Legal – (Not Just) Another Insurance Blog

How Indemnity and Additional Insured Interact

The lede, unburied: contractual provisions for indemnity and insurance are intimately related and need to be coordinated. If not, you could be massively over-extending yourself for liabilities of counterparties. This is especially true of Additional Insured provisions.

Key to know is that, except where specified otherwise, Indemnity provisions and Additional Insured provisions are separate agreements.¹ This means limitations on one do not translate to limitations on another. As both statues and contract language typically very beneficial limitations on indemnity obligations, if insurance isn’t coordinated to match then it receives none of those benefits. Ultimately this means you can be required to pay via insurance (e.g. via Additional Insured extension) what you are legally prohibited from paying otherwise.² In fact an indemnity obligation could be completely voided by a court but a policyholder is still responsible to pay via AI!³

This is perhaps most imperative to those with self-insurance mechanisms as the insured will ultimately bear the cost. Meaning while you may be statutorily prohibited from indemnifying another party for (e.g.) their sole negligence, you could end up paying the exact same costs from your own pocket to your self-insurance.⁴

With full knowledge of this disparity an insured can make an informed business decision. However, many are already making this decision, though unwittingly. This is because us insurance professionals (rightly) strive to add the “broadest” AI forms to an insured’s policy. While this maximizes compliance, it does so by maximizing coverage extended to third parties beyond that to which they’re otherwise entitled.

It’s likely this is unintended, but an insured with (e.g.) blanket “10/01” AI forms is doing precisely that. Newer ISO (and proprietary language) attempts to prevent this, but such is insufficient since it attempts to do this by limiting AI to that “allowed by law”. But extending insurance beyond indemnity limitations is “allowed by law”!

Most insurance provisions I see pay no reference to indemnity obligations, or if they do it may be non-specific and in passing. I’d say most insurance provisions I’ve encountered, and assuredly some I’ve personally drafted, attempt to be as “vague” as possible since upstream parties often benefit from ambiguity. But even with meticulously crafted insurance provisions the problem persists – one needs to understand and align insurance with the indemnity provisions of that contact.

Insurance professionals have known for a long time that adding certain versions of AI forms to their clients policy extends coverage to include even the “sole negligence” of a named AI; it’s why those forms are demanded even if they are patently unfair to the providing party. So putting a positive spin on this: amending a contract’s insurance obligations to conform with indemnity obligations is a way to negotiate around overbroad AI requirements. Sure a third party may be provided (e.g.) 10/01s, but if that AI status is triggered pursuant only to satisfying indemnity obligations, and indemnity obligations are limited by contract or statute, then you have clawed back the overreaching portion of that AI coverage grant. That’s the theory, at least.

From my research, I’d say the key take-aways are:

1. Contractual indemnity and insurance obligations should always be assumed to be separate and distinct obligations with separate and distinct rules/permissions.
2. Know your jurisdiction. Some have explicitly crafted legislation to prevent this issue, though most have not.⁵ However, even if in a favorable jurisdiction, such limitations can be circumvented via choice of venue, undeveloped case law, etc. So codify within the contract regardless.
3. Draft indemnity and insurance obligations together; craft both provisions to be specific and symmetric. For bonus points, avoid using “minimum” or “no less than” or similar language when it comes to insurance obligations as that can over-extend limits.⁴
4. Specifically identify that any insurance obligation, and Additional Insured obligations specifically, exist solely to satisfy requirements under the indemnity agreement. I.e., state contractually that AI coverage applies only to obligations under the contract’s own indemnity agreement.⁶ There should be standard language about this in all insurance requirement templates.
5. Amend policy/AI wording. There is no “catch all” language here and, while tempting, inserting boilerplate to limit AI to (e.g.) only that which is allowed to be otherwise indemnified can pose an opposite problem: a policyholder is obligated to provide AI but coverage is not triggered. However, in general, you want to ensure you’re not providing a greater degree of coverage than is requested (especially as relates to specified form numbers/wording), and that coverage applies only to obligations assumed under contract or that would exist absent that contract. Again though, language on the policy forms themselves are useless without coordinating insurance/indemnity agreements.

Footnotes:

McCarter & English, Attys.
Contractual Indemnity and Additional Insured Coverage (2014), as presented at RIMS
http://cms4files.revize.com/ctvalley/CONTRACTUAL_INDEMNITY_AND_ADDITIONAL_INSURED_COVERAGE___Connecticut_Valley_RIMS___REVISED_c.pdf

[Benefits for Additional Insured] Can be independent of, and provide broader protection than, the indemnity obligation, i.e., for the additional insured’s negligence. – Important where applicable state’s law prohibits indemnification for one’s own negligence

Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty

A promise to obtain insurance is different from a promise to indemnify. Zettel v. Paschen Contractors, Inc., 100 Ill. App.3d 614, 617, 427 N.E.2d 189 (1981)

IRMI
2013 ISO Additional Insured Endorsements (2013)
https://www.irmi.com/articles/expert-commentary/2013-iso-additional-insured-endorsements-putting-the-changes-into-context-for-the-construction-industry

For many years, the construction industry has been able to avoid some of the effects of anti-indemnification statutes that prohibited the transfer of indemnitees’ concurrent negligence through contractual indemnity provisions. The construction industry did so by using the additional insured requirements to insure against losses that could potentially violate states’ anti-indemnification statutes.

Supreme Court of Minnesota
Eng’g & Constr. Innovations, Inc. v. L.H. Bolduc Co., quoting prior precedent (2013, 1996)
https://casetext.com/case/engg-constr-innovations

Therefore, when faced with questions about the enforceability of an indemnification provision in a construction contract, we must “consider[ ] the combined effect of sections 337.02 and 337.05,” and “even though an indemnification provision may be unenforceable under section 337.02, a promise to purchase insurance to cover any negligent acts by the promisee is valid and enforceable.” Katzner, 545 N.W.2d at 381.

Michael Rossi; Insurance Law Group, Inc.
Additional Insured Requirements in Contracts
https://www.linkedin.com/posts/michael-rossi-083743248_additional-insured-requirements-in-contracts-activity-7261403004837191681-0cZE

Foundation of the American Subcontractors Association, Inc.
via Kegler Brown Hill + Ritter
Anti-Indemnity Statutes in the 50 States: 2020
https://www.keglerbrown.com/content/uploads/2019/10/Anti-Indemnity-Statutes-in-the-50-States-2020.pdf

Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty

Cases have upheld the validity of provisions requiring the party named as indemnitee to be named as an additional insured on the indemnitor’s insurance policy where the insurance provision is not inextricably tied to a void indemnity agreement. E.g., Juretic, 232 Ill. App.3d 131, 596 N.E.2d 810 (despite a paragraph stating that the insurance would cover the contractor’s obligations to the owner under the indemnification clause of the agreement, other paragraphs stated that the insurance would also cover the contractor’s and owner’s liability to pay for injury and damages connected with or growing out of the contractor’s performance, and the owner was required to be added as an additional insured under these areas of coverage)

[…]

Although the insurance provision in the Blommaert subcontract requires insurance “to cover” the indemnity agreement and states that coverage is “afforded for” the indemnity provision, the provision also requires that O’Neil be named as an additional insured on Blommaert’s comprehensive general liability insurance. It stands separate and apart from the indemnity agreement as an agreement to purchase insurance for the general contractor. We conclude that the insurance provision is not tied inextricably to the indemnity agreement.

CrowdStrike: What We Can Learn

To recap:
1: Delta Airlines uses CrowdStrike’s “Falcon Sensor” for antivirus.

2: 07/19/2024 an update to the Falcon Sensor bricks Delta’s systems, grounding 6,000+ flights and (supposedly) costing $500M.

3: Delta publicly and privately tells CrowdStrike they’re going to pay.

4: CrowdStrike responds to Delta stating they they have a different opinion.

Firstly, if you consume any media about this event, let it be this video: https://www.youtube.com/watch?v=wAzEJxOo1ts&t=619s.

This is created by David Plummer, an old school Windows developer who runs a YT channel (and who has a book!). He does a wonderful job of making tech topics consumable and has tons of wonderful anecdotes. Just a great channel all around. Regardless, watch the video and I guarantee you’ll know more about this than you did 15 minutes ago.

With the facts as established as they’re gonna be, let’s dissect that letter.

Dear David:
I am writing on behalf of my client CrowdStrike, Inc. in response to your letter dated July 29, 2024, in which Delta Air Lines, Inc. raises issues and threatens CrowdStrike with legal claims related to the July 19, 2024 content configuration update impacting the Falcon sensor and the Windows Operating System (the “Channel File 291 incident”).

Can we appreciate how much this letter sounds like the dozens and dozens (and dozens) of letters insurance and risk professionals receive? I guess this just goes to show that the only thing that changes about claims is the dollar figure….

CrowdStrike reiterates its apology to Delta, its employees, and its customers, and is empathetic to the circumstances they faced. However, CrowdStrike is highly disappointed by Delta’s suggestion that CrowdStrike acted inappropriately and strongly rejects any allegation that it was grossly negligent or committed willful misconduct with respect to the Channel File 291 incident. Your suggestion that CrowdStrike failed to do testing and validation is contradicted by the very information on which you rely from CrowdStrike’s Preliminary Post Incident Review.1

Eagle-eyed readers will notice a specific word here: GROSS negligence. And this is why contracts are so important, because by invoking GROSS negligence Delta is attempting to do a couple things.

First, to allow for punitive or exemplary damages which are typically only allowed in cases of “gross” negligence. “But punitive damages aren’t insurable,” an astute insurance person might respond. Yet this isn’t entirely accurate. While many policies do exclude this, some don’t, and whether they even can be insured are subject to individual jurisdictional rules. In fact, most (US) localities actually do allow insuring punitive damages, though with very specific qualifying criteria (usually “vicarious only”). So if you’re an insurance professional, strive for solutions that follow (e.g., covers such “where insurable by law”).

The second reason Delta is alleging gross negligence is because there is certainly a liability cap in their contract. Such caps can be bypassed (either via contract language or by course of law) if the offending party is “grossly” negligent or engages in “willful” misconduct. You hire a vendor and they trip and start a fire, their liability to you is capped. You hire a vendor and they’re an arsonist who intentionally starts a fire, their liability to you is uncapped.

As a risk professional, these liability limitations are some of the most critical yet rubber-stamped parts of contracts. I can’t tell you the number of times I’ve seen a business accept boilerplate language that limits liability to, for example, “the cost of the contract” (i.e., what you’re paying the vendor). I’ve even seen such in architectural/engineering contracts! That’d be like limiting the liability for my auto mechanic to the cost of my brake job – a lot more damage than the few hundred bucks the work cost can result if those brakes don’t work.

Delta’s public threat of litigation distracts from this work and has contributed to a misleading narrative that CrowdStrike is responsible for Delta’s IT decisions and response to the outage. Should Delta pursue this path, Delta will have to explain to the public, its shareholders, and ultimately a jury why CrowdStrike took responsibility for its actions—swiftly, transparently, and constructively—while Delta did not.

While this is speculation, note the verbiage of “CrowdStrike [is not responsible for] Delta’s IT decisions and response to the outage.“. It does not say CrowdStrike wasn’t responsible for the outage, or that CrowdStrike didn’t error, or that they didn’t specifically circumvent system security when rolling out updates. This is clever wording, from a clever attorney, who knew this letter was going public.

Among other things, Delta will need to explain:
● That any liability by CrowdStrike is contractually capped at an amount in the single-digit millions.

Womp womp.

Items for Legal Preservation:
1. Delta’s response to the Channel File 291 incident.
2. Delta’s emergency backup, disaster recovery, and IT business continuity plans, and any related testing of those plans.
3. All assessments of Delta’s IT infrastructure, including any gaps and remediation recommendations, for the last five years, including in the wake of the Channel File 291 incident.
4. All decisions to upgrade or not upgrade Delta’s IT infrastructure in the last five years.
5. All scripts and software that Delta has deployed before and after the Channel File 291 incident to address possible Windows group policy corruption issues across the IT estate.
6. All system event logs for the weeks preceding and succeeding the Channel File 291 incident.
7. All encryption-level software that Delta deployed on all its IT infrastructure and the management of this software.
8. All technology and operating systems that Delta utilizes to assign workflow, routes, crews, flight schedules, etc. and any information, documents, or analysis on how that technology interacts with any software that Delta employs on its IT infrastructure.
9. Any data loss following the Channel File 291 incident related to Delta’s workflow routes, crew and flight schedules, and all communications with crew members following the Channel File 291 incident.
10. Delta’s response and recovery to any previous IT outages in the past five years.

Not earth shattering, but I cite the above just to show how problematic legal discovery can be. Can you imagine, as a business owner, coming in and needing to essentially produce a report regarding how you responded to every IT outage over the past 5 years? Now imagine you have services all over the world and 100,000 employees. You may be completely within “the right” of whatever legal dispute you’re having but it’s going to cost you a million bucks just to comply with discovery.

Now certainly some of the above is likely to get reduced in scope for being onerous, but the point is that the majority of expenses and effort happen well before trial, and this is just a “throwaway” letter!

Delta has a big enough checkbook to figure this out, but what about a $100M company? A $10M company? A $1M company? Something like this would ruin them. Hope they know a good insurance person.

What Enron Can Teach Us About D&O Coverage

The Enron saga is, itself, utterly fascinating. If you haven’t had the chance there are several good documentaries about it, one being “Enron: The Smartest Men in the Room”. Unfortunately I don’t believe it’s available on Netflix anymore, but alternate streaming services still have it (here’s an Amazon link). I’m sure there’s more in-depth and technical sources out there but as a relatively “soft” documentary it’s a great film with which to wind down a day. FindLaw.com also has an interesting set of articles if you’re looking for more to peruse.

While perhaps not the most interesting of all the specific topics dealing with Enron, there are some curious lessons in the way insurance played out – especially D&O. If you’re just looking for the take-home point it’s this: even if a defendant pleads guilty that is not considered a “final adjudication” of guilt (I know!), at least in the Enron case. This was surprising to me, as Enron’s D&O insurers I suppose, whom I understand had a total of about $350M in limits put up. Here is an expert explaining the circumstance from an IRMI Whitepaper (I have since lost the link but I *believe* the below is verbatim):

Former Enron CFO Andrew Fastow pleaded guilty in criminal proceedings associated with Enron’s bankruptcy. Yet since the Enron D&O policy forms were written on a “final adjudication” basis, the insurer was obligated to continue defending Mr. Fastow against civil lawsuits because his conduct still had not been subject to “final adjudication.” Although Mr. Fastow had already pleaded guilty to criminal charges, he had not yet been sentenced and until that time could still change his plea. But by continuing to defend Mr. Fastow, other far less culpable directors and officers—including retired directors—had their remaining policy limits depleted.

My notes say the IRMI article called the “Final Adjudication” language a “minefield”, but I wouldn’t go that far (seriously IRMI?). However, it is one of the most preferential provisions an insured can secure in a D&O policy – and be careful out there because while it is becoming *more* common it should certainly not be considered the default. While such language may provide for sub-optimal circumstances – such as a “guilty” director getting defense coverage they “shouldn’t” have – the benefit of preserving coverage for alleged fraudulent acts, which are ultimately baseless, far outweighs such consequences.

But there’s a second consideration to all of this as well. What if instead of “guilty”, Andrew Fastow had pleaded no contest? Is a plea of nolo contendere a “Final Adjudication”? The short answer is… “No!” But do bear in mind that jurisdictions vary. This “Policyholder Advisor Alert” from the law firm Anderson Kill (NY) does a great job of explaining how the variations on the “Final Adjudication” clause in policy can play out, both theoretically and practically:

The most advantageous conduct exclusions are triggered only by a final and non-appealable adjudication against the policyholder. Conversely, insurance companies may interpret references to “determinations in fact,” “adverse admissions,” or other potentially non-final determinations as giving them license to adopt an earlier trigger. Triggers like “written admission by the Insured” or “plea of nolo contendere or no contest regarding such conduct” make it more likely that the insurance company will apply the exclusion. An insurance company might attempt to latch onto a statement by the policyholder’s representative at deposition or a preliminary finding of fact by the court. Even an exclusion that lacks only the “non-appealable” component could be fodder for an insurance company to argue against coverage, even if an incorrect result is overturned on appeal.

Final, non-appealable adjudication language ensures the policyholder gets its full “day” in court and pushes the coverage decision further into the future, increasing the likelihood of a settlement that avoids the conduct exclusion altogether.

You will note that they specifically mention some provisions which state “an admission by the insured” or similar – this is because carriers are inserting these into “Final Adjudication” clauses with regularity, though not always. Again, it’s important to know how your particular provisions work.

Another topic to discuss, which the above Anderson Kill article touches on, is severability. This is the portion of your policy, usually hidden in the “warranty” and “state conditions” and similar pages that people tend not to read. In short, severability determines whether one insured’s actions impute/affect another insured’s coverage. For example if one director is found guilty of fraud what happens to the coverage for the other directors? What happens to the coverage for the corporation? What happens if the CEO knowingly falsified and signed the coverage application – will that exclude coverage for other individuals?

This, again, is something that is going to be unique to each carrier. However, I am happy to say that many offer decently advantageous “severability” clauses either in their base form or via endorsement. When you’re looking at these you want to pay attention to two key areas:

1. What happens if one director is found guilty – is coverage preserved for “innocent” insureds?

In this case I would say most policies I’ve personally dealt with do preserve coverage. Smaller D&O policies or “add-on” D&O coverage may not be as generous but my experience shows this isn’t a contentious ask.

2. What happens if the application is falsified?

This scenario is typically more complex as, while many carriers will provide details in this situation, they vary widely in to whom the falsification is “imputed”. The more generous provisions will state something along the lines of “if an application is falsified by [C-Level Executives/Directors] it’s imputed to the corporation but not to other directors and officers”. In such a situation, a CEO falsifying an application would remove coverage for the corporate entity, but not for other executives. This is also why D&O carriers often insist that applications be signed by particular individuals.

D&O policies are some of the most complex beasts out there, and such complexity isn’t often known until the crisis arrives. So if you have the time, I highly suggest you look at not only Enron data (I picked that simply because of its fame and the info is plentiful), but anything else you can get your hands on. These types of policies, being “relatively” new to the scene and non-standard are also going to be highly sensitive to jurisdictional changes (jurisdiction itself being a concern when you have a policy for a national or international client!).

CAT Express v. Muriel (previously Hammer) – Employee/Independent Contractor Status and the Limit of IL DOI to Adjudicate

This is a piece of case law that has me pretty confused. If anyone has any insight please contact me!

The IL First District Appellate Court recently issued a ruling in CAT Express v. Mureil. The ‘overview’ of this is:

CAT Express is a trucking company that purchased an IL Workers Compensation Assigned Risk “Pool” policy. They declared 6 clerical employees and paid about $1200 in premium. Upon audit the carrier (Liberty) categorized CAT Express’s [no idea how a possessive apostrophe works there to be honest –ed] independent contractor truckers as “employees”. This boosted premium to over $350K.

CAT engaged NCCI, who handles IL Work Comp rating disputes, and NCCI declined to hear stating they cannot determine whether someone is an employee but can only interpret NCCI Work Comp rating and rules. NCCI advised CAT of their right to appeal to the Director of Insurance (at the time Jennifer Hammer but the pleading was updated to reflect the current Director, Robert Muriel). The DOI investigated and said that these independent contractor truck drivers were employees for purposes of Work Comp premium and that the audit of $350K was appropriate.

CAT Express appealed. The subject of the appeal was actually never heard as the First District IL Appellate court asked the parties to submit supplemental briefs to explain why the Director of Insurance even had the authority to determine employee status in the first place. Both parties did, and they concurred that the Director did have that authority.

Long story short – the court found these briefs uncompelling and rules the Director of Insurance *did not* have authority to determine employment status for purposes of premium calculation. I would suggest reading the opinion, but they make a handful of specific notes:

1. The Director/Department has only the authority vested to it by legislation, and that authority is [that which] “may be necessary and proper for the efficient administration of the insurance laws of this State” [such as enforcing rules].
2. The Director/Department does have the authority to hear appeals for the application of rating systems/rules, such as hearing appeals from NCCI’s rulings.
3. The Director/Department erred in taking up this matter after NCCI declined. In short, the determination made – that these independent contractor truckers were employees – is outside the “necessary and proper” administration of insurance law and is instead a legal determination that should be made by courts. The Director had no jurisdiction over this particular dispute.

The reason I find this puzzling is that I’ve been through NCCI dispute processes, up to presenting in front of the board for my district, and determining employees *for the purposes of premium only* is absolutely a function of the rules and ratings of NCCI. For coverage disputes absolutely not, but who is and is not an employee (or more specifically what payroll should and should not be captured) is in their manual.

So I’m not sure why NCCI declined or if such was appropriate – perhaps it was the way the grievance was worded. I no longer have access to NCCI online so I can’t review the specific parts of the manual that apply.

Secondly, and more broadly, the classification of a party for the purposes of premium calculation seems exactly within the “necessary and proper” purview of the Director. I am emphasizing “for the purposes of premium calculation” as that is from the ruling itself – the court uses that specific phrase.

To clarify: The determination of “employee” is only for purposes of generating premium. The Department classification is not, to my knowledge, relevant in any other capacity. For example, being an “employee” for purposes of Work Comp premium doesn’t mean you’re also an “employee” for, say, benefits eligibility.

That said I am out of my comfort zone; I suppose there could be some legal ramification of which I am unaware. Perhaps there is precedent that a determination of employee status on WC is a de facto determination elsewhere under law. If that is the case I would follow the theory, but no such information was provided in the opinion.

As a rhetorical tool – assuming the classification of “employee” for Work Comp rating is inconsequential elsewhere, review the situation while changing the term. For example, instead of using “employee status” use “chargeable exposure”. Is it proper for a Director of Insurance to determine the chargeable exposure for Work Comp policies? Perhaps I’m being a tad disingenuous but I do think doing such can be clarifying.

This is especially true because there are situations where those whose payroll is captured (for premium purposes) on a policy may not be eligible for benefits. Or, more often, those whose payroll isn’t captured are ultimately eligible for benefits. In fact this happens quite a lot and is why I suggest having work comp even if you have no employees; because the legal determination of an employee is separate and distinct from the premium determination of an employee (though it is true they try to be aligned as much as possible).

[UPDATE]
I found Davis v. Ed Hickman, P.A., March 2020 (editorial here; full opinion here) which is an Arkansas Appeals Court decision that found a worker was not entitled to benefits even though his payroll was captured for purposes of Work Comp premium and explicitly states that payroll being captured for purposes of work comp premium is simply a factor in determining employee/independent contractor status and not a determinant by itself. Granted AR DOI legislative authority may be broader, and I’m not sure how a “Work Comp Commission” ruling compares to a DOI appeal, but it’s still another piece that adds confusion.
[/UPDATE]

For what it’s worth I don’t have a horse in this race – I don’t particularly care where a matter is adjudicated as long as it’s transparent and fair. I do admit to incredible frustration as a broker when dealing with Workers Compensation; it is by far the most troublesome policy to administrate and inquiries are often met with conflicting responses. So if you’re reading any level of annoyance in this post, that’s probably why.

Arbiters and Conflicts of Interest

An interesting story at Professional Liability Matters regarding an arbitration settlement that was voided because the arbitrator, in this case as judge, did not disclose an affiliation he had with one of the parties. You can read the article here. The interesting part comes in the legal theory to determine conflict; from the California Court of Appeals (emphasis added):

On appeal, the California Court of Appeals noted that the standard for disclosure is not whether the judge was actually biased, but whether a reasonable person “could entertain a doubt that he could be impartial.” Because the judge included one of the firm’s partners as a reference on his resume, the court determined that this standard was met. Accordingly, the Court held that the judge had erred in failing to make the disclosure and vacated the arbitration award.

This touches on a topic that insurance coverage lawyers have been dealing with for years. Namely, that an insured can state that a particular lawyer or firm, in a case where a determination of coverage impacts that insured, has a potential conflict of interest simply because they are panel counsel of the insurance carrier and thus the carrier has sway over their economic likelihood. I.e., it’s theorized a particular law could have an incentive to perform in the insurance carrier’s favor rather than in the insured’s favor.

An example would be a situation where an insured is brought up on potential fraud charges. The theory goes – and mind this is simplified and subject to jurisdictional law – that a carrier’s panel counsel has incentive to steer the decision toward a finding of fraud rather than negligence so that the insurance carrier will not have to pay an award. This would then encourage the carrier to use that particular counsel in the future. c.f. San Diego Navy Federal Credit Union, et al. v. Cumis Insurance Society, Inc.

States handle this matter differently – some state that a conflict doesn’t really exist or, if it does, the professional ethics and requirements put upon lawyers is sufficient to preclude “steering” cases in this manner. While an insured can still hire their own counsel in cases they believe they have conflict, many locales state it’s at their own cost. However, other jurisdictions do require the carrier to pay for an insured’s independently chosen counsel if there’s a significant conflict.

In jurisdictions where “independent counsel” is mandated (California being one) an interesting question arises when an insurance contract has an arbitration clause. I’ll be honest in saying that I’m not familiar with California policies, but if their arbitration clauses read like others I’ve seen then an insurance contract can require insureds to submit to binding arbitration in matters of dispute. These clauses often specifically define the firm to be used.

If such is in your contract, it seems like a potential “steering” problem, similar to that exists with lawyers, is created. After all if a state assumes that legal counsel will be influenced by volume of business, why wouldn’t an arbitration firm? I’ll admit it’s probably a harder argument to make, but certain jurisdictions consider a legal counsel conflict to be per se, so if the conflict is automatically presumed, it’s not that big of a stretch to apply it to other scenarios.

And remember the article above – in the situation of this particular arbiter, all that was needed was for a “reasonable person” to “entertain doubt” of their impartiality. So while perhaps a difficult argument, the obstacles are still pretty low. And it would only take one court case to, essentially, invalidate any arbitration agreement in a particular jurisdiction when the insurance carrier was solely responsible for appointing the arbiter.