How to avoid a liability insurance nightmare with the right coverage

Edward Galloway, Shareholder, Jackson DeMarco Tidus Peckenpaugh

Joel Covelman, Senior Counsel, Jackson DeMarco Tidus Peckenpaugh

A lawsuit has just been filed against your company and several of the company’s executives. Your first thought: “We have general liability insurance, and paid a lot of money for it. The insurance company will pay the lawyers to defend us and pay any settlement or judgment that might be entered. No need to worry.”

But then the insurer tells you that your general liability insurance policy only covers claims for bodily injury, property damage and something called “advertising injury.” None of the claims in your lawsuit fall into those categories. You are on your own. Now, your company has to pay for the defense and any settlement or judgment. Suddenly, the lawsuit that you thought was “no problem” because you have general liability insurance is now a financial nightmare for your company.

How can a company avoid this scenario?

Smart Business learned more from Edward Galloway, shareholder, and Joel Covelman, senior counsel, at Jackson DeMarco Tidus Peckenpaugh, who specialize in advising companies regarding insurance issues.

Why would a business need anything other than general liability insurance?

The scenario described above is a painful reality for some businesses because they wrongly assume that their general liability insurance covers far more than it does. In our experience, these situations can quickly get even more complicated, causing the potential litigation costs to spiral out of control.

To illustrate this point, consider these possibilities: Imagine if one of the executives in your company who was sued has been advised that he should have a different lawyer, separate from the others, because he believes that others are at fault, not him. He asserts that under the terms of his employment contract the company has to pay for his separate legal counsel. Your company is now faced with paying two law firms to defend the case. Both sets of lawyers send you a litigation budget well into the six-figure range. They also tell you that they need expert witnesses to testify at trial, and the experts’ hourly rates are almost as high as those the lawyers charge. Early in the lawsuit, the plaintiffs make settlement demands also in the six-figure range, but instead of the money coming from your general liability insurer, you would have to pay it out of existing assets or revenues.

If you do not settle quickly, the defense costs are not the only ‘costs’ you will have to worry about. The time that your employees and you spend dealing with the lawsuit, such as preparing for and attending depositions, answering interrogatories, and searching for documents that are requested by the other side, is an additional cost to your company that is hard to quantify, but can have a very real impact on your bottom line.

How does a company know if its liability insurer is justified in denying a claim?

Just because your general liability insurer’s adjuster tells you that its liability policy does not cover your claim does not mean that is, in fact, correct. When a potentially big and expensive claim is on the line, it is worthwhile to seek the advice of a knowledgeable insurance lawyer to be certain you are presenting all the necessary information that will maximize the odds of triggering coverage under the policy, and to be sure the insurer is not wrongfully denying your claim under the law governing insurance coverage.

How can a company avoid having no insurance to pay defense costs or any possible judgment?

While there is not insurance for every conceivable kind of claim, every year, businesses of all sizes should conduct a thorough review of the internal and external risks they face. Competent insurance brokers and lawyers knowledgeable about insurance coverage and litigation can give advice about the types of insurance available, what risks they cover, and the cost of such insurance.

When shopping for insurance you should know that not all policies are the same. Although there is a great deal of standardization in insurance contracts, some insurers modify the industry standard coverage forms or exclusions. You should ask your insurance broker to obtain ‘specimens’ of the actual policies of insurance you are considering buying, so that your insurance coverage lawyer can evaluate whether there are meaningful differences in coverage, and so you can minimize gaps in coverage that are sometimes buried in the details of the policies being offered.

With a coverage analysis of the specimen policies, your company can then perform a cost-benefit analysis by weighing your business risks against the cost of insuring against them. If there is no insurance coverage available for some of the identified risks, or the cost of the coverage offered is too high, then the company at least knows what uninsured risks it is facing, and can contemplate steps to minimize those risks or create reserves to deal with them.

What are some of the other kinds of coverage available besides general liability insurance?

The typical general liability insurance policy issued to a business does not cover claims for breach of contract, negligent misrepresentation, fraud, sexual harassment of a company employee, wrongful termination of an employee, pollution liability, breach of fiduciary duty by a company officer or director, professional malpractice, employee theft, or workplace injuries to employees. Depending upon the insurer and the endorsements you select, your liability insurance policy may or may not cover auto accidents in company vehicles or in the private vehicles of your employees who are on company business, and it may or may not cover defamation of individuals, or disparagement of businesses or products.

Specialized types of liability insurance may be available to provide at least some degree of coverage for these types of claims, such as employment practices liability, pollution liability, directors and officers liability, and errors and omissions liability, among others.

To understand whether your business needs any of these or other coverages, an annual risk and insurance coverage audit is the starting point, along with a discussion with your insurance broker and insurance lawyer.

Edward Galloway is a shareholder and Joel Covelman is senior counsel at Jackson DeMarco Tidus Peckenpaugh. Reach them at [email protected] and [email protected], respectively.