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.