Action Items

  • Served with a lawsuit. When your financial institution is served with a lawsuit, you should provide it to your insurance broker to make a claim on any applicable insurance policy.
  • "Duty to defend" provision. If the applicable insurance policy has a “duty to defend” provision, the insurer will attempt to select a law firm (not your own law firm) to represent your institution.
  • Confirm claims coverage. When the insurance company responds that coverage is possible and indicates a law firm has already been or will be engaged to defend your financial institution, do not agree to be represented by that law firm unless the insurance company confirms in writing that the claims asserted in the lawsuit are covered by the insurance policies.
  • "Reservation of rights letter." For claims qualifying for coverage under Directors and Officers (D&O) Liability Insurance or Errors and Omission (E&O) Liability Insurance (aka Professional Liability Insurance), insurance companies almost always qualify coverage at the outset with a letter stating the insurer reserves its right to later deny coverage. There are several reasons why financial institutions that receive that “reservation of rights letter” should seek out – and may be entitled to – their own independent counsel and not automatically proceed with using the law firm that reaches out at the instruction of the insurer.

The Right To Select Its Own Defense Counsel

Professional Liability Insurance policies may contain a “duty to defend” provision that ostensibly allows the insurer the right to select a law firm to defend its insured.  If there is no “duty to defend” provision, then the insured has the absolute right to select its law firm.

Under many states’ laws, when an insurance company provides coverage subject to a reservation of rights to later deny coverage, the insured party has the right to select its own counsel to defend the claim despite the “duty to defend” provision.

Generally, the law firm suggested by the insurance company is either a “captive law firm” (that is, 100% of its work is defending insureds of that specific insurance company and the law firm is effectively a division of the insurance company) or is a law firm that receives a substantial portion of its work from that insurance company. Either way, that law firm’s economic loyalty is to the insurance company. When the law firm suggested by the insurance company reaches out, it almost never discloses its relationship with the insurance company.

While these law firms are generally very experienced in handling tort cases like those involving customer injuries at the branch locations, they often have significantly less experience defending the types of cases covered under D&O or E&O policies. While there are excellent litigators with applicable experience in these types of cases who are on insurers’ panel counsel lists, in our experience those are not the litigators referred to our clients.

Reasons You Should Not Automatically Agree

In our experience, insurers often take the following approaches when defending a case under a reservation of rights allowing them to later deny coverage:

  • Pay minimum legal fees. Pay the absolute minimum in legal fees and encourage an approach focused only on minimizing legal fees regardless of whether that is the best strategy to defend the case;
  • Settlement. Settle the case and demand the insured cover a significant part of the settlement on the basis that most of the settlement should be allocated to claims not covered by the policy or within the policy’s deductible;
  • Declaration the insurer has no obligation. If the case cannot be settled on terms acceptable to the insurance company, then file a separate lawsuit seeking a declaration that the insurer is not obligated to cover the claim;
  • Adverse judgement. If there is an adverse judgment against the insured, then assert that the insurance policy covers little or none of the judgment amount; and
  • Seek to recoup costs. Under certain circumstances and where allowed, seek to recoup the defense costs already made.

When an insurer reserves its rights, defense counsel’s loyalty is supposed to be to the insured only. However, it can be problematic for clients to be represented by a law firm that is economically dependent on the insurance company for its business. Such a law firm likely will not push back on the legal strategy suggested by the insurance company and may refuse to offer any advice to the client when the insurance company demands that the client pay most of the settlement. Additionally, the insurer’s law firm will not be as sensitive to business and reputational issues important to the client that might be implicated by arguments made by the lawyers in legal pleadings or in the courtroom.

The insurance company and its law firm will often suggest the conflict can be addressed by the client having separate “coverage counsel” to assist it during the case and any settlement discussions. This is usually insufficient, however, because coverage counsel does not control the defense of the case and is not usually in a position to settle the case with the plaintiff and explore settlement terms that are good for the client but disagreeable to the insurance company (for example, exploring assignment to the plaintiff of the client’s right to insurance coverage). In addition, the insurer will not pay the fees of separate coverage counsel.

We Can Help You

Our Financial Institutions Group’s trial attorneys have extensive experience defending financial institutions and their officers against claims covered by D&O and E&O insurance policies. Additionally, several in the group have a specialized practice representing clients in litigation with insurers regarding whether claims are covered by insurance policies.

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