Insurance Coverage for Litigation Expenses
To say that America is a litigious society – or even that the world in which we live is a litigious one – is merely to state the obvious. Hardly a day goes by in which we read of lawsuits and judgments which affect both great and small and seem to involve virtually every realm of corporate activity.
The underlying reason is both subtle and glaringly obvious. It isn’t that people have simply become more contentious over time, although that may be true. Rather, the culprit in so many situations today that result in legal action – libel, slander, defamation, infringement, breach of contract and many more– is that practically everything we do today involves some kind of contract or agreement.
No one among us, except attorneys at law, has the time or even the inclination to read every word of the documents to which we routinely affix our signatures. So, more and more situations arise in daily corporate life that have the potential to end up in a highly contentious matter.
In such situations, standard insurance is usually not sufficient to cover every situation and contingency which may arise. This is why insurance that covers specific litigation expenses has become a valuable and even essential coverage for business today.
Terms of Non-Endearment.
From the outset, it is important to understand what is meant when we speak of litigation expenses. This is a specific term which applies to a wide but not all-inclusive set of costs incurred in litigation. These costs typically include attorney fees, the costs involved in hiring expert witnesses, court costs, even monetary fines and penalties assessed directly to the insured. Also included are the public relations expenses that may be necessary to mitigate the effects of adverse publicity.
What, you may be wondering, about the actual costs of settlement? Here, a distinction must be made. Settlement costs refer only to the monetary amounts paid by the insured and not otherwise reimbursed in the prosecution of the lawsuit. Such costs do not include general overhead and/or office expenses, the opposing party’s or attorney’s fees as may be awarded by the court, or the premium paid for a litigation expenses policy.
More importantly, a settlement cost imposed by the court is not covered. In other words, one may file a claim for the attorney’s fees and other stipulated expenses in defense of a lawsuit in which you may be named, but if you wind up owing a settlement, that settlement amount is not reimbursable under this particular coverage.
Real-life examples.
Before we look at some specific situations in which litigation expenses often arise, let’s remember: a defining feature of litigation expenses insurance is that it covers the insured both when acting as a plaintiff to defend their business and when they have to defend an action brought by another party.
A typical example almost everyone can relate to is copyright infringement. Any successful idea will have emulators. But when someone uses your idea or your logo without permission, or is copying your product or process and misrepresenting it as their own, a typical response is to bring legal action in order to defend your property.
Other examples illustrate life’s complexity which is, of course, reflected in the complexity of today’s contracts. For example, many contracts involve hold harmless agreements in which contractual responsibilities are not always clear until they are litigated in situations where one party feels it has been wronged. In today’s world of constantly changing trade and labor practices, it can be deceptively easy for the insured to find themselves in a defense situation.
Think, for a moment, about the complex realm of employee and labor relations. Today, this sphere routinely involves wage and hour claims, as well as wrongful termination suits and other types of discrimination claims. Unforeseen defense situations may also involve agreements with customers, suppliers and distributors which often lead to uncollected receivables, bad debt and other payment disputes.
Any of these situations and a multitude of others, are exactly why businesses need coverage that goes above and beyond that offered in the standard commercial market.
The point is, real life does not pull any punches when it comes to exposure to litigation expenses.
A Word About Exclusions.
The most important point to understand about exclusions is that the main part of any general liability policy is the exclusions. In other words, if an incident falls outside your standard insurance policy’s covered cause of loss, the insurance company will not provide defense in any event. This is why it is critically important to have such situations covered in advance through separate coverage specifically for litigation expenses.
In addition, a responsible business owner must consider the exclusions to the litigation expenses coverage for itself. Importantly, this form will not provide coverage when coverage is provided by another policy issued to the insured. This would extend to not providing additional or excess coverage for a situation where the limits on any other policy providing defense are exhausted.
Assume, for example, that the limit of your commercial insurance policy providing defense is $1 million and your commercial carrier pays the policy limit and ends its defense. Any additional legal expenses incurred by you would not be covered by your litigation expenses insurance.
A third category of exclusions involves a lawsuit or criminal allegation not related to the insured’s business. For example, a situation may arise in which the insured is named on the policy and yet the owner has property interests not related to the business. In such a case, a business owner could easily be acting outside their own business duties and find themselves being charged criminally. In either case, the litigation expenses would not be covered by the form.
Be Smart. Be Careful. Be Covered.
The business world isn’t getting any easier. Today, virtually all businesses, small or large, face at least some exposure to litigation. These can range from a simple contract dispute to a situation in which former employees steal your protected process or proprietary information to set up their own business, even becoming your direct competitor.
For these and countless other reasons, it pays to consider litigation expenses insurance as an essential component of your long-term risk financing strategy.
