We know that most of our clients, manufacturers of prescription medical products (for purposes of this post), if they have insurance at all, have coverage that is subject to large self-insured retentions (“SIRs”). While the Blog doesn’t usually follow insurance matters, the decision discussed in this guest post is very good news for insureds
This month’s edition of For the Defense magazine focuses on insurance law. That makes sense. It is difficult to do much defending without bumping against insurance issues. Our torts professor constantly emphasized the relevance, sometimes even the primacy, of insurance considerations. But law school being law school, we learned precious little of the mechanics of insurance. Some companies self-insure, some use captive insurers, and some have some/several/many complicated insurance policies where the scope of coverage becomes a question of theoretical majesty. A colleague of ours, Rick Berkman, probably knows as much as about settling cases and dealing with insurers as anyone on the planet. He once told us that insurance policies seem to contain a clause written in invisible ink: “Void upon claim.” There are lawyers who devote their careers to representing insurers. There are lawyers who devote their careers to harassing insurers — come to think of it, quite a few of these folks have offices quite close to us. And then there are lawyers (we count ourselves among them) who often do a delicate dance of collaboration and conflict with insurers. Whether there is insurance overage, or what is the extent of such coverage, plays a huge role in case disposition. Think of the simplest auto accident case and how the policy limits drive the settlement numbers.
We have not represented an insurer for a good long while. As a summer associate, we had a case where the issue was whether an auto insurance policy covered the death of a man who, after experiencing car trouble, entered a phone booth (remember those?) to call for road service and was then shot by a street criminal. We do not remember how that one turned out. You name a bizarre fact pattern, and there is probably an insurance case that comes close to it. Insurers naturally would rather pay less or not at all, but they are in a sticky spot, particularly when the insured seeks litigation defense. If the insurer denies coverage, including denial of a defense, and then turns out to be wrong, that insurer is in a heap of trouble. After all, when someone buys insurance, what they are really buying is peace of mind. Otherwise, just based on the actuarial numbers, it is a dodgy investment. But if the insurer wrongly denies coverage, there is a betrayal of that peace of mind. It is one of the areas of the law (along with mishandling of corpses) where psychic injury damages cropped up relatively early in our jurisprudence and did not seem entirely nonsensical. The rational thing for an insurer to do – and insurers are nothing if not rational – is to tender a defense whilst reserving rights. In the meantime that defense can turn out to be terribly expensive. Consequently, there is something else an insurer can do: file a declaratory judgment action seeking a ruling that the underlying case is outside coverage. One wonders whether that fairly typical maneuver by the insurer might exhaust a penurious insured, at least giving the insurer some leverage in the coverage dispute. But we hate to indulge our cynical side.