Insurers approach cases based on numbers, not emotion.

IT'S a lesson that should come as no surprise to any business owner. Money often comes with strings attached--and insurance is no exception.

Whether it's a product liability lawsuit, a contract dispute or a garden variety slip-and-fall, if a business faces litigation, and the alleged wrongdoing is covered by insurance, it's not too hard to guess who's in control.

"You cannot unilaterally go and decide you want to settle or fight a case, because the insurer will he paying most of the bills," said Robert Hartwig, chief economist for the Insurance Information Institute, a carrier trade group. "The insurer has the fight to direct the defense if you expect any insurer participation in an award or settlement."

It's a system that's been in place for decades, and generally serves both sides well. Businesses facing lawsuits aren't necessarily experts in the litigation, while insurers have seen it all before and bring expertise to the case.

They have relationships with specialized attorneys, consultants and research firms--all of whom help determine if there's any liability, whether to agree to a settlement or to fight a damage claim considered excessive.

Which is not to say that the interests of a business and its insurer always coincide, especially when a settlement or damage award could exceed policy limits. The result can be a secondary lawsuit over insurance coverage.

Litigation against businesses is covered by different insurance policies, with claims of sexual harassment, for example, covered by employment practice liability insurance and slip-and-falls by general liability coverage. Premiums are determined by policy limits, past claims history and the size of the deductible, among other factors.

First priority in any litigation is hiring attorneys, and insurers often get to choose the ones that represent the business, unless the business pays a large deductible or negotiates otherwise.

George Mallory, a Century City attorney hired by insurers to represent their clients, said the arrangement results in a "tripartite" relationship in which the attorney has a primary responsibility to the insured business but also maintains a special relationship with the insurer. "The lawyer is being paid by the insurance carrier, so there is a reporting responsibility," he said.

None of the nearly half-dozen insurers contacted to discuss their litigation strategies would make anyone available for comment.

The reticence makes sense, said Hartwig. "One might be more prone to take a case to settlement and some more likely to fight. They do not tend to talk about their individual settlement or defense practices. It's part of their trade secrets."

Whatever the strategy, most cases first move toward settlement.

Reaching that point is a complicated process that takes a host of considerations, not the least of which are the damages being sought. If those are considered excessive, the possibility a case may go to trial increases.

"The insurer has to balance between the cost of litigation and the uncertainty of the trial with settling the matter for a fixed amount," Mallory said.

That determination is made a number of ways, including relying on the judgment of experienced litigators. Insurers also use companies, such as Jury Verdict Research, which maintains a database of jury awards.

If potential damages are high enough, generally $1 million or more. insurers also may pay to hold mock trials, or call in the services of a consultant who uses probability analysis of possible jury awards to determine how high settlement offers should go.

There are other considerations. Sometimes a carrier fully expects to settle a case but finds it is actually cost-effective to lengthen the proceedings.

If the insurer's exposure is expected to hit $100 million and it is earning 5 percent annual interest--$5 million--it may be worth paying $1 million in legal fees to drag out the case even though a client may want to settle it. "The calculus is there to settle eventually, but why settle unless we have to?" said Bruce Beron, principal of Litigation Risk Management Institute, a Palo Alto consulting firm.

The struggle between a business defending itself and the plaintiff can be minor compared with more significant disputes that can arise between carriers and their clients.

Those disagreements arise frequently, most often when a carrier concludes that the allegations in a lawsuit are not covered by insurance. Just this month, Miller Brewing Co. sued four of its insurers when they refused to pay the defense costs for a class action lawsuit alleging that the brewer marketed its product to underage drinkers.

Conflicts also arise when damages exceed policy limits, giving the carrier an incentive--and the business a disincentive--to settle.

That can be the case when potentially large punitive damage awards are at stake.

"It's been my experience that one out of three or four cases have disputes at some level, though it may not result in some ugly piece of litigation," said Drew Pomerance, an attorney with Pomerance Roxborough & Nye LLP who represents businesses in their legal disputes with carriers.

Litigation, Coverage

Insurance companies have their own calculus when it comes to how--or if--to defend a case.

Who's in charge? If a carrier is footing the legal bills it will have a big say in the defense, often including picking attorneys.

That's my attorney, right? Ethics require the attorneys to consider the defendant as their client, but insurers are kept fully apprised.

Why the loot dragging? Sometimes carriers delay settling because it puts off the big payout and earns carriers lots of interest.

No, don't settle! When a carrier believes damages exceed policy limits or are not covered, it could leave a business footing a big bill.