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Sue or Settle? Strategic Thinking for Insurance Coverage Disputes
(CLM018)
Speakers:
Ash Kilada, PepsiCo, Inc.
David F. Klein, Pillsbury Winthrop Shaw Pittman LLP
Learning Objectives
At the end of this session, you will:
• Know the legal and commercial considerations that drive the decision whether to litigate or compromise major insurance claims
• Understand the key strategic considerations driving settlement, the variables shaping negotiations, the potential formal or informal negotiating forums, and the tools at your disposal to get a settlement done
• Know how to manage litigation or settlement negotiations to minimize cost and maximize recovery
The Best Disputes are the Ones Avoided Improve contract certainty – know your policy
• Involve coverage counsel when reviewing policy terms and conditions
• Ask for clarification, wording enhancements up front
• Stress test loss scenarios through your policy language
• Choose your insurance partners carefully (brokers and insurers)
• Understand dispute provisions in your policy (arbitration, choice of law, etc.)
Identify and head off potential disputes before they occur:
• If a claim appears likely to be controversial, try to involve your broker early
• Get the underwriter involved
• Set reasonable expectations early with your internal management
The Day of Reckoning
You have been waiting for weeks to hear from insurers about that major claim
The loss is large enough to be reported on the company’s 10(k)
Your boss has been asking about insurance proceeds almost daily
Operational people have been assuming the cash will come in the door
A thin envelope comes in the mail . . . .
What do you do?
When Bad News Comes, Inhale . . . Review the insurer’s denial letter in light of the policy language
Review any applicable legal decisions with inside or outside counsel
Discuss objectively with the insurer’s claims staff
• Understand their basis for denial
• Do they understand the facts and your argument for coverage?
Understand all the intangible factors
• Is the problem an overly aggressive claims person or insurer’s coverage counsel?
Is the insurer making a statement to your broker?
• Is the insurer having a bad year? Or trying to avoid setting a precedent?
• Is there a chance of getting a better result talking to your account
manager/underwriter, or higher level management?
Features of a Major Coverage Dispute Underlying loss – very substantial
Ongoing/future exposure
• Financial
• Institutional
Legal uncertainty
Factual disputes
Impasse
• Denial of claim
• Insurer inaction
• Collateral disputes (indemnifiable loss, defense costs/rates)
Example #1: A D&O Claim D&O insurer denies legal costs of responding to a U.S. Attorney subpoena are
covered defense costs under its policy
Underlying loss is uncertain:
• Subpoena imposes some legal costs, but no immediate damages
Ongoing/future exposure:
• Future risk is very substantial—includes securities investigation, potential class action lawsuits, liability of directors, officers and company
• Insurer may have institutional commitment to policy interpretation
Legal uncertainty/factual issues:
• Is an investigative subpoena a “claim” within the meaning of the policy?
Impasse:
• Insurer declines coverage
• Note that a second claim for coverage may be possible as SEC investigation or third-party claims develop
Example #1: D&O Claim OptionsConsideration Do Nothing Sue Settle
Loss Absorb loss Win/lose on line-item basis
Partial recovery
Future Exposure Can pursue later claim as investigation unfolds
May or may not resolve if you win/lose
Possible accord as to future coverage
Legal Uncertainty No resolution Resolution if litigated to conclusion
Skip resolution of legal claims
Impasse Interim insurer win Interim win or interim/total loss
Narrower range of outcomes (partial recovery)
Example #2: An Environmental Claim Insurers have denied coverage or reserved rights under historic CGL policies
on a major environmental claim spanning sites in many jurisdictions
Underlying loss is very substantial:
• Company has 10 environmental sites in 4 states
Ongoing/future exposure:
• Overall remediation costs may reach $100M
• Insurers have institutional commitment to legal positions
Legal uncertainty/factual issues:
• Insurers cite qualified pollution exclusions, assert that administrative actions do not constitute
“suits” seeking “damages,” and contend that common-law allocation principles require the
insured to bear 2/3 of the liability
Impasse:
• All have denied claims or reserved rights with no indication that they will proceed to adjust
the losses or pay your attorney fees to deal with regulator agencies
Example #2: Environmental Claim OptionsConsideration Do Nothing Sue Settle
Loss Absorb loss All or nothing outcome (or settle)
Partial recovery
Future Exposure Absorb future risk Resolve ripe claims only (possibly set precedent)
Resolve past and future claims
Legal Uncertainty No resolution Resolution if litigated to conclusion
Skip resolution of legal claims
Impasse Insurer win Wide range of outcomes (from 0% to 100%)
Narrower range of outcomes (partial recovery)
Example #3: A First Party Loss with Business Interruption Property insurer asserts flood sublimit caps coverage for massive property and
business interruption loss
Underlying loss is very substantial:
• Property damage is $40M
Ongoing/future exposure:
• Business interruption may reach $200M
• Insurer may have institutional commitment to policy interpretation
Legal uncertainty/factual issues:
• Flood sublimit
• Expect line-item disputes over property damage loss
• Expect disputes over quantum of covered business interruption loss
Impasse:
• Insurer is willing to pay $5M of $240M loss
Example #3: First Party Loss OptionsConsideration Do Nothing Sue Settle
Loss Absorb loss Win/lose on line-item basis (or settle)
Partial recovery
Future Exposure Absorb future risk Win/lose (or settle)
Partial recovery
Legal Uncertainty No resolution Resolution if litigated to conclusion
Skip resolution of legal claims
Impasse Insurer win Wide range of outcomes (from $5M - $240M)
Narrower range of outcomes (partial recovery)
Sue or Settle? Deciding how to respond to an insurance dispute requires a balancing of
commercial and legal considerations
• Importance to the company
• Importance to the insurer
• Financial cost of litigation versus settlement
• Cost of litigation versus settlement in corporate time and resources
• Securing venue
• The risks and rewards of upping the ante
• The risk of making bad law
• Timing to resolution
• Likelihood of success (uncertainty of the merits)
• Publicity
How to you balance your thinking about these factors?
Recovery Pathways
Rights to
Coverage
Tolling
Agreement
Prepare &
Document
Claim
Principal-
to-Principal
Bargaining
Settle
Impasse
Sum Certain $$ in
return for release
Tender
Claim
Reservation
or Denial of
Claim
Insurer
Investigation/
Cooperation
Lawsuit Insurer
Defenses
Return to original
status quo
Lose
Win
Costs
+
Declaratory
Judgment
Negotiation
Pathway
Litigation
Pathway
Claims
Litigation Pathway
Pros Cons
May be necessary to vindicate importance
to company
Institutional importance to insurer may
prolong litigation
Holds open chance of winning “top dollar” May lead to no recovery
Increases pressure on insurers Expensive – may lead to net loss
In multi-jurisdiction case, may secure most
favorable forum
In cases involving large “future cost”
component, victory may be only partial: $
+ declaratory judgment
Allows discovery of insurer data that may
support coverage
Potential corporate disruption—discovery,
litigation holds, depositions
May leader to higher $ settlement Once begun, often difficult to settle
In multi-insurer cases, a strategic goal is to
“peal off” early settlers to increase
pressure on remaining insurers
In multi-insurer cases, insurers enjoy
advantage of sharing litigation costs
Litigation Pathway: When May It Make Sense?
When forum-selection may be case-dispositive
When upside potential greatly exceeds litigation cost
When upside potential exceeds coverage risk
When upside potential is worth a significant investment of corporate time and resources
When claim facts are manageable (discrete facts, few corporate witnesses)
When only one or two insurers are involved to bear costs
When early disposition of one or two issues may increase claim value
When court disposition of legal question is a pressure point
When insurer will not compromise
Negotiation Pathway
Pros Cons
Allows company to monetize uncertain
claims at “fair” value—avoiding risk of no
recovery
Cannot achieve “top dollar”
Shorter cycle time to resolution Insurer may abuse process to delay
resolution
Less demand on corporate resources Less pressure on insurer
In some complex cases, allows liquidation
of both past a future losses without
multiple litigation
May require surrender of future coverage
rights
Conducted on an orderly, confidential basis
with set meetings at agreed times
Lack of access to the insurer’s “black box”
Lower cost, more adaptable to alternative
fee structures
Imposes less pain on insurer, too
In multi-insurer cases, reverses insurers’
economic advantages in litigation
In multi-jurisdiction case, fails to secure
choice of forum
Negotiation Pathway: When May It Make Sense?
When risk of “no recovery” is unacceptable
When litigation cost may be disproportionate to upside potential
When coverage risk is high—applicable law is uncertain
When management of corporate resources dictates
When claim facts are very complex or uncertain (multiple claims and witnesses, unknown or old facts)
When multiple insurers are involved
When adverse publicity is a concern
When time to recovery is important
A Decision-Analytic MatrixFactor Litigation Settlement
Importance to company May dictate litigation for
cultural reasons
May dictate settlement if
“all/nothing” risk
unacceptable
Likelihood of success Favored if likelihood of
success is high
Favored if legal or factual risk
is high
Cost Very costly Less costly
Resources More resources required Less required—but not none!
Time Usually takes longer Favored if time to resolution
is important
Pressure on insurer Places more immediate
pressure on insurer
Less pressure—but can sue
later
Securing a forum Requires litigation Standstill & Tolling Preserves
both parties’ opportunities
Economic pressure More on policyholder More on insurers (in multi-
insurer cases)
Using Decision Analysis:$10M D&O Case
Likelihood Value
Forum?Subpoena
Covered?
75% 60% 6,000,000 Chance of80% Recovery
25% 20% zeroChance ofNo Recovery
50% 10% 1,000,000 20% Years to
50% 10% zero Recovery
100% 7,000,000 2% Interest Rate
Expenses (2,000,000)
Nominal Net Value 5,000,000 PV 4,711,612
90% Chance of90% 4,500,000 Recovery
Chance ofNo Recovery
10% 10% zeroYears to
100% 4,500,000 Recovery
Expenses (500,000) 2% Interest Rate
Nominal Net Value 4,000,000 PV 3,921,569
Issues
90%
10%
1
Branch Outcomes Final Outcomes
70%
30%
3
LITIGATE
Win: Illinois
Lose: New York
Win: Yes
Lose: No
Win: Yes
Lose: No
NEGOTIATE
Succeed: NegotiatedSettlement at 50% of
Incurred Costs
Fail: Move to Litigation
Decision Analysis: $100M Environmental Claim
Likelihood Value
Forum?As
Damages?
Pollution
ExclusionAllocation
100% 64.00% 64,000,000 80%
0% Chance of100% Recovery
80% 20%
0% 16.00% zero Chance ofNo Recovery
0% 0.00% zero20% Years to
100% 20.00% zero Recovery
100% 64,000,000 2% Interest Rate
Expenses (5,000,000)
Nominal Net Value 59,000,000 PV 53,438,118
Chance of90% Recovery
90% 49,500,000 Chance ofNo Recovery
10% 10% zeroYears to
100% 49,500,000 Recovery
Expenses (2,000,000) 2% Interest Rate
Nominal Net Value 47,500,000 PV 46,109,812
Branch Outcomes Final Outcomes
64.00%
36.00%
Issues
5
90%
10%
1.5
LITIGATE
Win: Washington
Lose: California
Win
Lose
Lose
NEGOTIATE
Fail: Move to Litigation
Win
Lose
Win
Lose
Win
Discount for General Coverage
Defense: 25%
Succeed: Overall discount of 55%(1-0.4)*(1-0.25)=0.45
Discount for Pollution
Exclusion: 40%= +
Decision Analysis:$240M First-Party/BI Claim
Likelihood Value
Forum? Sublimit? BI IssuesAll Line
Items50% 32.00% 76,800,000
80%50% 32.00% 57,600,000
Chance of100% 50% 8.00% 19,200,000 Recovery
80% 20%50% 8.00% 14,400,000
0% Chance of0.00% zero No Recovery
0% 0.00% zero20% Years to
100% 20.00% zero Recovery
100% 168,000,000 2% Interest Rate
Expenses (4,000,000)
Nominal Net Value 164,000,000 PV 148,539,853
Chance of90% Recovery
90% 82,080,000 Chance ofNo Recovery
10% 10% zeroYears to
100% 82,080,000 Recovery
Expenses (2,000,000) 2% Interest Rate
Nominal Net Value 80,080,000 PV 77,736,289
Issues
10%
1.5
80.00%
90%
Branch Outcomes Final Outcomes
20.00%
5
LITIGATE
Win
Lose
Win
Lose
Lose
Win
Lose
Win
Lose 25%
Win
Win
Lose 25%
NEGOTIATE
Fail: Move to Litigation
Succeed: Overall discount of 62%
(1-0.5)*(1-0.2)*(1-0.05)=0.38
Discount for Sublimit:
50%= +
Discount for BI Issues:
20%
Line Item Discounts:
5%+
Managing Litigation Open and maintain clear communications with counsel
• Understand their theory of the case—ask questions!
• Understand case status, calendar, and how it affects you
• Set up regular updates
Prepare your company for litigation
• Understand and implement litigation holds
• Depositions and discovery—understand who must participate, the timing, and the resources required
• Understand that your counsel may influence, but cannot control, the calendar—the court’s calendar comes first
• Consider and have a plan to deal with public relations issues
Managing Litigation (cont’d)
Managing costs
• Have counsel prepare a budget showing expected and potential tasks, professionals providing services, rates and expected timeline
• Counsel should explain contingencies that may change the budget and what effect those contingencies could have
• In regular meetings with counsel, set aside time to track performance against budget, discuss developments that may increase costs, and consider approaches that may introduce efficiencies
• Your budget seldom includes the impact of stays, expansive discovery orders, and appeals, all of which can blow the budget
• Expect the unexpected—build a contingency into your budget
Managing Negotiations Like litigation, negotiations have to be managed to minimize
costs and maximize recovery
The key is preparation
• Marshal available data—thoroughly (leverage informational advantages over insurers)
• Analyze facts and law
• Come to a realistic internal assessment of strengths and weaknesses
• Set realistic financial goals before negotiations
Create a space where negotiating is “safe” for both sides
• Standstill and tolling agreements
• Confidentiality
• Make your case—credibly and diplomatically—while acknowledging risk
• Understand insurer needs (information, reinsurance, avoiding adverse precedents)
Managing Negotiations (cont’d)
• Negotiate with intermediaries, not through them
• Your participation represents corporate buy-in and authority—don’t just speak “through counsel”
• Insist on participating in strategic decisions with your counsel
• Rely on mediators for information about your case—but remember who your counsel is
• Maintain litigation option
• The other side needs to see you have counsel capable of bringing suit
• The other side needs to know your counsel has done his homework just as if litigation were a step away
• But no need to threaten litigation explicitly (especially if you don’t mean it)
• And the corollary: Don’t sue unless you are prepared to see litigation through to the end
Managing Negotiations (cont’d)
Managing Costs
• Discuss at the outset with your counsel
• Set specific expectations, budgets and targets
• Take a phased approach and measure costs against pre-determined milestones
• Maintain communications with counsel at regular intervals
• Explore alternative fee options
Take-Aways Avoid disputes - understand your coverage and negotiate up front,
also choose your counterparties carefully
Identify potential disputes early and work with the broker and/or
underwriter before formally tendering the claim
Understand the tangibles and intangibles of the dispute and look
for ways around a logjam
Evaluate the potential outcomes and set reasonable internal
expectations
Don’t assume litigation is the only answer—explore the pros and
cons of a negotiated alternative
Consider decision analytic tools—and professional advice—in
exploring the value of litigation and settlement alternatives
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