By Todd A. Rossi

The legal process typically begins with a claim, which, if not resolved, can result in a lawsuit.  There are steps a business should take to protect itself at the claim stage, or when a lawsuit is served.  Larger businesses may have a risk manager with the formal training and experience needed to respond to a claim or a suit.  However, the reality is that most businesses do not have a risk manager and are unfamiliar with the legal process.  For those businesses, the following actions may be appropriate:

  1. If a pre-suit demand letter is received, or a suit is served, read it.  Do not ignore the demand letter or the suit.  There must be a formal response to a suit within a certain time or there is a risk of a judgment against the business.  Likewise, demand letters typically request a response or action by a certain date or a lawsuit will be filed. 
  2. Seek legal counsel to protect the business.  If you have a lawyer, contact your counsel immediately.  It’s time to pull out the insurance policies and immediately contact your insurance broker or agent.  A copy of the demand or the legal papers should be given to legal counsel and the broker or agent.  Insurance policies can have strict requirements related to the content and timing of notice, and any delay can adversely affect coverage.
  3. The insurance company will review the claim and the suit papers, and should give their opinion on coverage.  Most states require the insurance carriers to do so within a certain period of time, but it may not coincide with the period in which the business must respond to the suit. 
  4. If the insurance company accepts coverage and it has a duty to defend, it will appoint an attorney to defend the business and will pay a judgment or settlement, but only up to policy limits.  The business needs legal advice if the potential exposure exceeds the dollar limits of coverage. 
  5. The insurer can also deny coverage based on its conclusion that the insurance policy does not apply.  On some occasions, the insurance carrier may not respond, and follow-up is needed. 
  6. The insurance company can also agree to defend the business under a reservation of rights.  This means that the cost of legal counsel will be paid by the insurer, but the insurance company believes that there are policy terms that may preclude or limit coverage. 
  7. Many insureds wrongfully assume that there is coverage if the insurer agrees there is a duty to defend.  The insured should still consider keeping legal counsel involved throughout the litigation to monitor the likelihood of coverage.  With a reservation of rights, the insurance company can still conclude that there is no coverage when the litigation ends.
  8. Whether the insurance carrier issues a reservation of rights letter and agrees that it has a duty to defend, or if the insurance company denies coverage, the insured may need help to understand the insurers’ position.  The insurance carrier’s conclusion is not legally binding, but merely its opinion as to coverage.  Agents and brokers are a good starting point for dealing with insurance carriers that have not unconditionally accepted coverage.  The insured must decide if it will pursue litigation against the insurance company to obtain coverage if the insurance company does not pay a settlement or judgment.    
  9. Interpreting an insurance policy is a legal issue.  An attorney can assist the broker and the business by reviewing the insurance policy, the claim or suit, and providing an opinion.  With some exceptions, that cost is borne by the insured.
  10. An insured cannot settle a case or otherwise prejudice the insurer’s rights without the insurer’s consent.  Thus, before you commit to, or actually, spend any money to stop or mitigate additional losses, repair any damages, or replace any damaged items, or even settle a claim, get the insurer’s consent.