What to Do When Your Insurer Hangs You Out to Dry

Scenario: A claim exceeds coverage and you begin to believe your carrier isn’t doing all it could or should to protect your interest.

What to Do When Your Insurer Hangs You Out to Dry

(Image: Monika Wisniewska/stock.adobe.com)

You carry E&O coverage for peace of mind and to protect you (pay on your behalf ) your defense costs and any damages that may be awarded against you for claims brought by your subscribers, their insurance carriers and sometimes third parties.

If you’ve had a claim and turned it over to your insurance carrier you know that first you hear from a claims representative and often in the first communication you are advised that your carrier has assigned defense counsel to represent you in the lawsuit (assuming a lawsuit has been filed — typically your carrier won’t engage counsel for you until a lawsuit is commenced, which is often a poor decision since you are looking for guidance before a lawsuit is filed).

If you’ve had a claim you also know that your carrier will often focus on your deductible early in the claim assessment process, letting you know you’re on the hook for it and you either have to pay it out as defense costs are incurred or you can wait until the case is resolved to send in your deductible.

Once your claim is accepted for coverage by your carrier and you’ve resigned yourself to having to pay the deductible and spend your time participating in the defense of the claim, you should be able to let the carrier protect your interests and resolve the case eventually. But what happens when your carrier may not fully cover the claim or lawsuit?

This can arise when:

  • The carrier isn’t sure that it has responsibility to cover the claim but it decides it will cover the defense cost, at least until it decides if it has to cover the claim (this is called covering the claim under a reservation of rights).
  • The claim exceeds your policy limits, leaving you exposed to damages in excess of your coverage.

The issue becomes more acute when the claim exceeds coverage and you begin to believe your carrier isn’t doing all it could or should to protect your interest. You begin to suspect the carrier is really looking to protect itself rather than you.

Let’s weave a scenario where there is a very good chance for liability and damages. You install an alarm system, without a proper contract, know you made a mistake and the subscriber suffered damages well in excess of your policy limits. Your carrier takes the defense.

You want to move on, so you send in your deductible and try to ignore the lawsuit. You’ve got $1 million in coverage. You know the loss exceeds $10 million in damages, but you’re not the only defendant in the lawsuit.

You begin to have doubts that your case is being properly defended when the carrier sends you a letter advising that the claim exceeds your coverage and you now have the right to engage your own counsel, at your expense, to advise you.

You are under the belief that your carrier is exposed only to policy limits of $1 million, leaving you exposed to another $9 million plus interest. One concern you have is can the claim be settled for the $1 million now, eliminating your exposure and has your carrier tried to settle within policy limits, or is your carrier willing to risk a trial because its limit of exposure is only the $1 million?

The role of your private counsel is to monitor the defense of the lawsuit. In New York, and most (if not all) other states your carrier owes you a duty of “good faith.” It must place your interests above its own. If your carrier is found to be in “bad faith” it can be liable for an award in excess of the policy limits.

In other words, if your carrier could have settled and should have settled within policy limits but decided to roll the dice on a bluff, unreasonably exposing you, it can be held responsible for its bad faith and required to pay the excess award. If you’re in an excess claim situation you need to have experienced counsel monitor the case.

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About the Author


Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.

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