Business Suits of Today - Are You Covered?

Historically, lawsuits involving businesses typically fell into one of a few well-trod paths - suits over a breach of contract, slip and fall cases on company property, suits over unpaid receivables, suits involving a machine failure causing personal injury, and the like. In that historical business and legal climate, corporate risks managers often came to have a good working knowledge of business suits, and readily learned to distinguish between those matters which would typically be covered by liability insurance and those that would not.

What is not widely known today is that, as the range and complexity of business disputes have increased over the years, it is not uncommon for a company's liability insurance policy to provide some degree of coverage for a variety of business disputes that are not often thought of as "insurable." For that reason, companies often fail to consider, and thus forego, the benefit of insurance coverage for lawsuits that may be covered to some degree by their liability insurance.

In order to understand this trend, it is important to consider the two primary benefits provided by a liability insurance policy. The first benefit is the so-called "defense" coverage, which typically provides that the insurance company will retain and pay for a law firm to defend a company in a lawsuit filed against it. The second benefit is the so called "indemnity" provision, which is the insurance company's obligation to pay for a settlement or judgment entered against its insured under certain circumstances. These concepts are known in the insurance industry as the "duty to defend" and the "duty to pay."

The distinction - between "defense" coverage and "indemnity" coverage - is important, because the courts typically require insurance companies to defend a much broader category of lawsuits than they are required to indemnify against. And, in these litigious times, the cost to defend a lawsuit can sometimes approach or even outpace the cost to settle or pay a verdict. Thus, while. an insurers obligation to pay for a judgment is often an open issue, it is common for a policy to more broadly provide for the cost of defense. For that reason, this first benefit - the insurance company's "duty to defend" - can be a significant asset to a company involved in a business lawsuit.

For instance, in 1994 the Illinois Supreme Court required a company's liability insurer to defend it against a lawsuit alleging retaliatory discharge of an employee. While a knee-jerk reaction might suggest that a lawsuit of that nature would not be covered, as it involves intentional conduct rather than negligence, the court nonetheless required the insurer to defend the employer against the suit.

In another example, insurance companies are often required to defend their insureds in lawsuits involving business defamation or libel. This coverage typically arises under a special section of a liability policy called "advertising injury coverage." In this day and age, where e-mails and faxes are instantly circulated around the globe, it is not uncommon for lawsuits to be brought over statements made in those transmissions, and thus the importance of this coverage becomes clear.

Similarly, courts have required insurance companies to defend their insureds in lawsuits over environmental cleanup issues. Most companies are aware that their current general liability policies (and most written since 1985) contain "absolute pollution exclusions" barring coverage for environmental matters. What is not as well-known is that a company's historical liability policies - even those from the 1970's, 1960's or earlier - can sometimes provide coverage for suits involving hazardous waste.

In the product context, courts will often require insurance companies to defend their insureds against lawsuits where the primary claim is for breach of a product warranty. If the lawsuit includes even a suggestion of damage to some property beyond the supplied product itself (such as material that was scrapped), the insurance company's "duty to defend" its insured will typically be triggered.

These four examples involving the firing of an employee, the sending of a defamatory e-mail, the cleanup of hazardous waste, and the failure of a product to perform as warranted - are regularly encountered in business yet rarely thought of as covered by insurance. And, as noted above, while an insurance company's duty to pay for judgments in these kinds of cases is not often clear, its duty to defend its insured in these cases may be well established by case precedent. For that reason, careful risk managers will promptly notify their liability insurance carriers of virtually all litigation filed against their companies, to avoid losing the benefits of a key component of liability insurance - the cost of defending such suits.