Know the limitations of your liability coverage.

Sadly, litigation is so prevalent that no businessman should be without liability insurance. The corporate status of a company does not shield him from claims alleging his bad acts or omissions. He will need defense counsel, which liability insurance typically provides. Exposure does not end with retirement, although coverage under the business' policy might. Company insurance does not necessarily follow the businessman when he switches jobs, so a wise businessman will determine if he has continuing coverage.

Here's an example: A lawyer who did not check on his coverage under the firm's policy assumed he would be covered after leaving. He had been employed many years with the law firm, which had liability insurance. As is often the case for professionals, the policy was a "claims-made" policy, covering him as an employee so long as it was in force at the time the claim is made. Months later, a former client alleged negligence by the lawyer. He wasn't covered because he was not an insured employee when the claim was made. The fact that the alleged misconduct occurred while the lawyer was employed by the firm was irrelevant. He should have purchased "tail coverage," an individual policy that extends his coverage under the firm's policy. The cost of tail coverage is usually nominal. Simply stated, never assume that you have liability coverage.

Carriers provide legal defense, which is important because costs can be high. This benefit is a twoedged sword for insureds under a claims-made policy because the costs erode coverage. Many professionals who have been sued for wrongful conduct fail to understand that coverage is eroded by defense costs. The insured's deductible is first used to pay defense costs such as attorney fees. Assume that the policy has a $35,000 deductible. If the claim against him is defended and resolved for less than $35,000, then he will end up having paid the costs, the fees and any settlement.

Another factor is the tripartite relationship. Policies typically provide that the insurer has the contractual right to hire a defense lawyer. The attorney has a duty of loyalty to the carrier, but the insured is his client. The attorney's primary responsibility is to the client/ insured. Attorneys are permitted to represent one person but be paid by another if the attorney will be able to exercise independent professional judgment, the representation is reasonable, and there is consent.

The attorney should discuss his fee with the client/insured, along with how his defense costs might erode coverage. The client should question the attorney regarding his experience in the type of matter or claim. The client should ask the attorney for copies of correspondence sent to the carrier. If not satisfied with the attorney, he should contact the carrier. The attorney should refuse to represent you if he does not have your confidence.

The attorney also needs consent to represent the client/insured. If the attorney cannot locate the insured, then he may not represent the insured. There is no consent by the insured. The attorney would be required to withdraw from representation. In court lingo, the insured has constructively discharged the attorney hired by the carrier.

Typically, the carrier has a contractual right to control the defense, but not over the attorney's exercise of independent judgment. The carrier must exercise that control in good faith. The carrier is not required to hire the best-known lawyers, only competent counsel. Carriers will impose limitations on what actions defense counsel may take in defending the client/insured, though recent rulings indicate that an attorney may not abide by such limitations if they would impair his judgment.

Conflicts naturally can arise while representing the insured. The carrier is entitled to know the evaluation of the attorney as to liability exposure, facts about the issues, the range of recoverable damages, and the chance of a settlement. Conflicts between the insurer and the insured affect what the attorney may disclose, which places the attorney in the precarious position of serving two masters. For example, the attorney may learn facts that the carrier could use to deny coverage, but he may not provide such information to the carrier even if they relate to the litigation. In this regard, the attorney needs to be sure detrimental information does not find its way into billings.

The client/insured and the insurer may differ over whether the case should be tried or settled. The attorney may not take sides in the dispute between the insurer and the client/insured inasmuch as both are clients. The attorney may, and should, inform the client/insured of his evaluation of the case, as well as the insurer's assessment of it. Multiple scenarios arise over whether to settle or continue with the defense. One is that the client/insured may insist the case be settled immediately for any price within policy limits, but the insurer would reject such a rash settlement using its money. The insured fears erosion of his coverage by defense costs. An attorney may not give an opinion on the settlement value of a case to the insurer if the opinion will hurt the client/insured. Nor can he make a demand on behalf of the client/ insured against the insurer that the case be settled within policy limits.

On the other hand, he may and should inform the insurer of the client/insured's wishes as to the defense of the case and settlement. Also, the attorney may be prevented from telling the insurer and the client/insured that he believes the recoverable damages should be less than the coverage because the insurer could use that information to reject the client/insured's personal request that the case be settled within policy limits. Finally, in another scenario, plaintiff's counsel may propose to the defense counsel that liability be admitted in exchange for the plaintiff's agreement that no judgment would be enforceable in excess of coverage. The attorney must remain neutral. The client/insured may support that because it guarantees the judgment won't exceed his coverage, but the insurer may reject the proposal because it believes it can win the case. The attorney should tell the client/insured and the insurer of the proposal but not offer an opinion on it. These points aren't intended to be exhaustive. In conflicts, the attorney should discuss the conflict with the insurer and the client/insured and advise each that they can seek advice from independent counsel.

In summary, you should determine if your company's policy provides liability insurance for you after you leave. Find out if the coverage will be eroded by the expenses of defending against a lawsuit. The attorney hired by the insurance company to defend you is your attorney first, however, he has duties to the insurance company that would prevent him from taking sides in a dispute between insured and insurer.

Company insurance does not necessarily follow the businessman when he switches jobs.

Stephen M. Russell Sr.

Stephen M. Russell Sr. practices in the Winston-Salem office of Bell, Davis & Pitt PA. His specialties include business torts, contract litigation, legal and professional malpractice. He is a Salisbury native who earned bachelor's and master's degrees from East Carolina University and his law degree from Wake Forest University. He is president-elect of the Forsyth County Bar Association and is on the North Carolina Bar Association's professionalism committee.

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