The topic of this week’s column comes from a vexed landlord, who writes: “Mr. Beaver, over the past two years I have been involved in a lawsuit from a guy who literally stubbed his toe on a tiny object sticking up from the sidewalk in front of a small strip mall I own. “[My defense attorneys] could have taken his deposition early in the case, but did not, and tried to bring in the city, which was an expensive lost cause. They refused for months to tell me how much my insurance company was paying them. “The case finally settled for peanuts — which could have been offered early on. Was I the victim of a conflict of interest with the law firm?”How can property owners recognize when their insurance-appointed defense attorneys may be prolonging litigation and driving up legal fees rather than pursuing an efficient resolution? I ran that question by Shant Karnikian, managing partner at Los Angeles-based Kabateck LLP. He provided practical guidance on how property owners can protect themselves during settlement, including verifying medical liens and bills, reviewing settlement language, and spotting provisions that could improperly release attorneys from liability. “As a plaintiff’s trial lawyer,” Shant said, “I sue the people and businesses responsible for injuries. I also represent policyholders against their own insurance companies — folks who are being sued but having trouble getting their insurance company to protect them in that lawsuit. So I understand exactly where insured parties get hurt, often by the very insurer that’s supposed to protect them — a company they’ve paid high premiums to for years.”The bottom line policyholders need to understand: Your insurance company isn’t your friend, even when it’s paying your lawyer. And the defense lawyer they provide may have a conflict of interest.”About Adviser IntelThe author of this article is a participant in Kiplinger’s Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.Reservation of rights letterI asked Shant if he could explain what it means if you receive a reservation of rights letter from your insurance company or the lawyer they hire to represent you. “This usually means, ‘We’ll defend you, but we may not pay,'” he said. “These letters rarely spell out that you may have to fund the settlement.” To understand why, it’s helpful to know how the insurance for liability coverage works.Duty to defend vs duty to indemnify: The carrier (insurance company) must provide (appoint and pay for) a lawyer if a claim against you involves even a potential for coverage. However, the insurer must pay a settlement or judgment only for claims that are actually covered. “That gap is where the insured often gets burned,” Shant said. “Furnishing a defense does not necessarily mean they will fund your settlement (indemnify) — it depends on your policy.”So it would seem that having an appointed lawyer creates a false sense of security. Would it be wise to consult with your own lawyer to make sure the insurance company is doing the right thing? “Yes,” Shant agreed. “We represented a plaintiff injured on a homeowner’s property. The carrier appointed defense counsel, so the homeowners thought they were covered. Only at settlement discussions did the carrier reveal it wouldn’t contribute anything. The homeowners had to pay out of pocket. “The carrier lulled them to sleep by creating the impression that defending them in the lawsuit also meant that they would pay for all damages.”The three-way relationship conflict”While the law firm represents you,” Shant said, “the carrier pays them and sends them repeat business. This creates a conflict of interest, incentivizing your defense attorney to protect the insurance carrier.”For example, if facts come up in the case that affect your coverage, the way counsel handles them can shape whether or not you’re covered — and, therefore, help determine whether the carrier has to pay out on the claim. “This conflict may entitle you to independent counsel paid by the carrier and depends on your state’s law.” Shant listed several red flags that suggest a serious conflict of interest:There’s been no early case evaluation or settlement push.Defense conducts heavy discovery and motion practice on a small case.Defense says, “Plaintiff hasn’t made a demand yet.” (Nothing stops your attorney from making a demand or offer.)You receive no status reports or budget.Defense files costly cross-complaints when cheaper options exist, such as offering to pay policy limits to settle the case.If you spot any of these, you should immediately consult a lawyer you’ve selected to monitor what the defense attorney is doing.It’s also important to realize that how much the attorney bills matters to the policyholder, even when the insurance company is paying for the defense lawyers. First, you may still be paying deductibles. Second, you may have a policy in which defense costs reduce limits. Future premiums may be affected by how much it costs to defend the case. The longer it takes to resolve, the greater the risk the case may grow beyond your coverage or limits.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.What should you do if you’re in this situation?Tell the carrier and defense counsel in writing that you want the case settled within the limits of the insurance policy as soon as possible.Instruct the defense attorney to communicate with you about every settlement demand and offer. If you receive a reservation of rights, ask in writing: “Will you fund a settlement? If not, why not?”Consider hiring your own lawyer to watch the carrier and push it to get you out of harm’s way.At settlementMake sure the entire case gets dismissed, including cross-complaints.Make sure that any release you sign doesn’t include a release of claims you may have against the insurance company.Get confirmation that your insurance company won’t be coming after you for money it pays out.Bite-sized piece of advice”A lawyer showing up to defend you is not the same as your insurance company agreeing to pay,” Shant cautioned. “Waiting for a demand isn’t a strategy. It’s a reason to bill another month. “A few thousand dollars for your own lawyer to watch the insurance company can be the best money you spend in a lawsuit.”Dennis Beaver Practices law in Bakersfield and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.Related ContentMeet the World’s Unluckiest — Not to Mention Entitled — Porch PirateDefamation vs Protected Opinion: Jackie’s Risky Magnetic Sign Courts Major ConsequencesSurprise: Your Small Business Probably Needs Auto InsuranceDo You Think You Have a Great Wrongful Termination Lawsuit?Owed Money? When NOT to File a Lawsuit for ItThis article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Does Your Insurance Defense Attorney Have a Giant Conflict of Interest?
