Written by Ben McAninch
Most people understand how insurance claims work and most people understand why it’s a good idea to carry insurance. What might be surprising is the degree to which insurance issues affect civil lawsuits. The following is a (non-exhaustive) list of some of the ways in which insurance affects litigation.
Cost to bring a suit: Lawsuits cost money. One of the factors in determining whether a lawsuit is worth bringing is whether a judgment would be collectible in the event of a victory. While it is easy to say, “it’s not the money, it’s the principle,” it’s harder to pay a lawyer thousands of dollars in legal fees to obtain a judgement from a party who can’t afford to pay. There’s also a disincentive to bring a small claim where even a nominal victory in Court would not yield as much money as the cost to obtain the verdict. In most cases involving negligence (auto, recreational vehicle, homeowners’, farm liability, commercial, construction defect), some kind of insurance is involved. If the claims made in the lawsuit are covered, the insurance company generally provides a defense to those claims. Thus, the person getting sued doesn’t have to pay their lawyer. The fact that the fees are paid by someone else affects the litigation strategy.
Identity of the lawyer: Since the insurance company has the obligation to pay, it generally gets to choose the lawyer handling your case. Your insurance company doesn’t want you hiring your cousin-in-law who just passed the bar and who generally writes contracts to defend your multi-million dollar injury case. Insurance companies usually have panels of attorneys that have been determined to be able to properly represent their insureds’ interests. Thus, the presence of insurance sometimes means you don’t choose your own lawyer.
Coverage Limits: A defendant with a small amount of coverage may see their insurance company more willing to settle the claim to avoid a verdict in excess of the policy amount. Having a larger limit generally gives the insured more piece of mind. On the other hand, an individual with a very large insurance policy may become more of a target than someone who has a smaller policy. This analysis is often dependent on the availability of other assets to pay a judgment.
Subrogation: Sometimes insurance companies sue other insurance companies or entities on behalf of their insureds. If your insurance company pays a loss and subsequently discovers that another carrier or entity should have compensated that loss, it may bring the lawsuit against that other entity.
Bad Faith: An insurance company generally has a duty “to the insured to represent his or her best interests and to defend and indemnify the insured. Even though the insurer has the right to control negotiations, that right must be subordinated to the purpose of the insurance contract – to defend and indemnify the insured within the limits of the insurance contract.” Short v. Dairy Land Ins. Co., 334 N.W.2d 384 (1983). Without getting into a highly technical analysis, failure to fulfill that duty can subject an insurance company to a claim of “bad faith.” Attorneys for insureds or injured people may include a claim that an insurance company will be found to be in bad faith as a means of increasing the potential exposure and leveraging a better result.