You just received a “Summons and Complaint”. After recovering from the surprise, you see your company is being sued by a customer complaining your product did not work, or that they were harmed by the product, or that they slipped and fell in your store…or any number of other scenarios in which your business is being accused of doing something wrong.
There are two concrete, positive steps to take right away: (1) contact your lawyer, and (2) send a copy to your insurance agent to send to your insurance carrier.
1. Contact Your Lawyer
If your company already has a lawyer, let him or her know of the lawsuit, and send them a copy. There is usually a 20-day deadline for responding to the Complaint, and you don’t want to miss the deadline. If you miss the deadline and don’t have a lawyer filing a Notice of Appearance on your behalf, you risk the Plaintiff getting a default order against you. Best to avoid that.
2. Notify Your Company's Insurance Agent and Carrier
Even if you don’t have a lawyer, make sure your insurance carrier gets notified of the lawsuit. Usually the most efficient way is to have your insurance agent get it to your carrier.
Why get the insurance carrier involved at all? Because when you opened your business one of the things you did was get Commercial General Liability (“CGL”) and/or other insurance. This situation- a lawsuit – is something insurance is designed to address. Make sure it gets to the CGL carrier, not merely the bonding company (bonds - such as for contractors - are a topic for another day).
It is important to get the insurance carrier involved early in the lawsuit for many reasons, not the least being that for situations covered by your insurance policy, the carrier may provide you with a lawyer to defend you. If that happens, you will not get a bill for that lawyer’s service – it’s part of what you get with your insurance. This is a huge cost saver for you. The sooner you get the insurance carrier notified, the sooner a lawyer can be appointed to defend your company.
Reservation of Rights – What is it?
Sometimes when an insurance carrier agrees to pay for the defense of your company it does so with a “Reservation of Rights” (“ROR”), and sends you a lengthy letter explaining its reasoning. An ROR basically means that if it eventually turns out the issues in the lawsuit are not something covered by the insurance policy, the insurance carrier “reserves its right” to stop funding defense of your company against the lawsuit, and/or reserves its right to refuse to fund a possible verdict against your company. Because the insurance policy is a contract, the terms of that contract govern what is covered, and not all situations are covered by the policy.
Being defended under an ROR is not cause to panic. Simply because an insurer defends your company under an ROR does not mean it is denying coverage. But situations vary considerably, and it is important to have an adviser you can trust.
Note: RORs are nearly standard in construction defect lawsuits. If you are in the construction trades and your company gets sued for defects related to its work, chances are very high that if your insurance carrier defends you, it will do so with a Reservation of Rights.
All of this leads to back to step #1:
Call Your Company’s Attorney (a/k/a “Personal Counsel”)
Lawsuits are confusing, and it is important to know you have someone watching out for your best interests. That is what your lawyer does. If the insurance company appoints a lawyer to defend you in the lawsuit, that is great. That person will work very hard on your behalf.
But it is important to know there are some limits on what that lawyer can do. The insurance defense lawyer is required to focus on defending you against the allegations in the lawsuit, and their duty of loyalty is to you, the defendant/client. To maintain focus on defense of the lawsuit and to avoid potential conflicts of interest, the insurance defense lawyer is prohibited by Washington law from addressing questions about what is or is not covered by your insurance policy. Therefore do not be alarmed, surprised or disappointed if the insurance defense lawyer cannot address your coverage questions – the law does not allow them to do so.
Instead, your company’s attorney or personal counsel is the one who can address coverage issues. An ROR can have serious implications, and it is important you understand from a trusted adviser what it means and what, if anything, you need to do to make sure your company is protected.
For the vast majority of situations, working with your insurance carrier is simple and straightforward. The vast majority of cases are also defended without the carrier “reserving its rights”. But there are situations that can be complicated and anxiety producing. Indeed, “Insurance Coverage” law” is a specialty in its own right. Always remember you do not have to manage it alone. Having a trusted attorney with you throughout the process is good business.