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Litigating coverage dispute requires cost-benefit analysis

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Litigating coverage dispute requires cost-benefit analysis

When policyholders decide their only option is to pursue litigation against their insurers in coverage disputes, they should first conduct a cost-benefit analysis to see if it would be worth their while, say policyholder attorneys.

Speed may be critical, say attorneys, who note there can be a “race to the courthouse” as policyholders and insurers rush to file lawsuits in the jurisdictions viewed as most sympathetic to their cause.

At the same time, experts say negotiations should continue even after litigation has been filed. In fact, observers note relatively few coverage cases ever actually reach the trial stage, and settlements often are reached at the last moment before trial.

Experts also say policyholders' frequently voiced concern that they somehow will be excluded from the insurance market if they sue their insurers is unfounded.

Litigation sometimes may be necessary, say observers. “If you're in a spot where simply the insurance company draws the line in the sand and refuses to discuss any further, and the parties are at loggerheads,” policyholders may be forced to file suit, said Scott N. Godes, of counsel at Dickstein Shapiro L.L.P. in Washington.

“Policyholders should stand by their rights,” said Gary Thompson, a partner with Reed Smith L.L.P. in Washington. “Don't let the insurance company be a bully.”

Richard D. Milone, a partner with Kelley Drye & Warren L.L.P. in Washington, said there are three key variables in conducting a cost-benefit analysis: How much the policyholder expects to recover, which “can be a real moving target” because this can depend on the underlying litigation; how much the insurance coverage litigation is going to cost, which takes into account the prospects for a summary judgment; and the case's merits.

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Timothy W. Burns, a partner with Perkins Coie L.L.P. in Madison, Wis., said, “I've had million-dollar disputes that it wouldn't make sense to litigate over in court because of the cost of recovery.”

Benedict M. Lenhart, a partner with law firm Covington & Burling L.L.P. in Washington, said, “Sometimes, there are issues at stake beyond the immediate case.” For instance, there might be a relatively small claim in dispute, but if you are afraid of having to file more of the same type of claim, “you've got to make the precedent that there's coverage.”

Another consideration is how litigation could impact underlying litigation, such as in product liability cases, said Steven Gilford, a partner with Proskauer Rose L.L.P. in Chicago. “There may be concern about whether or not it is strategically sensible to be litigating both of those at the same time.”

The amount of time involved also should be taken into consideration. “Coverage cases can require significant resources in terms of responding to inquiries and discovery requests,” said Mr. Gilford.

“To the extent management is distracted from day-to-day business activities to focus on a dispute, that can lead to more acrimonious litigation” and “certainly is a drain on company resources,” said Seth D. Lamden, a partner with Neal Gerber & Eisenberg L.L.P. in Chicago.

Policyholders should develop a clear timeline that lays out “what they are trying to achieve, by what date,” said Robert M. Horkovich, a shareholder with Anderson Kill & Olick P.C. in New York.

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There is sometimes a rush to the courthouse to try to ensure the most favorable jurisdiction. The law may be favorable for policyholders in one jurisdiction and advantageous to insurers in another, “and frequently it's a race to the courthouse,” said Mr. Horkovich.

“Insurance companies sometimes jump the gun and sue their own policyholders first, because they want to get into a jurisdiction where they can manipulate results, or in front of a judge they think is friendly toward insurance companies,” Mr. Thompson said.

Mr. Gilford said some courts construe ambiguous policy language in policyholders' favor, some do so only under particular circumstances, some hold policies should be interpreted in light of policyholders' reasonable expectations, and some do not. These issues arise particularly when there is ambiguity or dispute over the policy language that may come into play, he said.

Many times though, said Mr. Lenhart, “there's only one realistic forum.”

Finley T. Harckham, a shareholder with Anderson Kill in New York, warned that particularly for first-party property polices, there often are contractual deadlines for filing suit against insurance companies, “and policyholders have to be very mindful of those. They can be as short as one year,” he said.

These deadlines can be enforced even if the loss is continuing, for example in a case where a hotel is destroyed and a year later there are still business interruption claims, Mr. Harckham said.

Experts say even if litigation has been filed, it does not necessarily preclude continued negotiation—in fact, filing suit can encourage settlement.

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Mr. Gilford said, “One of the things litigation does is allow you to centralize the dispute and deal with information on a centralized basis, and frequently a court will supervise or require a mediation process, so it creates a vehicle to exchange information in an orderly way,” which “is often difficult to manage in the absence of litigation.”

Observers label as unfounded policyholders' frequently expressed concern that filing litigation will hurt their ability to get insurance.

“My experience has been that insureds frequently bring lawsuits against their insurers to resolve dispute claims and have had no problems finding appropriate insurance,” Mr. Lamden said.

The fear is overblown, said Mr. Lenhart. “In my 20 years' experience, I've not seen a policyholder suffer because they decided to pursue a coverage claim in litigation.”

Litigation “certainly strains the relationship,” but even if it affects your relationship with the claims department, “it shouldn't have an effect on underwriting,” said Mr. Gilford.

“Insurers are counting on the fact that policyholders will back down from their heavy-handed positions,” said Mr. Thompson. But they “shouldn't be afraid to take on their carriers. That's why they buy the insurance.”

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