Tuesday, January 22, 2008

Untangling Employment Practices Liability insurance


Earlier this month, law.com had a very insightful article on the advantages and pitfalls of business insurance policies. See On the Horns of a Defense Counsel Dilemma. While the article did not specifically concern Employment Practices Liability policies, the issues are the same. Any insurance policy sets up a very curious relationship - the relationships between the policy holder and insurance company, the law firm and their insurance carrier referral source, and the attorney-client relationship.

When I used to do a lot of work for clients under EPL policies, the refrain I most often heard from my client was, "You're the insurance company's lawyer." Nothing could be further from the truth. Unless an insured has paid for the right to select counsel, the insurance company selects and retains counsel for the insured under the EPL policy, and, subject to the policy's deductible, pays the fees. The client, though, is always the insured, and not the insurance company. Ohio law supports the idea that although there exists this odd "tripartite relationship" between the insured, the lawyer, and the insurance company, the only attorney-client relationship that exists is between the lawyer and the insured; there exists no such relationship between the lawyer and the insurance company. A lawyer's ethical duties are always solely owed to the insured. See Swiss Reinsurance Am. Corp., Inc. v. Roetzel & Andress

Notwithstanding any EPL converage a company might have, there are certain key instances where a company may want to have its own employment or corporate counsel involved in litigation, working along side insurance counsel.

  • EPL insurance will cover some, but not all, employment related claims in the state of Ohio. For example, it is illegal to insure against punitive damages in this state. Further, different policies may cover different types of claims. For example, discrimination claims may be covered, and wage and hour claims not covered. Therefore, it is important at the outset of any engagement in which there may be insurance coverage to have counsel review the claims, the policy, and any reservation of rights letters to make a determination as to what is and is not covered. Counsel may not agree with the insurance company on coverage. In that case, one is usually better served having an attorney fight that battle with the insurance company.
  • Because not all claims may be insured, one might be left with uninsured exposure in a case. Punitive damages or damages that exceed policy limits are two examples of uninsured exposure. Because one might have certain aspects of a case for which there is no insurance coverage, it may be wise to have separate counsel monitoring the litigation, and if the stakes are high enough, taking an active role to hedge against the uninsured risk.
  • Conflicts can also arise between the client's interest and that of the insurance company. How to defend a case, whether to settle, and for how much are all issues with which the insured and the insurer can have divergent issues. If such a conflict occurs, the insured may question the loyalty of the attorney hired by the insurance company. In such a circumstance it makes sense to get an outside law firm involved to manage the conflict, push back against the insurance company to triumph your interests, and even possibly take over the defense if the conflict cannot be resolved.

When these issues arise, they are rarely simple or easily resolved. Understanding the nature of this tripartite relationship is the first step in taking control of the process and ensuring that a defense is complete and proper.

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