When a policyholder screams “Help,” the liability insurer must answer succinctly with a simple “yes,” “no,” or “maybe.” Upon receiving notice of a claim “every insurer . . . shall immediately . . . accept (yes) or deny the claim, in whole (no) or in part (maybe).” Technically, screaming for help constitutes two related claims: 1) a third party claim by an injured plaintiff for payment of damages caused by the policyholder ; and 2) a first party claim by the policyholder for a defense of and indemnification for the third party claim.
The very first thing that most liability insurers do when they receive notice of a claim, is to determine coverage. Making a correct coverage determination of coverage is no easy task. To make sure that insurers make informed decisions, “[e]very insurer shall adopt and communicate to all its claims agents written standards for the prompt investigation and processing of claims.”
Yes – Insurer Accepts Full Coverage
When a liability insurer says “Yes”, it accepts “the claim in whole.” Insurers usually express “Yes” impliedly by providing a defense to their policyholders without any warning that coverage may later be challenged. Still, confidence that the insurer accepts full coverage to both defend and indemnify their policyholders requires an express waiver. “Yes” is usually welcome good news for policyholders and plaintiffs who can anticipate that the insurer will pay meritorious claims in full. Still, conflicts of interest may arise that divide the policyholder from the insurer regarding settlement. “[A] conflict is likely to arise . . . where the claim against the insured is likely to result in a recovery in excess of the policy limits unless the insurer accepts a settlement offer within the policy limits.” Also, while “Yes” seems like good news, there is no reliable deadline for an insurer to deny coverage, changing a prior “Yes” to a “No” or a “Maybe”.
No – Insurer Denies All Coverage
In contrast, when a liability insurer says “No”, it denies the claim in whole. by expressly and forcefully refusing to defend or indemnify against a claim. Encourage an insurer to reconsider its denial usually requires the assistance of counsel. “[W]hen coverage is disputed, the interests of the insured and the insurer are always divergent.” While “No” is bad news, counsel for the policyholder and the plaintiff can take appropriate steps to analyze whether a potentially covered claim exists and if so, how and when they should reply to the insurer.
Maybe – Insurer Reserves Rights to Later Deny Coverage
When a liability insurer says “Maybe”, it accepts and denies a claim in part. It accepts its obligation to defend its policyholder, but also defers any decision whether to deny the claim. With ever increasing frequency, many liability insurers assert a reservation of rights to later deny any obligation to pay for a settlement or judgment and sometimes threatening to get money back from the policyholder.
Obviously a reservation of rights always creates some sort of conflict of interest between the insurer and its policyholders for the simple reason that by its very nature, a reservation of rights expresses that the insurer wants the policyholder to pay, while the policyholder wants the opposite. A reservation of rights is a form of coverage denial that simply puts off a final decision.
But conflicts of interest between a liability insurer and its policyholder may arise in many ways. “Some of the circumstances that may create a conflict of interest requiring the insurer to provide independent counsel include: (1) where the insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by the insurer’s retained counsel; (2) where the insurer insures both the plaintiff and the defendant; (3) where the insurer has filed suit against the insured, whether or not the suit is related to the lawsuit the insurer is obligated to defend; (4) where the insurer pursues settlement in excess of policy limits without the insured’s consent and leaving the insured exposed to claims by third parties; and (5) any other situation where an attorney who represents the interests of both the insurer and the insured finds that his or her ‘representation of the one is rendered less effective by reason of his [or her] representation of the other.’”
Saying “Maybe” usually means that the insurer has as many as seven additional significant decisions to make, each of which may prompt policyholders and plaintiffs to respond. The result may seem as daunting as a game of chess where there are 170,000,000,000,000,000,000,000,000 possible moves in only the first ten turns. But even a neophyte can make smart moves, especially with the help of an experienced coach.
When an insurer reserves its rights, it has a series of additional decisions it may make:
Should the Insurer Hire Dependent Counsel? Should the Insurer Agree to Pay Independent Counsel? Should the Insurer Actually Pay Independent Counsel? Should the Insurer Accept a Settlement Offer? Should the Insurer Sue for Declaratory Relief? Should the Insurer Seek Reimbursement of Defense Costs? Should the Insurer Seek Reimbursement of Settlement Costs? These additional decisions are addressed at Top Ten Insurer Coverage Decisions at DutytoDefend.com.