When the Insurer Provides a Defense in Name Only – Current Issues Over Insurer Tactics to Limit Their Defense Obligation

When a liability insurer agrees to defend its policyholder, the policyholder often breathes a sigh of relief, believing that it now has the comfort of a defense against what could otherwise be debilitating litigation. And, indeed, sometimes that is exactly what the defense is – the insurer steps up, provides a robust defense to the policyholder against the underlying claim and the policyholder and insurer, united in common interest, march together in lockstep against the underlying plaintiff.

This united front between policyholder and insurer, however, does not always exist. In some cases, insurers deploy a toolbox of often highly effective tactics that minimize their defense obligation by limiting their defense spending. In practical terms, on the front end during the course of the defense, these tools can sometimes limit the insurer’s defense spending to a mere fraction of the policyholder’s actual defense costs.

Some of the front end tools frequently deployed by insurers during the course of the defense to limit their spending on defense of the policyholder include the following:

1. Refusing to pay policyholders’ independent defense counsel more than the rates that insurers pay lawyers on the insurers’ own approved panel of defense counsel (known as “panel counsel”) – rates sometimes considerably lower than market rates for those services due to the insurers’ market power as a mass purchaser of those services.
2. Insistence that policyholders and/or their independent defense counsel accept the insurer’s litigation management guidelines – sometimes even when those guidelines are found nowhere in the subject insurance policy.
3. Auditing the bills of the policyholder’s independent defense counsel for “reasonableness” and compliance with the insurer’s litigation management guidelines – sometimes resulting in very large reductions of what the insurer is willing to pay for those bills.

On the back end (often after the defense), if there is a ruling that some or all of the claims against which the insurer was defending the policyholder were not or were potentially not covered, some insurers will seek to recover those “uncovered” defense costs back from the policyholder. This is known as “recoupment.” Insurers will sometimes attempt recoupment even if their right to recoupment is not found in the subject policy.

These insurer tactics have provoked intense conflicts between policyholders and insurers and have sparked often fierce coverage litigation in the courts between the two sides.

This presentation will explore each of the above issues, how U.S. courts have treated them and offer strategies to policyholders for overcoming these insurer methods for limiting their defense obligations.

Please join Sills Cummis & Gross P.C. Member Scott D. Greenspan, the Co-Chair of the firm’s Insurance Practice Group and the Chair of its New York Insurance Practice Group, as he addresses:

• Explanation of an insurer’s defense obligation and a policyholder’s right to independent counsel in the event of a conflict between insurer and policyholder (5 minutes)
• Insurer refusal to pay the policyholder’s independent defense counsel more than the “panel counsel” rates paid by the insurer and the courts’ response to those refusals (15 minutes)
• Insurer insistence that policyholders or their defense counsel accept the insurer’s litigation management guidelines, policyholder responses and court treatment of such (10 minutes)
• Policyholder responses to insurer audits of the bills of policyholder’s independent counsel (5 minutes) 
• Recoupment of defense costs by insurers – overview (5 minutes) 
• Policyholder responses to insurers’ recoupment efforts and lessons learned from court decisions on insurer recoupment (20 minutes)

Who Should Attend: In-house counsel, outside attorneys, insurance, compliance and other allied professionals interested in the latest insurance coverage issues arising when insurers attempt to minimize their defense obligation to their policyholders and recoup already-paid defense costs

Program Level: Overview

Prerequisites: None

Advanced Preparation: None

Faculty:

Scott D. Greenspan

Sills Cummis & Gross P.C.