Sheryl L. Axelrod Insurance Bad Faith Law Blog on Lawyers.com

  It happens all too often. You buy an insurance policy to cover your business. You pay your premiums like clockwork, year after year. Then one day, your business gets sued. You immediately submit the claim to your carrier and you figure they’ll cover it. They’ll hire a lawyer at their cost (after you pay any deductible), and the lawyer will defend your company. After all, that’s why you’ve been paying all those premiums, to get that coverage. However, a few weeks later, a letter comes in the mail. Your carrier’s rejected the claim and now you’re stuck having to pay to fight the lawsuit. What should you do? Fight back and here’s how.

1. Size up the battleground
        Review your carrier’s claim rejection letter and cross check it against your insurance policy. Your policy is your insurance carrier’s contract with you, and your carrier is bound by its terms. The letter will explain your carrier’s reasons for denying coverage, and will refer to specific policy language. When you cross check the letter against the policy, don’t just look at the policy provisions your carrier cites. Read the entire policy, see how its terms are defined and get a handle on the scope of coverage -- which acts and damages the policy covers, and which it does not.
        In Pennsylvania, unless it is absolutely clear that your carrier does not have to provide your business with coverage, your carrier generally has to provide coverage. Courts interpret contracts against their drafters. In the case of insurance policies, the drafters are virtually always the insurance carriers.
        When courts interpret a policy against the carrier, they interpret ambiguous terms -- provisions that can mean more than one thing -- in favor of providing the insured, your business, with coverage. So if the policy could be construed to call for your carrier to defend the lawsuit, your policy will be construed to require your carrier to do so. In short, courts will read the policy in the way most likely to provide your business with coverage.
        Don’t let the carrier confuse you by claiming that the policy does not require it to indemnify a claim. We are talking about whether the policy requires the defense of a claim, whether the policy calls for the carrier to hire a lawyer to defend your company. Whether your carrier has to pay a judgment that could be entered against your business (indemnification) is a separate question.

2. Strike back
        If you conclude that indeed, your policy could reasonably be construed to require your company’s defense, write your carrier back. Set out why the policy requires your carrier to defend the lawsuit, quoting specific policy provisions which call for coverage.
        It can be an act of “bad faith” for a carrier to refuse to defend a claim covered by a policy, and if your business wins a bad faith claim against a carrier, the carrier may have to pay your company not only compensatory damages, but punitive damages. Compensatory damages are the monies your business actually incurs from the having to defend the claim (the legal fees and costs of the suit). Punitive damages go further. They are imposed to punish a carrier so that in the future, it will be more likely to defend such a claim rather than forcing its insured to defend it and have to sue to get reimbursed. If you truly believe your carrier’s refusal to defend your company is being made in bad faith, tell them so in the letter but be prepared to back that up with a claim against your carrier should it refuse to budge.

3. Don’t take your eye off the clock
        Whatever you do, do not let the time your company has to file a response to the lawsuit run out. In Pennsylvania courts, you may be able to file either an Answer to the Complaint or a pleading to have the Complaint stricken. Call the opposing party’s attorney. Do not mention anything about the merit (or lack of merit) of the lawsuit, but say that you are trying to get your insurance carrier to hire you a lawyer and ask for a reasonable extension of time to Answer the Complaint or otherwise plead. If the lawyer grants you the extension, confirm it in writing. This way, you will retain the ability to have the Complaint stricken while you try to get your carrier to hire your company a lawyer. In the meantime, don’t wait. Look for a lawyer to represent your business in the lawsuit -- preferably, one who will also help you fight your carrier.