Every business owner knows that his or her company needs insurance. While all businesses have insurance, it’s also important to take the time to identify the right types of policies that will respond to the different types of claims a business may face.
“At the end of the day, you want to be overinclusive when it comes to insurance,” says Steven J. Ciszewski, a partner with Novack and Macey LLP. “Try to cover anything and everything. It’s a lot easier to narrow down your coverage later on than it is to expand it.”
Smart Business spoke with Ciszewski about business liability insurance, how to ensure that you’re properly covered and what to do in the event that you are sued.
What is the first thing a business owner needs to do with respect to insurance when the business is sued?
The most important thing to do right away is to identify the proper insurance policies that might apply to the particular situation. Let’s assume that a third party is suing your business. In that case, there are two types of liability policies that you could have: a claims-made policy or an occurrence policy.
If you have a claims-made policy and you get sued in 2010 for something that happened in 2008, the policy that is in effect for 2010 will apply, because that’s the year in which the claim was made. On the other hand, if you have an occurrence policy, the policy that was in effect in 2008 would apply, since that’s when the events or occurrence at issue took place.
What is the next step after identifying the proper policies?
Make sure you provide timely and proper notice of the event to all of your insurance companies. To make sure you get that right, you need to know and understand the policy itself and the state laws that apply to that policy.
For example, some policies require you to notify the insurance company immediately, while others say to do it ‘as soon as reasonably possible,’ or something similar to that. But, in any case, the sooner you let the insurance company know, the better.
What are the consequences of not notifying the insurance company promptly?
The worst-case scenario is that you lose coverage entirely. Even if your policy says it would otherwise apply when you provide late notice, you could be in jeopardy of losing coverage.
A big issue with notice is whether or not, under state law, the insurance company needs to show prejudice in order to avoid coverage because of late notice. A typical example of prejudice is when the underlying case against you is over with or has advanced so far along that the insurer can’t meaningfully participate in the defense of that claim.
When it gets to that point, even if you are in a state where insurance companies need to show prejudice to avoid coverage, you’re still in significant jeopardy of losing coverage.
If a business owner is sued and has insurance, who chooses the attorney?
In some circumstances, a business can select which lawyer it wants to defend it, although this usually comes at a cost, as a policy with that option is more expensive. Most policies do not allow the business to identify an individual lawyer whom it wants to defend it; however, most states say that if an insurance company is not defending the business unconditionally, the business is entitled to its own independent counsel.
In many cases, if the insurance company, for example, is defending a business but doing it under a reservation of rights, the business may be entitled to independent counsel, and in that case might be able to select that counsel.
Another possibility is that the business has a particular lawyer that it wants to defend it, but that lawyer’s hourly rate is higher than what the insurance company will approve. In that case, the business may be able to negotiate a deal where the insurance company and the business will split the fee. The insurance company will pay the hourly rate it normally pays to lawyers in that locale and the business will pick up the balance.
What happens if a business owner wants to settle the case, but the insurance company refuses?
Whenever you get a settlement demand, particularly if the settlement demand is within your policy limits, it is very risky for the insurance company to refuse the settlement. So let’s say your limit is $1 million and the plaintiff offers to settle for $750,000. The insurance company exposes itself to significant risk if it refuses that settlement offer.
There is a lot of law that says that the insured’s interests need to be paramount and that the insurance company must have a strong reason against settling, especially when the demand is within the policy limits.
In the end, there is not a lot a business can do to force the insurer to settle, but there are laws that put out the potential of extreme liability if the insurance company refuses to settle.
Take the previous example of the $1 million limit and the $750,000 settlement demand. If the insurer refuses to settle and the case goes back to trial and the business gets a $3 million verdict against it, in many cases, the insurance company will be liable for the entire $3 million, even though it exceeds the policy limits. Because of this risk, insurers are often inclined to accept reasonable settlement offers within their policy limits.
Steven J. Ciszewski is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.