What Insurance Coverage Will Your Litigation Against Defendants Trigger That May Benefit Them or Your Company?
Discover What Insurance Your Litigation Opponent Possesses
Insurance coverage is a two-way street. Where you are litigating against a competitor of similar size and economic resources, it is likely that its insurance portfolio will mirror yours because of market conditions. Pursuant to Federal Rule of Civil Procedure 26(c), you can readily ascertain policies issued to it which may respond to claims asserted in your lawsuit. Parties that contend there is no coverage because their own review of their policies reveals no coverage or due to their receipt of a denial letter from their insurer must be tested. Your opponent’s views on the scope of its coverage can be tested in litigation.
It is important, in this effort, to not limit analysis to Commercial General Liability policies but to pursue umbrella and excess coverage, Errors and Omissions policies, Directors and Officers policies, as well as new forms of multimedia, cyberspace, and net security policies. While your opponent may object that this information is privileged, some level of inquiry is required to clarify whether a Rule 26(c) disclosure has been properly made.
Modify the Relief Sought in Litigation to Factor in the Availability of Insurance Coverage
One of the benefits of obtaining information about your adversary’s insurance coverage is that, in a number of jurisdictions, you can name the insurer as a party to the lawsuit you are pursuing and participate actively in the coverage dispute by clarifying what claims are being asserted and in so doing potentially impact the coverage available to the defendant.
For example, virtually every form of insurance policy requires that a form of damages be sought to entitle the defendant to a defense. While this may be limited merely to a quest for attorneys’ fees, pure claims for injunctive relief without the “such other and further relief” clause included in the complaint may not trigger a defense. Whether this is so will depend on what jurisdiction’s coverage laws apply. In a state such as Texas, where the “eight corners” rule is pertinent, pleadings define the scope of claims for insurance purposes. Thus, even if you seek further relief beyond an injunction, until that further relief becomes part of a formal pleading, no defense may be triggered. Feed Store, Inc. v. Reliance Ins. Co., 774 S.W.2d 73 (Tex. Ct. App. 1989), reh’g denied July 27, 1989; Reller (applying Florida law).
You may, however, wish to trigger coverage by your opponent, especially where it is a sizable company with significant resources and the availability of insurance coverage will not markedly enhance its ability to sustain the litigation, the benefit of coverage can well be to force its insurer to contribute at an earlier phase in the lawsuit and to fund its resolution. Similarly, where you believe damage claims are likely and the character of the damages sought may fall within the defendant’s coverage, having an insurer forced to pay that sum will make it easier to settle the case. Intellectual property cases, of course, often seek primarily nonmonetary relief.
What Insurance Coverage Will Litigation Against Your Company Trigger That Benefits Its Interests
Using Insurance Proceeds to Settle Litigation While Achieving Business Goals
Where the business issues predominate, as is often the case in trademark infringement litigation, procuring a judgment may be less significant than eliminating the competitor’s improper use of your trademarks. Nevertheless, where the monetary aspects of the dispute can be addressed by insurance coverage, so that recapturing litigation costs from the competitor need not come out of its company proceeds, resolving nonmonetary disputes may be simplified.
Each scenario is fact-driven, but assessing insurance as a tool for dispute resolution gives your company the benefit of being an insurance coverage-savvy litigator. Nor should outside counsel be expected to have full knowledge of the intricate interrelationship between insurance coverage and IP claims.
The Role of Policyholder Insurance Counsel in Enhancing the Value of IP Assets – The Insurance Coverage Audit
Outside coverage counsel’s expertise can effectively bridge the gaps in knowledge of these issues, facilitate insurer involvement in defense, reimbursement, and settlement, and create better continuity between defense firms entitled to reimbursement of fees who will not be perceived by an insurer as adversarial to their interests. Where the disputes over amounts due are between the company and its coverage counsel, and not the outside lawyers, coverage counsel who represent the insured can be the intermediary between the company and its insurers who advocates the company’s interests. This role for coverage counsel is especially useful where the outside law firm may occasionally represent insurers so it either has direct or at least business conflicts, as is the case for many major general practice litigation firms. In such a case, an independent coverage firm is ideally positioned to champion the company’s right to reimbursement for outside fees incurred without placing outside counsel in any conflict with insurers whom they must deal with on a business basis for other matters.
Special Opportunities and Pitfalls Posed by Insurance Coverage When Pursuing a Smaller Company
Where the defendant is a small company and where damage liability may be difficult to establish, and even if successfully done, may not create a return equal to the attorneys’ fees to obtain it, focusing only on recovery that is essential to the company’s mission may minimize expenses and assure that the defendant does not procure insurance coverage. Once the character of that coverage is ascertained through discovery, the company may elect to broaden its claims, including seeking damages which it may have heretofore eschewed, where it knows that that activity will not trigger a right to a defense funded by an insurer.
There is nothing more disconcerting for a company than to find that it is the only party paying litigation expenses in a bitterly fought dispute. There are numerous examples of small companies who have ended up funding their competitor’s counterclaim litigation expenses by pleading into coverage.
Thus a small company named Verteq who was a plaintiff in an intellectual property matter against a larger competitor received a counterclaim which triggered coverage. Given the fact that proof that the counterclaim was not viable involved the same legal action necessary to win its suit as plaintiff for violation of intellectual property rights, its competitor helped fund the litigation against it. Indeed, when a dispute arose over the rate of reimbursement, which was resolved in an arbitration under California law, the insurer’s unwillingness to pay the full rate was found to be improper.
Verteq received reimbursement for all attorneys’ fees expended at the full rate, pre-judgment interest from date of invoice, and the attorneys’ fees incurred in the arbitration to prove same. The latter fees were recoverable because the court found that Northbrook Insurance Co.’s reimbursement of counsel at a rate of only $150/hr. for litigation pending through 1994 was improper and constituted a breach of the covenant of good faith and fair dealing. While this result may not attend in every case, the net result was that the competitor ended up funding, via its ill-considered counterclaim, the entire cost of a successful litigation against it, without requiring the plaintiff to meet the standard for recovery of its attorneys’ fees under the underlying intellectual property statute under which it sought relief.
This same result was repeated by HP in a case where it pursued affirmative claims for relief against a patent infringer but drew a counterclaim for trade libel nested within various antitrust counts that ultimately led to a $51 million damage award in HP’s favor for 100% of attorneys’ fees expended at rates of up to $600 per hour and pre-judgment interest at 10% per annum from the date of invoice.
Recommendations for IP Owners Serving as Defendants/Counterdefendants
Based on these cases, the following observations are in order.
First, under the law of some jurisdictions, an insurer will be obligated to completely fund any non-collusive and reasonable settlement following its denial of a defense.
Second, in other jurisdictions that require a showing that all claims must fall within coverage, the standard for establishing a defense and for establishing indemnity under settlement may not be equivalent. Thus, facts beyond those in the pleadings and settlement agreement may be pertinent.
Third, because of these factors, coverage counsel should participate in the structuring of a settlement, as well as monitoring of a case as it proceeds to trial, since jury instructions, special verdicts, and interrogatories may address fact issues that determine coverage for any judgment that could arise in the underlying action.
Insurance coverage is a two-way street. Where you are litigating against a competitor of similar size and economic resources, it is likely that its insurance portfolio will mirror yours because of market conditions. Pursuant to Federal Rule of Civil Procedure 26(c), you can readily ascertain policies issued to it which may respond to claims asserted in your lawsuit. Parties that contend there is no coverage because their own review of their policies reveals no coverage or due to their receipt of a denial letter from their insurer must be tested. Your opponent’s views on the scope of its coverage can be tested in litigation.
It is important, in this effort, to not limit analysis to Commercial General Liability policies but to pursue umbrella and excess coverage, Errors and Omissions policies, Directors and Officers policies, as well as new forms of multimedia, cyberspace, and net security policies. While your opponent may object that this information is privileged, some level of inquiry is required to clarify whether a Rule 26(c) disclosure has been properly made.
Modify the Relief Sought in Litigation to Factor in the Availability of Insurance Coverage
One of the benefits of obtaining information about your adversary’s insurance coverage is that, in a number of jurisdictions, you can name the insurer as a party to the lawsuit you are pursuing and participate actively in the coverage dispute by clarifying what claims are being asserted and in so doing potentially impact the coverage available to the defendant.
For example, virtually every form of insurance policy requires that a form of damages be sought to entitle the defendant to a defense. While this may be limited merely to a quest for attorneys’ fees, pure claims for injunctive relief without the “such other and further relief” clause included in the complaint may not trigger a defense. Whether this is so will depend on what jurisdiction’s coverage laws apply. In a state such as Texas, where the “eight corners” rule is pertinent, pleadings define the scope of claims for insurance purposes. Thus, even if you seek further relief beyond an injunction, until that further relief becomes part of a formal pleading, no defense may be triggered. Feed Store, Inc. v. Reliance Ins. Co., 774 S.W.2d 73 (Tex. Ct. App. 1989), reh’g denied July 27, 1989; Reller (applying Florida law).
You may, however, wish to trigger coverage by your opponent, especially where it is a sizable company with significant resources and the availability of insurance coverage will not markedly enhance its ability to sustain the litigation, the benefit of coverage can well be to force its insurer to contribute at an earlier phase in the lawsuit and to fund its resolution. Similarly, where you believe damage claims are likely and the character of the damages sought may fall within the defendant’s coverage, having an insurer forced to pay that sum will make it easier to settle the case. Intellectual property cases, of course, often seek primarily nonmonetary relief.
What Insurance Coverage Will Litigation Against Your Company Trigger That Benefits Its Interests
Using Insurance Proceeds to Settle Litigation While Achieving Business Goals
Where the business issues predominate, as is often the case in trademark infringement litigation, procuring a judgment may be less significant than eliminating the competitor’s improper use of your trademarks. Nevertheless, where the monetary aspects of the dispute can be addressed by insurance coverage, so that recapturing litigation costs from the competitor need not come out of its company proceeds, resolving nonmonetary disputes may be simplified.
Each scenario is fact-driven, but assessing insurance as a tool for dispute resolution gives your company the benefit of being an insurance coverage-savvy litigator. Nor should outside counsel be expected to have full knowledge of the intricate interrelationship between insurance coverage and IP claims.
The Role of Policyholder Insurance Counsel in Enhancing the Value of IP Assets – The Insurance Coverage Audit
Outside coverage counsel’s expertise can effectively bridge the gaps in knowledge of these issues, facilitate insurer involvement in defense, reimbursement, and settlement, and create better continuity between defense firms entitled to reimbursement of fees who will not be perceived by an insurer as adversarial to their interests. Where the disputes over amounts due are between the company and its coverage counsel, and not the outside lawyers, coverage counsel who represent the insured can be the intermediary between the company and its insurers who advocates the company’s interests. This role for coverage counsel is especially useful where the outside law firm may occasionally represent insurers so it either has direct or at least business conflicts, as is the case for many major general practice litigation firms. In such a case, an independent coverage firm is ideally positioned to champion the company’s right to reimbursement for outside fees incurred without placing outside counsel in any conflict with insurers whom they must deal with on a business basis for other matters.
Special Opportunities and Pitfalls Posed by Insurance Coverage When Pursuing a Smaller Company
Where the defendant is a small company and where damage liability may be difficult to establish, and even if successfully done, may not create a return equal to the attorneys’ fees to obtain it, focusing only on recovery that is essential to the company’s mission may minimize expenses and assure that the defendant does not procure insurance coverage. Once the character of that coverage is ascertained through discovery, the company may elect to broaden its claims, including seeking damages which it may have heretofore eschewed, where it knows that that activity will not trigger a right to a defense funded by an insurer.
There is nothing more disconcerting for a company than to find that it is the only party paying litigation expenses in a bitterly fought dispute. There are numerous examples of small companies who have ended up funding their competitor’s counterclaim litigation expenses by pleading into coverage.
Thus a small company named Verteq who was a plaintiff in an intellectual property matter against a larger competitor received a counterclaim which triggered coverage. Given the fact that proof that the counterclaim was not viable involved the same legal action necessary to win its suit as plaintiff for violation of intellectual property rights, its competitor helped fund the litigation against it. Indeed, when a dispute arose over the rate of reimbursement, which was resolved in an arbitration under California law, the insurer’s unwillingness to pay the full rate was found to be improper.
Verteq received reimbursement for all attorneys’ fees expended at the full rate, pre-judgment interest from date of invoice, and the attorneys’ fees incurred in the arbitration to prove same. The latter fees were recoverable because the court found that Northbrook Insurance Co.’s reimbursement of counsel at a rate of only $150/hr. for litigation pending through 1994 was improper and constituted a breach of the covenant of good faith and fair dealing. While this result may not attend in every case, the net result was that the competitor ended up funding, via its ill-considered counterclaim, the entire cost of a successful litigation against it, without requiring the plaintiff to meet the standard for recovery of its attorneys’ fees under the underlying intellectual property statute under which it sought relief.
This same result was repeated by HP in a case where it pursued affirmative claims for relief against a patent infringer but drew a counterclaim for trade libel nested within various antitrust counts that ultimately led to a $51 million damage award in HP’s favor for 100% of attorneys’ fees expended at rates of up to $600 per hour and pre-judgment interest at 10% per annum from the date of invoice.
Recommendations for IP Owners Serving as Defendants/Counterdefendants
Based on these cases, the following observations are in order.
First, under the law of some jurisdictions, an insurer will be obligated to completely fund any non-collusive and reasonable settlement following its denial of a defense.
Second, in other jurisdictions that require a showing that all claims must fall within coverage, the standard for establishing a defense and for establishing indemnity under settlement may not be equivalent. Thus, facts beyond those in the pleadings and settlement agreement may be pertinent.
Third, because of these factors, coverage counsel should participate in the structuring of a settlement, as well as monitoring of a case as it proceeds to trial, since jury instructions, special verdicts, and interrogatories may address fact issues that determine coverage for any judgment that could arise in the underlying action.
