Insurance Law: Non-Covered Claims, Counterclaims & Third-Party Actions

Non-Covered Claims, Counterclaims and Third-Party Actions

In some cases, defense counsel may become aware that the insured has a potential counterclaim against another party in the lawsuit or a third-party claim that may be barred if not asserted in the pending action.  Insurance policies do not necessarily provide coverage for these additional claims, and the insurer will not pay the defense attorney to prosecute them.  The proper course of action for the defense attorney is to advise the insured of:

  • of the existence of such claims
  • that the insurance policy may not provide coverage for the prosecution of such claims
  • that the insured may wish to consult counsel at his own expense with regard to such claims. When an insured expresses a desire to pursue a counterclaim, defense counsel may be obligated to fully protect those interests without regard to the language of the insurance policy.  This obligation may arise as a consequence of the attorney’s duty to represent his client zealously and within the bounds of the law.
    Punitive Damages

    Some insurance policies exclude punitive damages.  If the complaint otherwise triggers the duty to defend, a conflict arises between the insurer and insured.  The insurer may have little interest in defending the punitive damages claim, as the insurer might have no duty to indemnify the insured for that aspect of damages.  If an insurer is not obligated to indemnify its insured for punitive damages, it may attempt to limit defense counsel’s activities with regard to defending that aspect of the claim.  At the outset of the representation of a punitive damages case, defense counsel must determine whether the policy provides coverage for punitive damages and advise both the insured and the insurer of punitive damages claims so that they may protect their respective interests. In any event, the defense attorney must continue to defend the punitive damage claims.

    Settlement within Policy Limits

    Defense counsel has a duty to keep the insured client fully informed of all settlement negotiations. In Formal Advisory Opinion 86-4, the Georgia Supreme Court cited Rogers v. Robson, Masters, Ryan, Brumund & Belom, an Illinois case involving an insurer’s settlement over the express objection of the insured.  Dr. James Rogers was sued for negligence by a patient.  Dr. Rogers’ malpractice insurer provided a defense.  During discovery, deposition testimony established that Dr. Rogers was not negligent.  The malpractice policy provided that written consent of the insured was not required before the insurer settled any claim or suit.  Despite Dr. Rogers’ express instructions not to settle, defense counsel negotiated a settlement.  Dr. Rogers then brought suit against the attorneys.  In opposition to the law firm’s motion for summary judgment, Dr. Rogers filed an affidavit in which he stated that he repeatedly informed one of the partners that he would not consent to a settlement, that he was assured the action would be defended, and that the attorneys never advised him that they intended to settle the suit.

    In affirming denial of summary judgment for the law firm, the Supreme Court of Illinois noted that when the attorneys became aware that settlement was imminent and that Dr. Rogers did not want to settle the case, a conflict of interest arose that prevented the attorneys from continuing to represent both Dr. Rogers and the insurer without full disclosure.  The attorneys breached their duty to Dr. Rogers and were liable for any damages stemming from the breach.  The Supreme Court of Illinois then stated:

    Although [the attorneys] were employed by the insurer, [Dr. Rogers], as well as the insurer, was their client and was entitled to a full disclosure of the intent to settle the litigation without his consent and contrary to his express instructions.  [The attorneys’] duty to make such disclosure stemmed from their attorney-client relationship with [Dr. Rogers] and was not affected by the extent of the insurer’s authority to settle without [Dr. Rogers’] consent.  We need not and therefore do not consider the question whether [Dr. Rogers’] insurance carrier was authorized to settle the malpractice action without his consent.  Further, since no disclosure was made and [Dr. Rogers] was not given the opportunity to elect what course to pursue, we need not speculate on what recourse, if any, [Dr. Rogers] had under the terms of the insurance policy.

    When faced with a situation where the insured and the insurer disagree on a settlement strategy, defense counsel can require the parties to work out disagreements on their own.  Defense counsel can provide an objective assessment of the likely outcome at trial and estimate future defense costs.  Defense counsel can also encourage the clients to obtain separate counsel or a mediator.  However, defense counsel should refrain from making an “all things considered” settlement recommendation without obtaining informed waivers from the insured and the insurer.

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