When a company is sued in a substantial lawsuit, it faces a difficult dilemma. The conventional course of action would be for the company to expect its insurer—to whom it has been paying premiums for years—to step in, represent its interests, and pay out an appropriate settlement amount. The problem is this almost never happens. 

Insurance companies have a powerful incentive to avoid settling cases. They make determinations to save part or all of their available coverage dollars, often deciding to wait the plaintiff out, no matter what the cost or exposure is to the insured. Unfortunately, insurance companies are generally able to get away with doing this with impunity. Contracts are drafted almost entirely in favor of the insurer, giving them control over a company’s defense and if and when to settle. Worse, many of these contracts prohibit companies from settling with their own money. In fact, they often state that if a company settles independently, it waives its right to try and subsequently collect from the insurer. These obstacles are even more pronounced for larger companies who might have multiple insurers. 

 All of this amounts to a profound and troubling conflict of interest. While insurers are supposed to protect the companies they represent, in reality they are pursuing their own agendas to protect their own money. Their delay and obstructionist tendencies can have devastating consequences for the companies they insure, negatively impacting those companies’ public reputations and their bottom lines.  

Executives looking to protect themselves and ensure they have a voice during litigation need to consider having a larger self-insured retention, or SIR (Self-Insured Retention). A SIR is a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance company will respond to a loss. Large companies often have SIRs, some which may be as much as $10 million. Thus, a company with a $10 million SIR would have complete autonomy to settle a lawsuit against it for any amount under $10 million because the insurance policy would not apply until a settlement exceeds $10 million. Larger SIRs are less expensive to a company with reference to paying insurance premiums, but could be more expensive if they need to defend and resolve numerous lawsuits. The advantage is that the larger the SIR, the more control a company has in deciding how to defend itself in lawsuits and resolve cases against it.   

 

Insurers’ Playbook 

Insurance companies pursue a number of tactics to guarantee they are in a position to dictate if, when, and how a case is resolved. In every instance, they are looking to cast doubt on a plaintiff’s case and avoid settlement. When a suit is brought, the insurer retains the right to engage outside legal counsel to represent the defendant company. Those attorneys, while ostensibly representing the defendant, are ultimately at the behest of the insurer. Typical tactics the insurers’ lawyers will pursue include overwhelming the plaintiff with motions, utilizing multiple expert witnesses, taking multiple depositions, seeking adjournments, and undertaking other legal maneuverings that eat up time. Most often, time is not on an injured plaintiff’s side. 

The obstacles are even more acute for very large companies, which, due to the high amount of coverage they need are often forced to engage multiple insurers. They typically use a layered system—known as a “tower of insurance”—where various insurance companies provide coverage at different limits. For example, a company might have a SIR of $10 million, Insurance Company A might provide coverage up to $15 million above the SIR, Insurance Company B might provide $25 million above that, Insurance Company C might provide $25 million above that, and Insurance Companies D and E might provide a shared layer of $50 million above that. Companies can procure as much insurance coverage as they want, but usually the tower consists of levels of $15 million or $25 million, or a level of $50 million, which is shared by two or three insurance companies. This system makes reaching a settlement all the more challenging, since the various insurers will try to stick their counterparts with the tab. More lawyers, more insurance companies, more red tape. 

Based upon my decades of experience, including my representation of the actor Tracy Morgan in his case against Walmart, I often insist upon negotiating directly with the defendant company rather than their insurers to avoid the obstacles created by the insurance dilemma. This course of action streamlines resolution of the case to the benefit of the parties involved. I resolved Tracy Morgan’s case directly with Walmart and they then engaged in a lawsuit with their insurers to be reimbursed. 

 

The Cost 

When insurers drag out the settlement process, the consequences companies face can be debilitating. Aside from the financial burden of ongoing litigation, they also can suffer long-term harm to their brand. General counsels and executives understand this—and often share their frustration with me. They know there is a cost if they are perceived to be denying justice to a clear victim, especially in a high-profile case. But insurance companies assume none of these risks and are content with delaying for as long as possible to keep their money.  

 

Solutions 

Companies should strongly consider maintaining larger SIRs, which will provide them with the autonomy to settle most cases on their own without their insurers’ consent. This is particularly true for large companies with towers of insurance coverage. They will need to convince each insurer at every applicable level to agree before reaching a settlement.  

While having a tower of insurance coverage seemingly protects companies from significant exposure in lawsuits, it often causes problems because the insurers are more interested in saving money than in protecting the defendant company. Oftentimes plaintiffs and defendants want a case settled but cannot achieve that end because of discord among the carriers for the various layers of the insurance tower. We need to see companies insist upon language in insurance contracts that provides an acceptable course of action if they disagree with the insurer on whether to settle.  

For example, contracts could stipulate that if such a disagreement occurs, an independent third-party process could be required to make the determination. Or, perhaps, we should do away with towers of insurance all together because they don’t accomplish their intended purpose—protecting insured companies. This system cannot continue where insurance carriers hold companies hostage to the detriment of all parties involved 

For executives and general counsels, it is important to think through these dynamics and prepare accordingly. While you won’t be able to change the business models and instincts of insurance companies, you can be intentional about guaranteeing they don’t hold all of the power when you’re facing a lawsuit that threatens your business.  

At the end of the day, we know that insurers are good at collecting premiums and they struggle when it’s time to pay out on behalf of the companies they represent. 

 

Mr. Morelli, founding partner at Morelli Law Firm, is one of the most successful and recognized attorneys in the country, specializing in civil litigation. With decades of experience and a reputation as a fierce trial lawyer, he consistently secures multi-million dollar results for his clients. He has tried every kind of civil case, with a particular focus on personal injury, truck and train accidents, employment discrimination, and complex product and drug liability. Mr. Morelli is frequently called on to handle high-profile cases, including representing actor/comedian Tracy Morgan in his landmark settlement with Wal-Mart