. . . so I won’t. Instead, I’ll direct you to this blog post, So Your Business Has Been Sued: Now What? It provides an excellent general overview of the steps to take should your business be sued, to which I would like to add the following.
First, while a lawsuit may sometimes take a business owner completely by surprise, there are often plenty of warning signs that a lawsuit may be on its way. A demand letter from a vendor, subcontractor, customer or client, for example, may include the threat of litigation should an issue not be resolved. As explained in the referenced blog post, it is important to notify your insurer(s) when you are served with a lawsuit, but it may also be important to notify an insurer of threatened legal action even before you are served. This is particularly true if the insurance policy in question provides coverage on a claims made basis (such as an errors and omissions policy). Engage counsel early to advise not only when to notify your insurers, but how. On this point, I must say that I disagree with the cited blog post’s advice that you should be relying on your insurance broker to determine whether there may be insurance coverage, and to handle notifying your insurer(s) of the lawsuit. Your attorney should be making the coverage analysis. And, regarding the “how” of tendering a claim or suit to an insurer for defense, sending it to your broker may not constitute notification to the insurer (unless your broker is the insurer’s agent – and agents and brokers are not the same thing), and may not satisfy your insurance policy’s notice provisions and requirements.
Something the cited blog post doesn’t mention is what you can expect your insurer’s response to be. Upon notifying an insurer of a claim made or lawsuit filed against you, you will at some point receive a letter from your insurer explaining the coverage your insurance policy may provide for your defense, and any qualifications or limitations there may be on that coverage. Attorneys call this a reservation of rights letter, although the insurance company will most likely not put that at the top of the letter. Instead, you will receive a relatively lengthy letter from an in-house claims representative or coverage attorney, or from your insurer’s outside legal counsel (in other words, a letter on legal letterhead). Receipt of such a letter is a “heads up” to you that the insurer is contesting coverage. Don’t ignore a reservation of rights letter, because it is a genuine “red flag”. Instead, consult an attorney with knowledge about insurance coverage, to determine if there are grounds to disagree with the position your insurer has taken, and to decide what steps should be taken if there are grounds for disagreement. This is important, for several reasons. First, while generally the insurer has the right to pick your defense attorney, control the defense, and determine whether to settle the case and if so for how much, the insurer’s reservation of rights may give you important rights to select your own defense counsel and control your defense (attorneys in California refer to this as Cumis rights).