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Pursuing complex liability claims requires careful documentation

First analyze policy and evaluate potential recovery vs. cost of litigation

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Pursuing complex liability claims requires careful documentation

Though litigation is never preferable, it often is a commercial insurance policyholder's only recourse to collect reimbursement for losses or defense costs connected with complex liability claims.

As the frequency of high-value third-party liability claims has increased during the past three years, so has the amount of money mid-market companies dedicate annually to legal expenses.

Simultaneously, insurers have been systematically limiting their exposure to certain forms of complex third-party liability, including mass tort environmental claims, construction defect suits, employment practices class actions and, most recently, data security failures.

“What typically drives complex litigation is where you have some set of liability-inducing circumstances occurring in the broader economy, and insurance policies that haven't been designed with those exposures in mind,” said John Vishneski, a Chicago-based partner at Reed Smith L.L.P.

“That's the kind of situation where an insurance company faced with high-dollar claims is going to find any way they can to trim what they have to cover.”

An insurer's refusal of coverage is likely to be a more pressing concern for mid-market companies than for larger corporations, which are capable of temporarily absorbing the underlying legal expenses during settlement negotiations with their insurers.

However, experts say midsize companies' limited financial resources also underscore the necessity of conducting a detailed value assessment of the potential recovery vs. the anticipated costs of the litigation, as well as a coverage analysis of the policy in question.

“If I were the CEO, I'd want to be absolutely sure that the case we're getting ready to pursue has a good chance of winning,” said John Dempsey, New York-based managing director and global practice leader at Aon Global Risk Consulting.

Once the lawsuit is determined to be economically and legally viable, experts say midsize companies and their legal counsel must decide on the specific relief they intend to seek at trial, because it likely will affect their overall litigation strategy.

“If all you want is to get a defense obligation established, you may not want to seek a ruling on the indemnity question right away,” said Tyrone Childress, a Los Angeles-based partner at Jones Day.

“You don't necessarily want to be fighting the underlying plaintiffs at the same time as the insurers about essentially the same issues.”

The nature of the relief sought from the insurer and the circumstances of the underlying liability claim should guide a midsize company's selection of the jurisdiction where it sues its insurer, which can be a crucial factor in winning an insurance dispute.

As a precaution, experts say midsize companies may want to consider drafting and filing — but not serving — their lawsuit against an insurer in a policyholder-friendly jurisdiction before starting settlement negotiations, especially since many insurers routinely take similar steps to secure their preference in forum during coverage disputes.

“It might seem like a hardball tactic, but it's one of the most prudent things a policyholder can do if they are thinking about going in the direction of litigation,” said Robert Horkovich, a New York-based shareholder at Anderson Kill P.C.

From an evidentiary standpoint, the most critical step a midsize company must take when pursuing complex litigation against its insurer is carefully documenting all communications with insurers, loss adjusters, investigators and independent consultants involved in the underlying liability claim.

Those documents, experts say, will provide the basis for the company to assert its right to coverage.

“You want to be able to show that the insurer had the information to properly adjust the claim at the time and just refused to do so,” Mr. Childress said.

That way, “the whole story will already be in the insurer's claim file before you litigate. Then you can make a much stronger presentation to a judge or a jury.”

Additionally, experts say satisfying the insurer's request for documentation during the claims process often can improve a policyholder's chances of uncovering valuable evidence of the insurer's intent once a demand for discovery is made for the insurer's entire file on the underlying claim.

Finally, mid-market companies need to work with their legal counsel to map out the “jury story,” which experts say should provide jurors with relatable information and context about the circumstances of the case.

“What the policyholder should always ask a jury is whether they'd want their insurance company treating them in the manner that has been laid out at trial,” Mr. Childress said.

“The hope is that the jury will view the case through the eyes of the policyholder in terms of what their reasonable expectations would be under similar circumstances.”