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Uh-Oh, My Company Has Been Sued - What Do I Do Now?

You just received a “Summons and Complaint”. After recovering from the surprise, you see your company is being sued. Don't panic. Here are the first two things to do.
Written Feb 16, 2011, read 6519 times since then.
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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. 

 

Learn more about the author, Susan Fuller, J.D..

Comment on this article

  • QuickBooks And Xero Outsourced Contractors Bookkeeping Services 
Lynnwood, Washington 
Randal DeHart, PMP, QPA
    Posted by Randal DeHart, PMP, QPA, Lynnwood, Washington | Feb 16, 2011

    Susan,

    Great article and it points out the value of having a business relationship with a lawyer, such as yourself, before being sued.

    I highly recommend this article for all contractors and other business owners as well

    Warm Regards,

    Randal

    PS: I rated it "10" because that is what it deserves!

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Feb 16, 2011

    Thanks Randal! My goal is to get business owners informed about what they need to do to protect their companies when stuff hits the fan. Oftentimes people don't know to bring in the insurance company early, when doing so can save a lot of headaches and money. And sleep.

    Susan

  • General Contractor/Remodeler 
Seattle, Washington 
Brad  Rodgers
    Posted by Brad Rodgers, Seattle, Washington | Feb 16, 2011

    So Susan, question..... if the insurance defense lawyer(IDL) is assigned to the case from the insurance company isn't it at least an accurate assumption that they are representing the interests of the insurance Company MORE than mine as the consumer? Somehow it feels similar to the "independent" medical examiners that contract with L&I to do medical exams for injured workers. My experience with them was there was nothing independent about them because they were on L&I's payroll. Does my personal counsel in this instance serve as my junkyard dog as Randal so affectionately referrs to good lawyers?

    BjR

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Feb 16, 2011

    Excellent question. In my personal experience, as a (former) IDL, I can tell you the interests of the defendant/client/policyholder came first. That's the rule. The difficulty comes in communication. For example, the client may not realize or fully appreciate that the insurance contract often (though not always), gives the insurance carrier the final say on whether to settle a case. This is important, because the client may want to continue the fight, not truly appreciating that the client's own funds will be on the line if a jury verdict exceeds the coverage. If a carrier has the chance to settle a case within policy limits - so that the client's personal funds are not jeopardized - that's a good thing. Indeed, if the insurance carrier fails to do that, it might in turn be sued for "bad faith". The "IDL" is also looking out for your best interests, and shutting down a lawsuit before it gets to a jury is nearly always in the client's best interest for many many reasons. That's a simple example, but hopefully you get the idea.

    And yes, your personal counsel is your junkyard dog. Especially if you have concerns whether your IDL is not acting in your best interest. Your junkyard dog can talk technical lawyer stuff with the IDL to find out what's going on, and then advise you accordingly.

    Your question might be a good topic for me to address in another article or discussion...anyway, if you have more questions or concerns, do give me a call.

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Feb 16, 2011

    PS - I'd like to amend that and say not "nearly always" best to avoid going to trial, but "often". A jury trial is a stressful process for the client, but sometimes it is the appropriate thing to do. Figuring out when to go to trial and when to settle is part of the art.

  • Carpet Cleaner 
Mountlake Terrace, Washington 
Steve Borcherdt
    Posted by Steve Borcherdt, Mountlake Terrace, Washington | Feb 17, 2011

    Dear Susan,

    Thank you for this companion article.  
    

    This is valid information to have beforehand. I appreciate your willingness to share this info to educate us so we have a track to follow. As a carpet cleaner I recognize the value of education to build trust.
    I am grateful that it is straight forward and made easy to understand for the business owner. For that reason alone I gave it a ten.

    Thanks again.

    Sincerely, Steve

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Feb 17, 2011

    Thank you very much Steve! My goal is to make these issues understandable, so your comments are very appreciated.

    One of the things I'm looking for are suggestions on what other legal issues the community might want an article about. I've got some ideas on more articles, but really want to know from folks in the trenches what is important to them. So if you've got any, or hear of any, don't be shy!

    Susan

  • WordPress websites and Marketing 
Parker, Colorado 
Veronica Cannady
    Posted by Veronica Cannady, Parker, Colorado | Mar 02, 2011

    Very interesting to learn about Commercial General Liability as part of business insurance. Well-written and clear. I'll check out your other articles. Thank you.

  • Creative Outlaw ~ Crowdfunding Consultant 
Portland, Oregon 
Adrienne Fritze
    Posted by Adrienne Fritze, Portland, Oregon | Mar 02, 2011

    I love that you posted this article!! Thank you for sharing your knowledge and recommendations on such an important small business topic that few of us in other solopreneurial businesses really want to deal with.

    Great job in so skillfullly bringing this to our attention.

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Mar 03, 2011

    Veronica and Adrienne - Thank you so much. Its good to hear the information is useful (usefulness is the goal).

  • SEO Consultant 
Jersey City, New Jersey 
Elvis Arias
    Posted by Elvis Arias, Jersey City, New Jersey | Mar 03, 2011

    great contribution susan, im sure this helps everyone in our community, there is nothing more important than brand protection as far as im concerned

  • COO 
Seattle, Washington 
Thomas Mercer
    Posted by Thomas Mercer, Seattle, Washington | Mar 03, 2011

    Nice article. Very timely for me as well (buying insurance, not defending a lawsuit). Thanks!

  • Business Lawyer 
Seattle, Washington 
Susan Fuller, J.D.
    Posted by Susan Fuller, J.D., Seattle, Washington | Mar 03, 2011

    Elvis and Thomas - Thanks for your comments!

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