Construction claims often involve insurance coverage issues. Common examples include construction defect claims and claims against design professionals. Insurance coverage issues can profoundly affect litigation and settlement of construction-related claims. This article will provide some practical thoughts for policyholders.

How Insurance Issues May Arise In Connection With a Claim

Insurance issues can arise in several ways in connection with a claim:

• The insurer may defend the insured with no coverage issues involved. Under most policies, the insurer will pay for a lawyer to defend the claim and pay any settlement or judgment up to the amount of policy limits. This is a policyholder’s best case scenario. Remember that the insurer typically has the right to control and make any settlement without the policyholder’s consent.
• The insurer may defend the insured under a reservation of rights. This means that the insurer is providing a defense, but has raised coverage questions concerning either the extent or existence of coverage, and may seek to disclaim or limit coverage at a later date. A reservation of rights is a warning to the policyholder, although the severity of the warning depends on the content of the reservation. A reservation is usually sufficient reason to consult with coverage counsel.
• There may be coverage litigation. The insurer may have denied coverage or reserved rights, and filed a declaratory judgment against the insured asking a court to determine that it has no coverage obligations. Sometimes the policyholder will have filed a breach of contract or declaratory judgment action against the insurer. In the event of coverage litigation, the policyholder will obviously need coverage counsel.

These three scenarios illustrate varying degrees of possible divergence of interests between the policyholder and the insurer, ranging from little divergence of interests (first scenario), to some divergence of interest (second scenario), to substantial divergence of interests (third scenario).

How Coverage Counsel Can Assist in Resolving Cases

A Nudge

A carrier may try to resolve a claim as cheaply as possible, trying to save money off of its policy limits. Certainly, if a claim can be settled cheaply, it is in the carrier’s interests and the policyholder’s interests to do so. In many instances, however, the insurer will want to settle cheaply when the insured needs to be protected from liability in excess of policy limits. In such instances, coverage counsel can remind the carrier of its fundamental obligation to protect the interests of the insured. Often, a polite letter or email will suffice.

Permission Slips

Sometimes, an adjuster is amenable to settling a case, but needs a permission slip. What does this mean? Insurance claims handlers often need justification to provide to their superiors to authorize paying more on a claim. Claims handlers may also need to document their file in the event of a file review or audit, as they do not want their decision to pay a claim to be questioned after the fact. Coverage counsel understand these realities and can often help provide the necessary information to the claims handler.

A Hammer

Sometimes a nudge and a permission slip are not enough to prompt a carrier to settle a claim. A strong letter to the carrier from coverage counsel – what claims handlers call a “hammer letter” will help make sure that the insurer does the right thing. A hammer letter may give the adjuster ammunition to go to superiors to get the additional authority needed to settle the claim. The most effective way to put pressure on an insurer to settle is for the plaintiff in the underlying case to take a demand within policy limits. Although the scope of an insurer’s duties are subject to different rules in different states, most jurisdictions recognize that an unreasonable failure to settle within policy limits exposes a carrier to liability for paying a subsequent judgment in excess of policy limits. A hammer letter that clearly and unequivocally sets forth the insured’s demand to settle within policy limits and that notes the carrier’s potential exposure for an excess judgment puts a great deal of pressure on a carrier to settle.

Conclusion

When policyholders purchase insurance and pay their premiums, they are buying the promise of protection in the event of a claim. When carriers live up to their obligations and protect their insureds, the policyholder will never doubt that the premium was well spent. When carriers do not live up to the promise of protection, coverage counsel can often help achieve a satisfactory outcome.