Every year, when your liability insurance premium comes due, you silently curse at the thought of paying it yet again – after all, you’ve been in business for years without a single incident. But you want to be protected, so you send the check out and go back to running your business.
So what happens if one day you do find yourself the target of a claim or lawsuit? What will your insurance company do?
It’d better do everything, you say – after all, you’ve paid a lot of money for this protection.
Well, in most cases, your insurance policy will come to your rescue. Of course, it depends on the specific type of coverage you have, but in general, you can expect your insurance company not only to pay the final judgment or claim, but also to pay for your defense. That’s why it’s important to get your insurance carrier involved whenever you have an incident that could result in a claim before it becomes a lawsuit. You want to put the insurance carrier on notice as soon as you suffer a loss or someone makes a claim.
You may have more than one carrier for liability insurance; for example, your directors’ and officers’ coverage may be with one company, and your general liability with another. Notify all your insurers, even if you don’t think the claim is related to what they cover. You can usually do this through your agent. Don’t just guess which policy will cover what; let the insurance companies sort it out.
Once they receive notification of the claim, your insurance carriers will respond in one of three ways:
1. They will tell you your policy doesn’t cover the particular situation you’re in, and they’re not going to defend you;
2. They will agree to defend you under the “reservation of rights,” meaning they’ll pay for your legal expenses, but they might not ultimately pay a settlement or judgment; or
3.They will defend you without the reservation of rights, which means they’ll pay your legal costs as well as any settlement or judgment (up to the limits of your policy).
Of course, even if your insurance company is handling your defense and will likely pay the final settlement or judgment, don’t just sit back and relax. You have an obligation under the terms of the policy to cooperate with the defense and assist the insurance company in reaching a favorable outcome. And obviously, it will be in your best interests to do so.
Finally, be prepared for your insurance company to decide to agree to a settlement even if you believe you were not in the wrong. Insurers often make settlement agreements based on economics not on the who is right and who is wrong. If you want to fight on principle, you could be going that route alone.