Getting insurance to pay for legal services.

Let's face it, nobody likes paying lawyer bills. With the right insurance, though, you might not have to.

Businesses are constantly the target of lawsuits alleging all sorts of physical, mental and economic damages. The harm caused to a company by the proliferation of lawsuits can be somewhat mitigated by tapping into various types of insurance coverage. There isn't one type that will cover every eventuality, so each policy needs to be carefully reviewed and analyzed.

LIABILITY INSURANCE

Liability insurance policies will both indemnify a policy holder and obligate the insurance company to defend or pay the cost of defending the policy holder against various allegations by plaintiffs. Several basic types of liability insurance include:

General Liability -- This will defend you against allegations of bodily injury, or property damage due to you or your employees' negligence arising out of your premises, operations or products that you manufacture or sell. This type of policy should also defend you against allegations of libel, slander, false arrest or malicious prosecution. A general liability policy may also defend you against lawsuits involving vehicles used by you or your employees in the course of business. General liability policies will normally not defend you against suits for malpractice, pollution, contamination, employment-related matters or deliberate acts (such as copyright infringement).

Professional Liability -- This coverage -- also known as errors and omissions insurance (E&O) -- will defend you against allegations of wrongful acts, errors and omissions in your professional conduct. Such policies are available to physicians, attorneys, accountants, consultants, franchisors, architects, Realtors, and other professionals and service providers. These policies generally exclude claims for bodily injury and property damage, responding only to claims for economic damages caused by professional negligence, or malpractice.

Director and Officers Liability -- Better known as D&O, this type of coverage is similar to E&O, and will defend against allegations of wrongful acts by directors and/or officers of a corporation or non-profit organization. Such allegations may come from stockholders, competitors, members of the public, employees or former employees. Some policies also defend against litigation by a government regulatory agency. it is becoming increasingly difficult to recruit and retain qualified board members without providing this type of insurance protection.

Automobile Liability -- Claims of bodily injury and/or property damage arising from operation of a motor vehicle will be defended through such a policy. While this type of coverage is familiar to most Californians, be aware that commercial policies differ considerably from other policies. Some policies cover "any" vehicle, while other policies cover only "designated" vehicles.

Pollution Liability -- Environmental impairment caused by you -- or for which you may be responsible -- is the focus of pollution liability insurance. All sorts of businesses are vulnerable to pollution liability, most notably manufacturers, gasoline stations, waste haulers, developers, medical facilities and financial institutions owning foreclosed properties. Pollution liability policies have been introduced fairly recently by a small number of insurance companies and their policies usually involve extensive underwriting and negotiation before the policies can be obtained.

Employment-Related Liability -- These insurance policies defend against allegations of wrongful termination, sexual harassment and discrimination. Several insurors are offering such coverage -- with assorted limitations and deductibles.

PRE-PAID LEGAL PLANS

While not strictly insurance, a number of prepaid legal expense plans are now being offered. A typical plan will require a monthly fee, entitling the "member" to certain services provided by a panel of attorneys (similar to an HMO or PPO in health care). These plans are very limited in scope and frequently only apply to individuals or families -- but not to the businesses they own. Pre-paid legal plans also offer a very limited choice of legal counsel.

HOW TO SHOP FOR COVERAGE

Insurance policies are often hard to fully understand -- even for insurance professionals. Consider the following when shopping for an insurance program that will come to your defense:

1. Coverage -- Be certain you know what activities, locations, events, products, etc. are covered. What kinds of claimed damages are covered? Do they actually reflect the way you conduct business?

2. Exclusions -- What is taken away or limited by this section of your policy or by negative wording elsewhere? Can a burdensome exclusion be removed or reworded? Don't be reluctant to ask.

3. Deductible -- Does the policy require you to reimburse the insurer up to a certain amount of defense costs? Or, does the policy require you to pay defense costs yourself up to a limit before the insuror begins paying? Is the deductible, or so-called self-insured retention, affordable?

4. Limits -- Are the defense costs included in the policy's limits of liability (which may be exhausted by prior claims) or in addition to those limits? In a serious matter, this will make an enormous difference in the amount of coverage actually available to you.

5. Choice of Counsel -- Most policies obligate an insurance company to defend you, but the policies give the insurance company the right to select counsel. Some insurors, however, will consider your request to be defended by the counsel of your own choosing. Find out your insuror's attitude about selection of counsel before there is a claim.

6. Cost -- Have you or your insurance broker reasonably shopped for coverage? Look for the best combination of price, coverage and service.

7. Financial Condition of Insuror -- Will the insuror be there to pay legal expenses when and as they are incurred? You must be satisfied that your insuror is financially sound.

8. Risk Management -- What have you done to minimize the likelihood of litigation? Ultimately, this will determine what kind and how much insurance you will need.

THIRD-PARTY SOURCES

After reviewing all of your business insurance options, be sure to consider every opportunity to be defended by third parties other than insurors or a pre-paid legal plan. As a landlord, lessor or vendor, for example, you may be able to contractually obligate another entity to defend you against claims for a variety of damages -- thus reducing your need to buy protection.

Elliott C. Rothman is executive vice president of GSCO Insurance Services Inc., a Woodland Hillsbased commercial insurance brokerage. GSCO's business is focused on law firms, financial institutions, bankruptcy trustees and receivers.