Email Article Print Article

Dirty Little Secrets-What Can You Do To Protect Yourself.

By - Email Editor

Date : July 24, 2008

Dear Valued Reader,

Last week, I wrote about some “dirty little secrets” that your insurance company won’t tell you about your defense lawyer. They included the fact that the lawyer hired by your insurance company to defend you in a lawsuit may have divided loyalties (between you and the company that is paying him to represent you), that your insurance company’s interests in defending you only extend as far as they go in getting out of a lawsuit as cheaply as possible, and the fact that you may have far less control over the defense and settlement of your case than you think.

The feedback from the article has been interesting, from readers who have said, in effect, “I had no idea that my insurance company might not vigorously defend me if I get into trouble,” to lawyers who have commented, “I’m glad that someone is telling people what they can and can’t expect from their insurance company’s lawyers.”

Among the questions I’ve gotten are, “So, do I need to protect myself from my own insurance company? I thought that the whole reason for buying insurance was for my peace of mind when I get into trouble. Are you saying that I’m wasting my money on insurance?”

The answer to those questions is a bit more nuanced than you might think. I certainly don’t recommend that anyone ever go without insurance. In today’s climate, it’s irresponsible and unrealistic to “go bare.” The money you spend on insurance coverage is, in my opinion, money well spent. Insurance is a valuable first line of defense in liability matters.

First, understand that your insurance company is not necessarily your friend. As I mentioned in last week’s newsletter, your insurance company has really only one interest when it takes you on as an insured person … its bottom line. If it can make more money by fighting your case for you than by settling, that’s what it will do. If it can make more money by settling your case than by fighting it, that’s what it will do. And if your insurer can figure out a way to deny insurance coverage to you and thus forego the necessity of defending or indemnifying you at all, that’s what it will do. If your insurance company can figure out some way to get its money back from you after having defended you, it will try that.

You see, insurance companies aren’t motivated by what you perceive to be your long-term best interest, your reputation in the community, or your ideas for strategies on how a claim against you should be handled. Their motivation is simple: money. Never forget that, and never expect anything else. Despite all of those advertisements assuring you that you’re in good hands or that your warm and friendly claims agent will be knocking himself out at 2 a.m. when you’ve had a catastrophe, you should never lose sight of the fact that those good hands will have no qualms about dropping you like a hot rock on the shoals of economic reality if they can get away with it. If you never have any expectation that your insurer is your friend, you’ll never be disappointed. It’s not.

Second, understand exactly what rights and duties you and your insurer have. Read your insurance policy. Don’t rely on the assurances that your friendly insurance agent gave you when you bought the policy. He’s not the one who will be making the decision as to whether to extend coverage to you, or whether to settle your case out from under you. He’s just the salesman – the guy who tells you that “it’s all just standard language, really,” when you have a question; the guy who gets a fat commission check when the sale is closed. The real guts of what you and your insurance company must do are contained in the actual insurance policy. Read it. If you don’t understand it, call the company. Send them a letter (in fact, I recommend that all of your dealings with your insurance company be in writing, for obvious reasons). Don’t be afraid to ask questions. In fact, insist on answers. Ask things like, “If I get sued, who are you going to hire to defend me? What’s their win/loss record? How many cases have they handled for your company? How many cases have they had involving businesses like mine? Are they going to be on a budget that’s been set by the insurance company? If so, what is that budget? How much involvement do I get to have in my defense? How far does my ‘duty to cooperate’ extend? Can I fire my lawyers if I don’t like them? Can I hire my own lawyer and have the insurance company pay for it? Can you settle a lawsuit against me without my permission?” You may not like the answers you get, but it’s important that you know where you stand. It’s best that you know what you can count on long before you’re in trouble.

Third, consider hiring your own lawyer to protect your personal interests. “Wait just a second here,” you may be saying, “Isn’t the whole reason I bought insurance in the first place so that I wouldn’t have to hire my own lawyer?” Probably so. Now that you know that you may have some issues with whether your insurance company will fully defend you and protect your interests, though, you may want to hire somebody of your choosing to make sure that you are truly protected fully. For instance, if your insurance company decides to defend you under what is known as a “reservation of rights,” (where the company reluctantly agrees to defend you, but “reserves its rights” to turn around and go after you for reimbursement of its costs and fees if it determines that it really wasn’t legally obligated to insure you after all), some courts have allowed the insured person to hire their own counsel at the insurance company’s expense – called “Cumis” counsel, after the name of the California case that established that principle. There are all sorts of nuances and restrictions on Cumis counsel that I don’t have time or space to fully explore here, but you need to at least be aware that such a possibility may exist for you.

Even in cases in which Cumis counsel is not available to you, (and even in cases in which a “reservation of rights” is not an issue), you still may want to hire your own lawyer and pay them out of your own pocket to “keep your insurance lawyer honest.” That personal lawyer may have as much or as little to do with your defense as you want. If you hire your own personal lawyer, though, I can assure you that the dynamic between your insurance company’s hired lawyer and you will change dramatically. Your insurance company lawyer will handle things a little more carefully, and a little greater diligence will be applied to your case. After all, the insurance company’s lawyer doesn’t want there ever to be a claim (or a complaint to the state bar organization) that he or she didn’t do everything they were required to do to comply with their duty to fully and zealously represent your interests. It’s a little harder to “slide” on defending your interests if there’s another lawyer who represents only those interests overseeing the case, and to whom the insurance company lawyer is accountable. In any case, by hiring your own lawyer, you will have an advocate for your rights and interests as against your insurance company, if necessary.

Fourth, consider litigation against your own insurance company, if necessary. There is an entire body of law called “insurance bad faith.” Myriads of cases have been brought and won by insured people whose insurance companies either denied coverage when it should have been extended, failed to extend full coverage when it should have been extended, refused to settle cases and thus exposed insured people to personal liability, and otherwise acted in bad faith towards their own customers. Courts have held that insurance companies have a special fiduciary duty in dealing with their own clients – especially in light of the fact that insurance contracts are what is known as “contracts of adhesion,” meaning that the insured person has really no bargaining power when it comes to the contract terms. It should come as no surprise that some companies have breached that duty, and have been held to pay dearly for that kind of behavior. While I’m not willing to say that most insurance companies commonly and routinely act in bad faith toward their insureds, or that they have a policy of treating their customers badly, I can say that it certainly happens – far more often than you might imagine. If you suspect that you are a victim of insurance bad faith, you should consider suing your insurance company.

Finally, remember that insurance is only one part of the overall Asset Protection equation. As I mentioned above, insurance is a good and necessary first-line defense against threats to you and your family. It is not the only defense, of course, and, as I’ve pointed out, it may have its own problems and weaknesses. A good Asset Protection Plan incorporates liability insurance as part of the overall equation, and implements other tools as well – limited liability business entities, trusts, ERISA-qualified retirement plans and other tactics and strategies. You should never rely entirely on insurance or, for that matter, any other particular tool, to fully protect you.

Randall K. Edwards practices law in Utah, Nevada, California and Arizona from his office in Salt Lake City.

RELATED ARTICLES:

• Managing Asset Protection Offshore
• Making the Most Out of Hedge Funds That Drive Success
• Working Your Portfolio to Being Green
• Finding Better Ways to Manage Your Money