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Essentials of Coverage: 2

Essentials of Coverage: 2

February 4, 2006
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" insurers have rights too "

In part one, we began to examine ways of insuring risk in the adult entertainment industry. In this conclusion, we'll look at ways of unlocking your business' insurance coverage.

Unlocking your business' insurance coverage starts with a basic understanding of the distinction between insurers' obligations to defend claims and how that obligation differs from their duty to pay-out indemnity by way of a settlement or judgment. In most instances, an insurer's contractual obligation to defend a lawsuit is triggered by the allegations asserted in the underlying action. In most states, when an asserted claim "may potentially" result in covered liability, a defense obligation will exist. Thus, an allegation that Company A is wrongly trading on Company B's ideas in its advertising, couple with the "potential" that such misconduct may ultimately require payment of a judgment under an insurer's misappropriation coverage, is sufficient to trigger a defense obligation.

Once this case for a defense is made, three important corollaries kick in: (1) Insurers' defense obligations exist even if the claims asserted are groundless, false or fraudulent. In other words, the claim asserted can be totally, objectively and completely devoid of any truth whatsoever, and still, defense obligations may exist. The veracity of the allegation is unimportant; the allegation's mere existence controls. (2) Where a "duty to defend" language appears in an insurer's policy, the carrier's obligation to fund a defense is typically unlimited. As such, the insurer is required to pay reasonable attorneys fees and costs incurred in the defense of an underlying lawsuit no matter how long it takes to resolve the matter and irrespective of the policy's stated indemnity limit. Accordingly, an insurer with a $2MM liability policy may be required to pay out $5MM (or more) in defense costs. In fact, the policy's $2MM liability limit isn't even implicated until the time for settlement or judgment arises; and (3) Where a duty to defend exists, an insurer is required to defend the entire action, inclusive of any uncovered claims. Thus, where is a lawsuit alleges 10 different causes of action and only one is "potentially" covered, an insured is entitled to an unlimited defense to the entire action for as long as the potential claim remains in controversy. Ultimately, allocation and reimbursement principles may come into play but, in the short run, a full and complete defense is the rule.

Granted, insurers have rights too, and as can be expected, they have their own attorneys who stand at the ready to enforce those rights. Aggressively. Given the stakes, most coverage battles are fought on the front-end, and concern whether (or not) the language in a particular lawsuit satisfies the "potential" for coverage standard embedded in duty of defend decisions. Here again a competent coverage attorney is essential. Because plaintiffs usually don't think (or care) about their adversaries' business coverage when they sue, accessing your coverage means hiring an attorney who thinks like a plaintiff, understands the insurer's policy forms, and "knows it when he sees it" in terms of converting the underlying lawsuit's allegations into coverage.

In the case of the website operator, effective legal counsel means translating allegations regarding the offending sites' presentation and characteristics into the essentials of an insured advertising liability claim. For the club operator, it means knowing that trade secret violations are often covered under CGL policies, errors and omission (E&O) policies, or other specially scripted coverage forms. As for the indicted investor, insurance typically excludes coverage for criminal acts. Nevertheless, an experienced insurance practitioner will know that various forms of E&O coverage - including directors' and officers' (D&O) liability coverage - will actually provide a defense against overzealous prosecutions depending on the policy's definition of the term "claim."

The key to all this is knowing your rights and refusing to take "No" for an answer. If you actually bothered to buy insurance, you owe it to yourself to actually take the next step and tender your claim to the insurer. You need to seek prompt review of the insurer's (inevitable) denial of benefits and you need to keep pressing for what's yours. In many states, insurers face extreme penalties, including exposure to punitive damages, if they fail to timely or properly afford coverage. An experienced coverage practitioner will know whether, how and when to best exploit that leverage as part of an effective risk management plan.

Michael Bruce Abelson, Esq. is a partner in Los Angeles, California's Abelson | Herron LLP, and specializes in policyholder coverage litigation for online and entertainment clients. Although this article does not provide legal advise regarding any particular claim or circumstance, questions regarding actual claims, coverages, and rights may be addressed to him directly (mabelson@abelsonherron.com) or through his firm's website www.abelsonherron.com.


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