When “Later” Is Just Too Late, Part 6
This is the final article in a six-part series on early "issue spotting" in construction claims and litigation. Previous articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, and Part 5.
This article in the series addresses issues which arise during a pending claim or suit.
Once the parties' positions have been staked out, the case against the insured develops. Three exposures develop simultaneously as evidence is gathered and the liability brought into focus: (1) the insured's exposure to the plaintiff in the underlying or liability case; (2) the insurer's exposure on the policy; and (3) the insured's exposure for uncovered damages.
In theory, the insured and the insurer each seek to minimize the collective exposure to the plaintiff, then sort out the coverage arguments later. In practice, how and what discovery is conducted, what litigation positions are taken, and how exposure and case status is reported to the carrier and the policyholder drive settlement decisions and evaluation. If a global settlement of the liability and coverage issues is feasible, the discovery and evidence from the liability case become the foundation for later insurance litigation.
Traps To Avoid Respecting Evidence In Insurance Litigation When The Liability Case Settles
It is no surprise that in insurance litigation, the rules of evidence apply. However, many clients and lawyers fall into one of two common traps. The first one is to not develop facts necessary to litigate the coverage case later, such as where a case settles because of off-the-record and/or protected communications. The second, related, trap is to assume that a coverage determination against a nonparticipating carrier will be favorable simply because the settlement seemed favorable. An insurance case is, quite simply, a new lawsuit; the liability case is the earth where the evidentiary seeds are planted.
The Case Within A Case And Problems Created By Settlement
Follow-on insurance litigation after settlement is, in many respects, similar to professional liability matters where the issues are tried as a "case within a case." In a professional liability case, the foundational fact is whether there is an injury to the plaintiff, measured by a settlement or judgment that would not have been necessary but for the negligence of the defendant; similarly, in insurance coverage litigation, the fundamental question is whether the settlement by the insured or unsatisfied judgment against it would not have occurred had the carrier recognized coverage under the policy. If the insured receives a defense verdict or pays nothing, there are no damages aside from defense costs; if there is a settlement or judgment on an uncovered claim against the insured, there are no damages for an action against the carrier.
The concept of litigating a "case within a case" is less difficult where the underlying case proceeds to trial, because the basis for the insured's liability is documented. While insurance coverage must be kept in mind when considering settlement with certain parties or the form of the verdict (discussed below), a settlement raises several difficult questions regarding evidence in a subsequent case, including:
- Where defense counsel in the liability case opines that liability is likely and that a settlement can be obtained on more favorable terms, what is the admissibility and weight of counsel's opinion in the insurance case?
- Are the discovery responses by the insured, or letters sent to other parties by the insured or its lawyer, admissible in subsequent insurance litigation, and for what purpose?
- Are discovery responses and letters sent by other parties in the liability case (not insureds or parties to the insurance litigation) admissible under any circumstances?
- If the liability case settles at mediation, what effect does that have on admissible evidence in the subsequent insurance litigation?
Jurisdictions differ as to whether the issues may be handled in a single lawsuit. For example, under California law, common issues between the liability and coverage case are tried and determined in the liability case. Thus, for example, if an insured is sued for bodily injuries arising out of an assault, and the matter proceeds to trial and judgment, the insurer may not later force the insured to prove its liability to the plaintiff and the amount of damages. Rather, in subsequent insurance litigation, the issue is limited to whether that liability is covered by the insurance policy under an estoppel theory.103
However, what if the liability case settles, and the insurer has denied coverage, or refused to contribute to the settlement? In that case, there is no adjudication of the insured's liability or the amount thereof. Since most cases settle, early recognition of coverage issues — and handling them — are critical.
This is the fifth article in a six-part series on early "issue spotting" in construction claims and litigation. Previous articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, and Part 6.
This article in the series begins to address the question of what to do when an insurance dispute is likely.
Choice Of Law
Choice of law can be outcome-determinative on many substantive issues in insurance coverage litigation, including litigation over coverage for construction defect claims. Sections below will highlight a number of key substantive issues on which the…
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