Dirty Little
Secrets Your Insurance Company Won’t Tell You About Your Lawyer.
by Randall K. Edwards
At least once a month I get a call
from somebody who says, “I’ve been sued. I turned the case over to my insurance
company, and they gave me the name of a lawyer who they say does a lot of work
for them. I’ve talked to this lawyer, and I’m not sure what to think. He
doesn’t seem to be listening to me, and sometimes I can’t get him to return my
calls. Is he looking out for me? What are my options here?”
I patiently explain that every
insurance company has a stable of lawyers, or a “preferred” group of law firms
that handle that company’s litigation. These are specialists in what in legal
circles is known as “insurance defense,” although their job isn’t necessarily
just to defend insurance companies (though some do). Their job is to defend
you, the insured, when a claim is made against you. They’re generally pretty
good litigators, and they usually know their way around a courtroom. After a
few years’ experience, they’ve got a pretty good handle on what a jury in their
community will do with a given set of facts, and they can tell you in a fairly
general way what a case is “worth” – how much a case might bring in monetary
damages or settlement.
Occasionally, in my more candid
moments, I’ll tell them a few of the dirty little secrets that I learned from my
years as an insurance defense lawyer or, now, occasionally on the other side.
I’ll share a couple here, although I fear that by pulling up this rock and
looking underneath, it may be a somewhat unpleasant awakening.
The Problems.
First, insurance defense
lawyers often have divided loyalties. When I say this, I’m not accusing
insurance defense lawyers of being unethical or having irreconcilable conflicts
of interest – at least not as a rule. In fact, I believe that insurance defense
lawyers are, in general, decent and ethical chaps – often among the best the
profession has to offer. Most would never knowingly sell their clients out, nor
would they knowingly compromise what they perceive to be in the client’s best
interest. It’s the way that perception is arrived at that often leads to a
question of divided loyalties.
I think I can best illustrate this by
an example. Let’s presume that you’ve been sued and you’ve been assigned to an
insurance defense specialist by your insurance company. With any luck, you can
pretty much bet that this will (hopefully) be the one and only time that you’ll
be this lawyer’s client. You won’t be a repeat customer. You can also bet that
it’s not the first case that your insurance carrier has assigned to this lawyer
or his firm, though. In fact, insurance defense work is this lawyer’s life
blood. He needs and he wants to continue to be on the insurance company’s list
of referred lawyers. He’s counting on the insurance company being a repeat
customer. Now, if there’s a close call between what you think is in your best
interest and what your insurance company thinks is in its best interest, who do
you think the insurance company lawyer is going to try to please? He’s
stretched between his economic best interest and his client’s desires, and
sometimes it’s a pretty far stretch.
Now, there’s a plethora of articles,
rules, commentaries about how a lawyer’s primary – in fact, only – duty is to
his client. He has an ethical requirement of complete loyalty to the client and
not the insurance company that’s paying his bills … at least in theory. It’s
where that theory comes into a stark collision with economic reality that things
begin to break down.
I remember a case in which I was
insurance counsel early in my career. The client, a pretty savvy businessman
who understood the litigation system, was insistent that I file a particular
motion. The insurance company, through its adjuster, told me not to, because
they didn’t want to pay for it – they believed that the risk-benefit analysis
didn’t favor laying out the money on a motion they didn’t think they had a clear
shot at winning. I went to the senior partner, whose crisis of loyalty lasted
about three seconds. “Yeah, I think it’s a pretty good motion, all right, but
we can’t afford to lose this insurance company over this,” he said. “Talk to
the client and tell them that you don’t think the motion is a good idea right
now … besides, the client’s got a duty to cooperate with the insurance company’s
defense.” I made the call to the client. He was not happy. I was
uncomfortable. The insurance company was pleased. I’m not sure there were any
blatant violations of the rules of ethics, or that I didn’t meet my duties to
the client under the circumstances, but from that point on, I was clear about
who was in charge of the client’s defense, and it wasn’t necessarily the client.
You may be surprised to know that in
some cases, the insurance company actually owns the law firm that is handling
your defense, although that may not be clear to you, since the firm has a
standard-sounding law firm name. In such a case, although the name of the firm
might be Slobotkin, Smith & Defender, the fact of the matter is that every
lawyer on their letterhead is a paid employee of Big Denial Insurance Company.
In those circumstances, there may be no real practical question of divided
loyalties at all. If you look at whose name is on the signature line of the
paycheck, it’s not going to be the client’s.
Second, there often is no
economic incentive for the insurance lawyer to aggressively pursue your defense
the way you want him to. It’s an unfortunate fact of life that
insurance defense lawyers are underpaid. If, for example, the going rate for a
top-notch business litigator in your town – not one paid by an insurance
company, but one paid out of the coffers of a national business firm – is $300
an hour, you can bet that your average insurance defense litigator is pulling in
somewhere around $175 to $200 an hour. That’s simply what the market will
bear. Why do they work for that amount? Generally, it’s the security of
knowing that there’s going to be plenty of cases and plenty of work from that
insurance company.
That isn’t all, though. The
insurance defense lawyer often finds himself having to fight to get paid full
value for even his reduced hourly rate. In one firm I worked for, we would be
periodically visited by an insurance company “auditor,” a squinty-eyed,
unpleasant little fellow who sat in a corner conference room with a stack of
files on the desk, and who would call each of the firm’s insurance defense
lawyers in for an interview on each of that company’s files that the lawyer was
working on. The conversation often went something like this:
“I notice that you billed us for 12
hours of research, drafting and arguing a motion for summary judgment in this
auto-pedestrian case. Our figures show that the average for doing a motion of
this type in this kind of case should only take nine hours. Can you tell me why
we should pay you for more than nine hours?”
“Well, the facts were somewhat
complicated, the law wasn’t clear, and I had to do some extra research online on
some new case law on negligence.”
“I don’t think that’s good enough,
and I’m pretty sure that corporate isn’t going to accept that. Why don’t we
just reduce the payment on this to nine hours and leave it at that?”
Now, the lawyer has a couple of
options here. He can fight for payment of his additional three hours and risk
losing the insurance client, or he can knuckle under, lose his payment for three
hours of sweat and research, and swear that next time he won’t be spending a
second more than nine hours, if that, on the next summary judgment he prepares
for this insurance company’s client, no matter what the facts and the law are.
Guess which he’ll choose? And if a vigorous and thorough defense of your case
requires more than nine hours? Hmmm … I think you can see where this is going.
What about the case in which the
insurance company has a policy that only a certain number of depositions should
be taken in a particular kind of case, but you believe that more should be
done? Is your insurance company-appointed lawyer going to fight the carrier who
is sending him cases week after week in order to satisfy your perceived needs?
It’s what an article I recently read on the subject referred to as “a real
tension.” No kidding. There are ethics opinions from some state bar
associations that say that an insurance company’s “litigation guidelines” unduly
interfere with the lawyer’s ability to fully and zealously represent the
client’s interest. That may be true, but it’s of little comfort when you find
yourself caught in the middle of crossfire that was not of your making. When
you signed the insurance application, you probably didn’t realize that there
were all sorts of ethical and practical strings attached to the defense and
indemnity of any claim against you. You also may not have understood that your
insurance company would be defending you “on the cheap.”
Now, you may be asking yourself why
an insurance company wouldn’t want its defense lawyers to take whatever time is
necessary to bring off a win in a case – even if it requires a lot of creativity
and research. The answer to that is simple. It’s a numbers game to the
insurance company. If its meta-analysis of summary judgment motions nationwide
show a diminishing rate of return – wins – after nine hours are spent on average
on that motion, that’s where the line is going to be drawn across the board.
If, in your particular case, the numbers don’t weigh in favor of spending a lot
more time on an aggressive defense, the numbers are usually going to win … you
may not.
Third, you often have less
control than you think with regard to either the defense or the settlement of
your case. When you’ve been sued, it’s devastating. You worry about
the case. You lay awake nights wondering what this case will mean to your
reputation, your marriage and your livelihood. You wonder if you’ll be somehow
branded by the fact that your name is on the defendant line of a lawsuit. You
wonder if you’ll lose your job. It’s not just a matter of money to you. It
often consumes your days, and makes you extremely unpleasant to talk to at
parties, since all of your conversations eventually drift back to this case
you’re involved in – the case that is with you every minute of every day. You
look at life differently. For the insurance company, though, your case is only
one of thousands they have on their ledger sheet, and your case is considered
only in terms of dollars and cents – how the insurance company can get rid of
your case the quickest and with the least amount of money spent.
If you peruse the fine print of your
insurance policy, you might be surprised to discover that you are obligated to
“cooperate” with your insurance company’s decisions on defense and settlement.
In some cases, what that means is that when the company and its lawyers tell you
how the case should be handled, it’s up to you to do what you’re told … it’s not
necessarily up to the company to listen to you. When the company decides to
settle, you may not have much choice in the matter, regardless of what that
settlement may mean to you personally or to your reputation. On the other hand,
there may be a situation in which you believe that a settlement within the
policy limits is justified, but your insurance carrier doesn’t want to spend
that much money and refuses your demand that the case settle so that the company
can hold out for a lower amount. When the company says “jump,” you may have no
choice but to jump. You may feel that you’re just a pawn in a big money game
that you have no control over. You may be right.
Even in a case where you do have some
say in the settlement of a case – for example, some medical malpractice
insurance policies require the doctor’s consent before a settlement can be made
– you may have less control than you think. Imagine the situation in which the
plaintiff demands a settlement for the policy limits – let’s say, a million
dollars. Your insurance company wants to settle for that amount and cut its
risk and its losses. You’ve got a policy of insurance that gives you the final
say over a settlement and you think the case isn’t worth half that, if anything
at all. Let’s say that you insist that the company go forward and “gamble.” Is
your company going to be obligated to follow your instructions, to its potential
economic disadvantage? Don’t bet on it.
In light of all of this, you may be
asking yourself, “So, do I need to protect myself from my own insurance
company? I thought that the whole reason for buying insurance was for my peace
of mind when I get into trouble. Are you saying that I’m wasting my money on
insurance?”
The answer to those questions is a
bit more nuanced than you might think. I certainly don’t recommend that anyone
ever go without insurance. In today’s climate, it’s irresponsible and
unrealistic to “go bare.” The money you spend on insurance coverage is, in my
opinion, money well spent. Insurance is a valuable first line of defense in
liability matters.
Now, having said that, I also
recommend that you know what your relationship with your insurance company is,
what you can expect, and whether you need to rely on something or someone else
to protect yourself and your assets. For that reason, I have these
recommendations to help you protect yourself.
Some recommendations.
First, understand that your
insurance company is not necessarily your friend. As I mentioned in
last week’s newsletter, your insurance company has really only one interest when
it takes you on as an insured person … its bottom line. If it can make more
money by fighting your case for you than by settling, that’s what it will do.
If it can make more money by settling your case than by fighting it, that’s
what it will do. And if your insurer can figure out a way to deny insurance
coverage to you and thus forego the necessity of defending or indemnifying you
at all, that’s what it will do. If your insurance company can figure out
some way to get its money back from you after having defended you, it will try
that.
You see, insurance companies aren’t
motivated by what you perceive to be your long-term best interest, your
reputation in the community, or your ideas for strategies on how a claim against
you should be handled. Their motivation is simple: money. Never forget that,
and never expect anything else. Despite all of those advertisements assuring
you that you’re in good hands or that your warm and friendly claims agent will
be knocking himself out at 2 a.m. when you’ve had a catastrophe, you should
never lose sight of the fact that those good hands will have no qualms about
dropping you like a hot rock on the shoals of economic reality if they can get
away with it. If you never have any expectation that your insurer is your
friend, you’ll never be disappointed. It’s not.
Second, understand exactly what
rights and duties you and your insurer have. Read your insurance
policy. Don’t rely on the assurances that your friendly insurance agent gave
you when you bought the policy. He’s not the one who will be making the
decision as to whether to extend coverage to you, or whether to settle your case
out from under you. He’s just the salesman – the guy who tells you that “it’s
all just standard language, really,” when you have a question; the guy who gets
a fat commission check when the sale is closed. The real guts of what you and
insurance company must do are contained in the actual insurance policy. Read
it. If you don’t understand it, call the company. Send them a letter (in fact,
I recommend that all of your dealings with your insurance company be in writing,
for obvious reasons). Don’t be afraid to ask questions. In fact, insist on
answers. Ask things like, “If I get sued, who are you going to hire to defend
me? What’s their win/loss record? How many cases have they handled for your
company? How many cases have they had involving businesses like mine? Are they
going to be on a budget that’s been set by the insurance company? If so, what
is that budget? How much involvement do I get to have in my defense? How far
does my ‘duty to cooperate’ extend? Can I fire my lawyers if I don’t like
them? Can I hire my own lawyer and have the insurance company pay for it? Can
you settle a lawsuit against me without my permission?” You may not like the
answers you get, but it’s important that you know where you stand. It’s best
that you know what you can count on long before you’re in trouble.
Third, consider hiring your own
lawyer to protect your personal interests. “Wait just a second here,”
you may be saying, “Isn’t the whole reason I bought insurance in the first place
so that I wouldn’t have to hire my own lawyer?” Probably so. Now that you know
that you may have some issues with whether your insurance company will fully
defend you and protect your interests, though, you may want to hire somebody of
your choosing to make sure that you are truly protected fully. For instance, if
your insurance company decides to defend you under what is known as a
“reservation of rights,” (where the company reluctantly agrees to defend you,
but “reserves its rights” to turn around and go after you for reimbursement of
its costs and fees if it determines that it really wasn’t legally obligated to
insure you after all), some courts have allowed the insured person to hire their
own counsel at the insurance company’s expense – called “Cumis” counsel, after
the name of the California case that established that principle. There are all
sorts of nuances and restrictions on Cumis counsel that I don’t have time or
space to fully explore here, but you need to at least be aware that such a
possibility may exist for you.
Even in cases in which Cumis counsel
is not available to you, (and even in cases in which a “reservation of rights”
is not an issue), you still may want to hire your own lawyer and pay them out of
your own pocket to “keep your insurance lawyer honest.” That personal lawyer
may have as much or as little to do with your defense as you want. If you hire
your own personal lawyer, though, I can assure you that the dynamic between your
insurance company’s hired lawyer and you will change dramatically. Your
insurance company lawyer will handle things a little more carefully, and a
little greater diligence will be applied to your case. After all, the insurance
company’s lawyer doesn’t want there ever to be a claim (or a complaint to the
state bar organization) that he or she didn’t do everything they were required
to do to comply with their duty to fully and zealously represent your
interests. It’s a little harder to “slide” on defending your interests if
there’s another lawyer who represents only those interests overseeing the case,
and to whom the insurance company lawyer is accountable. In any case, by hiring
your own lawyer, you will have an advocate for your rights and interests as
against your insurance company, if necessary.
Fourth, consider litigation
against your own insurance company, if necessary. There is an entire
body of law called “insurance bad faith.” Myriads of cases have been brought
and won by insured people whose insurance companies either denied coverage when
it should have been extended, failed to extend full coverage when it should have
been extended, refused to settle cases and thus exposed insured people to
personal liability, and otherwise acted in bad faith towards their own
customers. Courts have held that insurance companies have a special fiduciary
duty in dealing with their own clients – especially in light of the fact that
insurance contracts are what is known as “contracts of adhesion,” meaning that
the insured person has really no bargaining power when it comes to the contract
terms. It should come as no surprise that some companies have breached that
duty, and have been held to pay dearly for that kind of behavior. While I’m not
willing to say that most insurance companies commonly and routinely act in bad
faith toward their insureds, or that they have a policy of treating their
customers badly, I can say that it certainly happens – far more often than you
might imagine. If you suspect that you are a victim of insurance bad faith, you
should consider suing your insurance company.
Finally, remember that
insurance is only one part of the overall asset protection equation. As
I mentioned above, insurance is a good and necessary first-line defense against
threats to you and your family. It is not the only defense, of course, and, as
I’ve pointed out, it may have its own problems and weaknesses. A good asset
protection plan incorporates liability insurance as part of the overall
equation, and implements other tools as well – limited liability business
entities, trusts, ERISA-qualified retirement plans and other tactics and
strategies. You should never rely entirely on insurance or, for that matter,
any other particular tool, to fully protect you.
Randall K. Edwards,
former chief deputy City Attorney in Reno, Nevada,
practices law in Utah, Nevada, Arizona and
California from his office in Salt Lake City, Utah. |