured under the policy. In that situation, the certificate holder is also covered under the policy to the extent the policy provides coverage for the named insured.

TYPES OF LIABILITY COVERAGE – OCCURRENCE VERSUS CLAIMS  MADE
There are two basic types of liability insurance policies. Occurrence- based policies are much broader in scope of coverage than claims made. An “occurrence” is generally defined by the policy as an accident, including continuous or repeated exposure to substantially the same harmful conditions. So long as damage has occurred during the policy period, the policy is triggered. The policy will provide coverage even though the claim is not made until after the policy expires. Gilliam v. American Cas. Co. of Reading PA (N.D. CA 1990) 735 F.Supp. 345, 349, fn. 4. Because the insurer bears the risk of claims being made years later for acts or injuries which occurred during the policy period, occurrence policies are typically more expensive than claims made policies. Montrose Chem. Corp. Of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 689).

The term “accident” as used in an occurrence policy is given a common sense interpretation. It is generally interpreted as “an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.” Delgado v. Interinsurance Exch. of Auto Club of Southern Calif. (2009) 47 Cal.4th 302, 308. Therefore, the word accident in the coverage clause of a liability policy refers to the actual conduct of the insured for which liability is sought. The injury producing event is not considered an accident so as to trigger coverage “when all of the acts, the manner in which they were done, and the objective accomplished occurred as intended by the actor.” Delgado v. Interinsurance Exch. of Auto Club of Southern Calif., (2009) 47 Cal.4th, 302, 311-312. Whether an insured’s conduct and the injury the insured inflicted were “unexpected, undesigned and unforeseen,” is viewed from the insured’s perspective, and not that of the injured party. Id. at pages 308-309. Many courts have held that an accident can exist when either the cause is unintended or the effect is unanticipated. However, most of those decisions pre-date the California Supreme Court decision in Delgado v. Interinsurance Exch. of Auto Club of Southern Calif., which involved an assault and battery situation.

In  contrast  to  occurrence  policies,  claims  made  policies cover only claims made against the insured while the policy is in effect. Abifadel v. Cigna Ins. Co. (1992) 8 Cal.App.4th 145, 159. Claims made policies were developed to “limit an insurer’s risk by restricting coverage to the single policy in effect at the time a claim was asserted against the insured, without regard to the timing of the damage or injury, thus allowing the carrier to establish reserves without regard to possibilities of inflation, upward-spiraling jury awards, or enlargements of tort liability after the policy period.” Montrose Chem. Corp. of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th at 688. A claim in a claims made policy is typically defined as a “written demand for civil damages or other relief against the insured.” Unless the policy has a “prior acts exclusion,” a claims made policy provides retroactive coverage which means that it covers claims made against the insured during the policy period regardless of when the liability- producing act occurred. By contrast, an occurrence policy provides coverage, for acts or omissions that occur during the policy period, regardless of when the claims are made. Consequently, “claims made policies theoretically provide unlimited retroactive coverage, whereas occurrence policy offer unlimited prospective coverage.” Gilliam v. American Cas. Co. of Reading PA (N.D. CA 1990) 735 F.Supp. at 349, fn. 4. A prior acts exclusion in a claims made policy may exclude claims based upon acts conducted prior to the policy period. So long as the provision is conspicuous, plain and clear, their validity has been upheld.

Ordinarily, a claims made policy does not cover claims which are first made after the policy has expired, even if the insured’s act or omission and the harm occurred while the policy was in effect. To address this situation, “tail coverage” is available to extend the time within which a claim may be made. Under that circumstance, the insurance protection is provided if the wrongful act took place during the policy year and the claims are made before the expiration of the extended reporting period under the tail coverage. Taub v. First State Ins. Co. (1995) 44 Cal.App.4th 811, 818.

Many claims made policies also require that the insured report such claims to the insurer during the policy   period or within a short period of time after expiration. These types of policies are often referred to as “claims made and reported” policies. Absent such a provision, claims made against the insured during the policy period are covered although not reported to the insurer until after the expiration of the policy. However, a delay in notice may be a defense to the enforcement of the policy under the conditions of coverage found in most claims made policies.

EXCLUSIONS  OF COVERAGE
Insurance policies contain various provisions that take away or limit coverage. Any provisions that take away or limit coverage that is reasonably expected by the insured must be “conspicuous, plain and clear” to be enforceable. De May v. Interinsurance Exch. of Auto Club of Southern Calif. (1995) 32 Cal.App.4th 1133, 1137. The California Supreme Court has explained, “An insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear ... The burden rests on the insurer to phrase exceptions in clear and unmistakable language ... The exclusionary clause must be conspicuous, plain and clear.” State Farm Mut. Auto Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201-202. In situations where an exclusion has been added to the basic policy form or by way of an endorsement to a policy that has been renewed, the insurer is required to provide notice of the reduction in coverage. “It is a long-standing general principle applicable to insurance policies that an insurance company is bound by a greater coverage in an earlier policy when a renewal policy is issued but the insured is not notified of the specific reduction in coverage. Fields v. Blue Shield of California (1985) 163 Cal.App.3d 570, 578. In general, while insuring or coverage clauses are interpreted broadly, exclusionary clauses are construed narrowly against the insurer. State Farm Mut. Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 101-102. The burden is placed upon the insurer to prove that the exclusion applies. Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 880.

PRACTICAL TIPS FOR BASIC COVERAGE  ANALYSIS
Since the duty to defend is triggered upon the insured providing notice to the carrier, notice should be provided to the carrier of the claim as soon as possible. Many carriers will provide a defense even before it has conducted any investigation of the underlying claim or made a final determination on coverage. However, counsel should be very sensitive about allowing the insured to provide a recorded statement or to be interviewed by the insurance carrier before having a firm grasp of the underlying facts and the potential coverage defenses that might apply to deny coverage for your client. If coverage is tenuous, it may be wise to enlist the aid of an attorney who specializes in insurance coverage matters. It’s not simply the need to develop the basic facts of the claim; counsel needs to develop and investigate very early those facts that would trigger coverage and would impose a duty to defend upon the carrier and also to eliminate any applications of coverage exclusions or other coverage defenses to the extent possible. Since most cases settle, the duty to defend can be more financially meaningful to your client than the duty to indemnify. In fact, most cases that involve situations where the carrier defends the underlying claim under a reservation of rights will settle and the carrier will waive any right to reimbursement from its insured. Carriers are aware that any attempt to seek reimbursement from its insured for its defense costs will require the carrier to meet its burden of proof to establish that the defense costs were incurred solely for uncovered claims. Any defense costs that were incurred to defend both covered as well as uncovered claims will still be the responsibility of the insurer and reimbursement would be denied.

CONCLUSION
After utilizing your unique knowledge of the anatomy of an insurance policy, you write to Allsnake and inform it that the plaintiff has amended the complaint to include a cause of action for negligence. You also pointed out that the off-roading exclusion does not apply because Crackhead had driven off the field and had driven across a parking lot and then through an abandoned building when the accident occurred. Investigation shows that Crackhead Craig was unaware of the presence of Eggshell Eddie as Crackhead drove off of the loading ramp at the warehouse. The collision was unexpected and unforeseen and therefore constituted an accident which is covered under the policy. Allsnake Insurance realizes its error and recognizes your superior skill as an attorney. It reverses its position and provides a defense for Crackhead and ultimately settles Eggshell Eddie’s claim. Once again, justice has prevailed and Crackhead Craig is singing your praises.

Rocky Copley

Rocky Copley is in his twenty-ninth year in the practice of law. He has substantial experience in the area of civil litigation and has tried numerous trials before both juries and the bench. His practice emphasizes personal injury, insurance coverage and insurance bad faith, wrongful termination, sexual harassment and discrimination, and business litigation. In 1986, he opened and managed the San Diego regional office for the statewide law firm known as Borton, Petrini & Conron, LLP. He rose to the level of senior partner in that firm. He left the firm in late 2005 to open his own law practice. He is currently the principal owner of the Law Office of Rocky K. Copley, located in downtown San Diego.

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Filed Under: Practice Management

About the Author: Rocky Copley is in his twenty-ninth year in the practice of law. He has substantial experience in the area of civil litigation and has tried numerous trials before both juries and the bench. His practice emphasizes personal injury, insurance coverage and insurance bad faith, wrongful termination, sexual harassment and discrimination, and business litigation. In 1986, he opened and managed the San Diego regional office for the statewide law firm known as Borton, Petrini & Conron, LLP. He rose to the level of senior partner in that firm. He left the firm in late 2005 to open his own law practice. He is currently the principal owner of the Law Office of Rocky K. Copley, located in downtown San Diego.

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