by Gary Osborne & Dominic Nesbitt
(
view pdf )
A FREQUENTLY OVERLOOKED BUSINESS ASSET
A San Diego manufacturing company and its directors were sued for breach
of contract, fraud and defamation.
The company tendered the lawsuit to two of its liability insurers, both
of whom denied coverage. Over the next two years, the company spent almost
$2 million defending and ultimately settling the lawsuit.
After the case had concluded, the company's CEO hired an insurance
lawyer to review the insurers' denial letters. The lawyer advised
the company that both insurers had wrongfully denied coverage. The company
then proceeded to sue both insurers and ultimately recovered the entire
$2 million it had paid to defend and settle the lawsuit.
This real life experience of one local company is not unique. Businesses
are routinely denied insurance benefits to which they are entitled. This
article discusses the remedies available to businesses that find themselves
in this situation, including the value of undertaking an insurance-denial
audit of a closed litigation file.
BUSINESS LIABILITY INSURANCE
Defending against lawsuits can be an expensive proposition. Even a meritless
lawsuit can cost a business hundreds of thousands, perhaps even millions,
of dollars to defend. Liability insurance is intended to protect against
this financial risk.
While business liability insurance policies vary in the coverages provided (
e.g., Commercial General Liability, Directors and Officers, Employment Practices
Liability), they are all designed to cover claims alleged in business
litigation. Even breach of contract and fraud claims are covered by some
business liability policies.
WRONGFUL DENIALS
When a business is sued and its insurer wrongfully denies coverage for
the claim, the business suffers a double-loss. First, it incurs legal
fees and the costs of a judgment or settlement. And second, it has paid
a substantial premium for an insurance policy which has turned out to
be worthless.
The insurer, on the other hand, comes out way ahead. It retains the premium
and pays nothing on the claim.
Rarely does a business ever challenge a denial letter or even have it reviewed
by an insurance lawyer. More often than not, the letter is accepted at
face value, filed away and forgotten.
TIME LIMIT FOR SUING THE INSURER
California law provides a generous statute of limitations for liability
claims against insurers who wrongfully deny insurance benefits. For example,
if an insurer wrongfully refuses to defend a business against a third-party
lawsuit, the business has four years in which to sue the insurer for policy
benefits, and two years to sue for "bad faith." Importantly,
these time periods often do not start running until the underlying lawsuit
against the business has concluded.
What this means is that a business which had a claim denied several years
ago may still have time to challenge that denial in court.
A BUSINESS' RIGHTS WHEN A CLAIM IS WRONGFULLY DENIED
A business whose claim has been wrongfully denied has the right to recover
policy benefits and possibly also "bad faith" and punitive damages
from its insurer.
Policy Benefits
Policy benefits usually consist of: (1) the cost of defending a third-party
claim or lawsuit, and (2) the cost of paying a settlement or satisfying
an adverse judgment.
"Bad Faith" Damages
The law provides that additional damages can be awarded to a business where
an insurer denies a claim "unreasonably" or "without proper
cause," i.e., in "bad faith." Bad faith conduct on the
part of an insurer permits the business to recover not only policy benefits,
but any other loss it suffered as a result of the insurer's wrongful
denial. One such loss may be the attorneys fees which the business incurs
to challenge the insurer's denial. Under the law, these attorneys
fees can be recovered as bad faith damages.
"
Punitive" Damages
Punitive damages may also be recoverable where an insurer is found to have
acted with oppression, fraud or malice. Such damages are designed to punish
a wrongdoer and to deter future wrongful conduct. Punitive damages can
be substantial, often equaling an amount that is many times the amount
the insurer owes in policy benefits.
THE VALUE OF AN INSURANCE-DENIAL AUDIT
An insurance-denial audit is the process of examining a closed litigation
file to determine whether a business is owed policy benefits on past claims
where coverage was denied. An insurance lawyer will review the underlying
litigation file, the insurance policy, and the insurance company's
denial letter.
The audit is designed to answer, initially, the following two questions:
1. Was the insurance company's denial wrongful?
2. Does the business still have time to challenge the wrongful denial?
If the answer to these two questions is "Yes" then the audit
will next assess the viability of pursuing a claim against the insurer
as well as the potential monetary recovery for the business.
As the story at the beginning of this article illustrates, the potential
value of an insurance-denial audit can be substantial for any business
which has been sued, had its insurance claim denied, and been forced to
pay out defense and settlement costs. An insurance-denial audit can transform
an insurer's wrongful coverage denial, which would otherwise lie forgotten
in a closed litigation file, into a valuable business asset.
***
Gary W. Osborne, Esq. and Dominic S. Nesbitt, Esq. are founders and partners
of Osborne & Nesbitt LLP in San Diego. The firm is dedicated solely
to insurance coverage analysis and litigation on behalf of policyholders.
The firm's web page is www.onlawllp.com