Have you ever thought about what you would do if you were sued?
What if a neighbor tripped and broke his leg in your backyard and then sued you for his medical bills, pain and suffering?
After taking the neighbor off the list for your next party, you would face what has become in our litigious society a common dilemma: How to defend yourself in court.
Do you run out and hire a lawyer? That may be your first instinct but you would be wrong. The first thing to do is check with your insurance company. If you are being sued because of a car accident, your car liability insurance should apply. If it's the neighbor's broken leg, your homeowner's or renter's policy should work.
Then the insurance company will hire a lawyer to defend you. But that doesn't mean you and your assets are safe.
If the insurance policy applies, the insurance company will pay for your lawyer and the judgment if you lose but only up to the limits of the policy.
What if the insurance policy doesn't apply? It is not always easy to know whether the insurance will fully cover the lawsuit. There may be legal theories or types of damages that are not covered by your insurance.
If it is proven that you maliciously set out to trip your neighbor, the policy will probably not pay your bills because the injuries were intentional and not caused by mere carelessness or negligence. Or if your conduct was so reckless that the neighbor wins punitive damages, the insurance won't cover those.
Insurance companies don't want to scare you in advance by saying the policy won't cover your suit, and they certainly don't want to be accused of bad faith, but if they think that some aspects of the suit may not be covered, they might send you a letter.
Lawyers call it a "reservation of rights" letter. In it, the insurance company will tell you that it will defend the suit filed against you, for the moment, but that it reserves the right to argue later, even after a judgment is entered against you, that the insurance policy does not apply. If the insurance company's argument is correct, you will have to reimburse it for legal fees and the judgment.
All of this may create a conflict of interest between you and your insurance company. The insurance company may want to stress one legal theory, the theory that is not covered, while you want to press another.
The conflict may also arise when it comes to settlement. Say the policy limit is $100,000, but the neighbor's medical bills are more. It won't bother you if the case is settled before trial for $100,000 because it won't cost you anything. But if the insurance company only offers $75,000, the offer is rejected, the case goes to trial and the jury awards $150,000, you're not going to be very happy.
According to recent case law, if there is a real conflict of interest between you and the insurance company, you have a right to an independent lawyer paid for by the insurance company.
Under a controversial 1984 Court of Appeal case--the Cumis decision--if the insurance company merely sends you a reservation of rights letter, there is a conflict of interest, and the insurance company has to pay for your own attorney (up to the policy limits).
In that multimillion-dollar case, a San Diego credit union hired its own lawyers after it was told by its insurance company that some aspects of a wrongful-discharge lawsuit were not covered, such as willful conduct or punitive damages. The insurance company refused to pay for these new lawyers and argued that the existing lawyers already selected by the insurance company could protect the credit union and insurance company.
The court found there was a conflict of interest. The insurance company lawyers "may have closer ties with the insurer and a more compelling interest in protecting the insurer's position, whether or not it coincides with what is best for the insured," the court said.
The insurance industry and the insurance-defense bar are still reeling from this decision, trying to interpret what is required in routine lawsuits. And because the California Supreme Court still has not ruled on a similar issue, some lawyers are hoping that the case will not remain the law.
In the meantime, some experts have advised lawyers hired by insurance companies to review their files and meet with all clients who have been sent a reservation of rights letter to fully explain the potential conflicts and obtain written consent from the clients for continued representation.
After your particular situation is explained to you, you may want to hire independent counsel. But you should be careful before you select another attorney. In many cases, the lawyer hired by the insurance company will be able to protect your interests.
If you are currently being sued and have any questions about this, you should talk to the lawyer representing you, even if he was selected by the insurance company. The lawyer has a duty to you to disclose any conflicts of interest.
Attorney Jeffrey S. Klein, The Times' senior staff counsel, cannot answer mail personally but will respond in this column to questions of general interest about the law. Do not telephone. Write to Jeffrey S. Klein, Legal View, The Times, Times Mirror Square, Los Angeles 90053.