Legal Ethics Corner: How Much Do You Need to Know About Your Client’s Insurance Coverage?

Peter Roldan, Law Offices of Peter Roldan

insurance-coverage_MJzYEIwuIt’s no secret that insurance coverage is often a key issue in litigation, as insurance is used to pay defense costs, fund settlements, and satisfy judgments. In recognition of this, courts have recently been imposing more burdens on lawyers when it comes to understanding their clients’ insurance policies.

At the same time, policies are becoming more esoteric and specialized, which can make it difficult for lawyers to ascertain whether coverage is available for their clients.

As a result, lawyers who do not specialize in insurance law may be wondering whether they are now expected to provide advice on insurance issues that may be outside of their expertise.

Sanctions for Failure to Disclose Insurance Policies

In Sun River Energy, Inc. v. Nelson, 800 F.3d 1219 (10th Cir. 2015), the Tenth Circuit recently affirmed sanctions issued against a company’s outside counsel for failing to disclose or produce the company’s directors and officers (D&O) insurance policy in its initial disclosures.1

The magistrate who issued the sanction found that counsel never “took a serious look at whether there was applicable insurance” and “exhibited deliberate indifference to the obligation of providing relevant insurance information under Rule 26.” In upholding the sanction, the Tenth Circuit rejected the excuse that “counsel need not bother to review the actual terms of an insurance policy…before denying the existence of the potential coverage, so long as he believes the existence of coverage would be very unlikely or unusual.”

Clearly, the court believed that a lawyer must, at the very least, have a basic understanding of a client’s insurance program.

Failure to Investigate Coverage as Grounds for Malpractice Claim

In Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, 827 N.Y.S.2d, 231 (N.Y. Sup. App. Div. 2006), the court held that a lawyer could be found negligent for failing to investigate a client’s insurance coverage or failing to timely notify the client’s insurer of a claim.

The court noted that “whether an attorney can be found negligent for failing to investigate insurance coverage would turn primarily on the scope of the agreed representation” and whether the attorney’s conduct fell below the relevant standard of care.

Duty of Competence and Scope of Representation

So what can a lawyer do in order to avoid trouble when a potentially tricky insurance coverage issue arises?
First, make sure that your attorney-client agreement clearly defines the scope of your representation. If the matter you are handling could involve cross-claims or possibly trigger esoteric insurance policies, then be sure to state that your duties do not include handling coverage issues, if you’re not comfortable doing so.

You should also consider whether you may have a duty to advise the client to seek separate coverage counsel.

Second, keep in mind that CRPC 3-110, which governs attorney competence, provides that an attorney who may the lack specialized knowledge needed for a matter can meet the competency requirement by associating with or consulting with an attorney who has the requisite knowledge, or by timely obtaining such knowledge.

The most important thing is to be aware of such issues so that you can act appropriately to protect your clients.

Footnote

“[A] party must, without awaiting a discovery request, provide to the other parties…any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” Fed. R. Civ. P. 26(a)(1)(A)(iv).

About the author:

Peter Roldan is the principal attorney at the Law Offices of Peter Roldan. He represents policyholders in insurance coverage and bad faith litigation against insurers.