The Enforceable Unwritten Exclusions and their Business Risks
By: Rob Cutbirth
Claim experience on a local or national basis, or generalized soft or hard insurance market conditions, can affect an insurer’s decision on pricing and offered coverage terms. Premiums and underwriting guidelines may change to address market or loss experience concerns. Coverage benefits may be expanded or contracted to address competition or fiscal concerns. One often forgotten constant that continues to impact insurer/insured and insurer/broker relationships, however, are public policy coverage limitations imposed by statute or court-defined public policies.
“Implied” coverage exclusions are commonly triggered in D&O, E&O, and EPL claims, where covered forms of conduct can implicate “intentional” or “self-dealing” acts, or restitutionary, remedial or punitive damages, “excluded” as a matter of public policy not identified in a policy or its endorsements. Definitions of “loss” or “damage” may state no coverage exists for amounts deemed uninsurable under the law governing the application of the policy to a given claim, even experienced brokers and insureds are often unaware of such limitations, let alone how they impact an insurer’s right to assign counsel, manage the claim, and/or limit its settlement or judgment contributions. This can be particularly confusing given the fact insurers often address these issues differently, even when confronted with similar claims in the same jurisdiction.
As claims and coverage counsel, we often advise clients to take the following steps to avoid harm to important business relationships, and improve the efficient handling of claims:
- Identify and raise with the insured and its broker any applicable public policy limitations at the earliest possible date, recognizing that educated brokers can be a positive resource (or at least an informational resource) for insureds who may be “surprised” about the existence of coverage limitations outside of the four corners of the policy. Because public policy limitations are almost never raised during the underwriting process, but they can override express policy terms in a given jurisdiction (i.e., California Insurance Code Section 533 overrides standard policy form language on indemnifiable conduct and damages), early and clear communications may be needed to avoid and argument of waiver or estoppel, where the insured maintains that it “relied” on the policy’s coverage provisions in its participation in the claim and its defense.
- Raise relevant and applicable public policy limitations with recognizing that doing so does not necessarily create a right to “independent counsel.” In many jurisdictions, implied public policy limitations relate only to indemnifiable damages (not defense considerations) that do not implicate or create a right to separate counsel. These issues should be carefully evaluated and addressed, however, to ensure that conflict of interest issues are properly evaluated and addressed with the insured in order to avoid ongoing conflicts on representation that can impair efficient claim management.
- In advance of mediations or settlement conferences, particularly given inconsistencies in how insurers are addressing public policy limitations in those pre-judgment settings, expectations on contributions and/or allocation of settlement amounts should be addressed in writing in advance of such proceedings with the insured in order to help avoid “surprises” and disputes that can derail productive settlement opportunities. Insurers should also consider filing “coverage briefs” or having pre-conference separate discussions with a mediator/settlement conference judge to help ensure that they understand the factual and legal basis for any allocation or contribution demands that might be made or rejected by the parties.
The “unwritten” exclusions that can limit coverage rights present challenges to all concerned. They cannot be overlooked in terms of their financial and relational impact for both insurers and insureds, with the use of skilled claims and/or coverage professional important to successfully navigating their impact on challenging claims.
If you have any questions or would like more information, please contact Rob Cutbirth at [email protected].