Policyholder Pulse
As outside coverage counsel for corporate policyholders, we see firsthand how corporate risk management and legal departments interact and work together—or don’t. Some risk management and legal departments are in sync. They tackle intersecting insurance and legal issues through a unified front, to the company’s benefit. But others seem to operate in silos. This can present a number of coverage pitfalls—from failing to pursue coverage in the first place to jeopardizing claims that have been made. Here are a few of the most common problems we see when risk management and legal departments are not working in harmony, and some practical tips for avoiding them.
Three of the most common ways cooperation breaks down between risk management and legal departments are:
- Legal doesn’t inform risk management about a new claim or lawsuit. This could happen for various reasons. In-house counsel may not think about possible insurance coverage, as insurance isn’t always top of mind. Perhaps in-house counsel assumes there is no coverage for the given claim or incident. Perhaps in-house counsel thinks a mere demand isn’t relevant for insurance purposes, and will let risk management know if and when a lawsuit is filed. Whatever the reason, if risk management isn’t involved early on, it can create a host of coverage issues, including late notice, failing to report the claim when required under a claims-made-and-reported policy, or running afoul of exclusions for claims or matters the policyholder knew about prior to the policy period.
- Legal hires defense counsel not approved by the insurer. That this happens isn’t surprising: it’s generally the legal department’s job to hire outside counsel to defend the company. Once again, when dealing with a new crisis, perhaps in-house counsel isn’t thinking about insurance, thinks there’s no coverage, or thinks any coverage would be limited to paying a judgment or settlement, not to hiring defense counsel. If the insurer has not approved the counsel selected, it may refuse to cover counsel’s fees in whole or in part.
- Legal settles a claim or lawsuit without the insurer’s consent. Again, in the heat of settlement discussions, most lawyers aren’t thinking about insurance. To make matters more complicated, lawyers sometimes are uncomfortable with the idea of involving insurers in settlement discussions, as such discussions typically are confidential and sensitive. In addition, counsel may fear that an insurer will present an obstacle to getting a deal done. Policies typically prohibit the policyholder from settling without the insurer’s consent if the settlement will implicate the policy. In some circumstances, this could provide a defense to coverage.
Better outcomes start with in-house counsel having a better understanding of some of the key features of the company’s insurance portfolio. If counsel understands the types of coverages the company has and what they generally cover, he or she is more likely to be thoughtful about insurance implications as matters arise. Risk management should discuss these topics with in-house counsel. Consider doing this in an annual meeting, perhaps following policy renewals; not only will that account for any material changes in coverage on a year-to-year basis, it also will help keep insurance at the forefront. In addition, each year risk management should consider providing counsel a one- or two-page “cheat sheet” identifying the company’s policies and what they cover—this could be a useful quick resource to consult when new claims and other matters arise.
In-house counsel should also understand the most important policy requirements and coverage concepts on which counsel’s actions may bear:
- Policy notice requirements. What does the policy require? What triggers the notice obligation? Concepts such as a claims-made-and-reported requirement and notice of circumstances are critical. What constitutes a “claim” under a policy matters, and counsel may not be sensitive to the fact that events short of a lawsuit, such as a written demand, may constitute a “claim” for insurance purposes.
- Insurer may have the right to appoint, or approve/deny, defense counsel or their rates. The legal department may be constrained in the selection of counsel, and may need to consult with the insurer first. The insurer may require the policyholder to select among pre-approved panel counsel (although it’s possible to negotiate additions to the panel). On the bright side, insurers commonly have negotiated discounted rates with defense counsel, which could inure to the policyholder’s benefit. Consider coordinating with the legal department in connection with policy renewals to try to get counsel’s preferred law firms pre-approved by insurers.
- Policy prohibition on incurring costs without consent. The legal department should be informed that policies often contain restrictions requiring insurer consent for any costs the policyholder incurs, and if the policyholder doesn’t comply, those costs may not be covered. Once again, this goes to the necessity of involving the insurer as soon as possible and doing what is necessary to preserve coverage.
- Consent to settle. The legal department needs to understand that the company needs to notify insurers regarding settlement discussions, invite them to participate, keep them informed about progress, and ask for consent to settle. A failure to do this may or may not preclude coverage. (Many states impose a prejudice requirement.)
- Impairing subrogation rights. The legal department needs to understand what this means in practice—the company should not settle or release potentially liable third-parties without the insurer’s consent.
- Suit limitations provisions. Lawyers are familiar with statutes of limitation, but they may not realize that some insurance policies impose their own contractual limitations periods. Counsel needs to understand this, as they’ll be involved in any decision to file suit.
- ADR/choice of forum/choice of law provisions. These items can influence both the strength of the claim and legal strategy for pursuing it. Counsel needs to understand the lay of the land.
A few additional tips for better cohesion between legal and risk management departments, based on our experience: Consider involving in-house counsel on the front end when purchasing policies, as risk management will get the benefit of counsel’s views on the company’s exposures, and, in addition, counsel will be more familiar with the coverage profile. And, risk management should consider providing periodic training to in-house counsel on important insurance issues that are likely to impact the company—the more interactions between the departments the better. Finally, companies should set up a good internal distribution mechanism that automatically notifies both the legal and risk management departments when new claims or lawsuits are filed. This way, risk management can weigh in on whether there is applicable insurance, and legal doesn’t have to act as a gatekeeper deciding when risk management should be involved.
Overall, strong coordination between a company’s legal and risk management departments better protects the company and helps ensure that insurance assets are being fully utilized.