Claim Reduction is a monthly series by the ASCE Committee on Claims Reduction and Management designed to help engineers learn from problems that others have encountered.
Professional liability claims do not just impact a company’s finances, they have the potential to affect its reputation, operations, and future growth. When a claim arises, policyholders must be ready to actively manage the situation with the same level of focus and strategic planning they would apply to any other critical business issue.
An appropriately robust professional liability policy is certainly an important piece of the overall claims management strategy, but simply having the policy alone is not enough. Claims management begins after receipt of a claim – or potential claim. Managing defense counsel, working with insurers, and making certain the company’s goals remain central are critical components to effectively manage claims.
Part 1 of this two-part series laid out key policy provisions that equip companies to be prepared to manage claims.
Part 2 focuses on strategies for managing defense counsel and achieving the best possible outcomes for the policyholder. Part 2 also offers practical tools, including supplemental guidelines to help companies better manage the claims process. While engineering companies of all sizes benefit from proactive claims management, companies without in-house counsel may consider retaining outside counsel other than their insurer-provided attorney to assist in developing and implementing a comprehensive claims management strategy.
Establishing supplemental guidelines for insurance defense counsel
Requesting claims counsel from the insurer as soon as it suspects a claim is coming tends to help the company align its approach to the forthcoming claim and its business interests. Early involvement allows the policyholder to work collaboratively with counsel in shaping the defense strategy and making decisions that align with the company’s broader objectives. By engaging early, the policyholder can minimize the risk of initial missteps that could later contradict otherwise viable defenses or unnecessarily escalate costs.
Despite these advantages, policyholders often delay involving counsel – either because they fail to recognize an issue as a “claim” under the policy or due to concerns about ceding control to the insurer. Such concerns, while understandable, can often be mitigated with effective risk management practices embedded throughout the organization.
Insurers almost always provide detailed guidelines to their preselected attorneys, often referred to as “panel” counsel. These guidelines prioritize cost containment and set expectations for managing claims efficiently. Even when the insurer allows the policyholder to select its counsel, the engagement typically requires acknowledgment of these insurer-driven guidelines. While reducing defense costs is a shared interest, the policyholder often has broader considerations beyond immediate expenses.
For example, the company’s reputation with a key client or its standing within an industry may hinge on the outcome of the case. Without careful oversight, the policyholder risks having its interests overshadowed by the insurer’s focus on minimizing short-term costs.
This divergence in priorities becomes more pronounced when considering how claims impact the policyholder versus the insurer. For the policyholder, a single claim can lead to reputational harm, operational disruptions, and financial strain.
Conversely, insurers absorb claims as part of a larger risk pool, making the impact of any single event less significant for them. This dynamic creates a potential moral hazard where insurers control the claims process entirely. For instance, an insurer might push for a settlement to quickly reduce costs, even if that strategy jeopardizes the policyholder’s long-term relationships or reputation. Such scenarios underscore the need for policyholders to maintain sufficient control over claims management, ensuring that the defense strategy aligns with the company’s overall objectives. One effective way to achieve this is by issuing supplemental guidelines to counsel. These guidelines enable policyholders to clearly articulate their expectations and priorities.
Supplemental guidelines are intended to set expectations of the policyholder with defense counsel and help align the actions of panel counsel with the policyholder’s objectives. As the name implies, they are supplemental to the insurer's guidelines.
Contractually, most policyholders will be required to get approval from their insurer – a step the author recommends regardless, because of the importance of maintaining a good relationship between policyholder and insurer.
Below are important topics to address in supplemental guidelines:
1. Reinforce the policyholder’s status as the client: Defense counsel must clearly understand that their primary duty is to the policyholder. This includes safeguarding attorney-client privilege and avoiding conflicts of interest or coverage issues. Supplemental guidelines should explicitly state these responsibilities and require immediate disclosure of any potential conflicts or coverage issues.
2. Emphasize the importance of preserving attorney-client privilege: Protecting the attorney-client privilege is critical – not only to the immediate case, but to future claims as well. Counsel should be instructed to delineate privileged communications clearly (using liberal constructions of what constitutes privileged communication) and make certain that any disclosures to the insurer do not inadvertently waive this protection. Because the rules of privilege vary from state to state, care should be taken when drafting language to anticipate that disclosures acceptable in one jurisdiction may not meet the standards of another.
3. Require transparency in communications: Defense counsel should include the policyholder in all communications with the insurer. No discussions regarding strategy should take place between defense counsel and the insurer without first consulting with and obtaining consent from the policyholder. This establishes transparency and allows the policyholder to direct the course of the defense – or, at the very least, avoid being blindsided.
4. Reports to the insurer: Counsel should obtain prior consent from the policyholder before preparing or sending any written reports requested by the insurer. This prevents unnecessary costs and confirms that all expenditures align with the policyholder’s strategic and financial objectives. Often, the policyholder is in a better position to negotiate these requirements with the insurer than counsel will be, so the importance of seeking pre-approval cannot be overstated.
5. Policyholder approval of experts: Counsel should obtain the policyholders approval before retaining any experts or before requesting authority from the insurer to retain an expert. This allows for informed, strategic decision-making by the policyholder. When it comes to engineering companies, the policyholder will often have a better grasp on an expert's technical competence for the issue at hand than the insurer or panel counsel.
6. Retain authority to direct litigation strategy: The policyholder should seek authority to approve major strategic decisions, including settlement terms and overall litigation direction. This prevents unilateral decisions by either the insurer or defense counsel that may conflict with the policyholder’s long-term objectives. This will often be a point of contention between the insurer and policyholder, and a discussion best had during policy renewal. Companies with in-house counsel and a good claims history are often in a better position to negotiate the extent of this authority. Regardless of the policy provision, however, making sure that the insured is at least consulted with, included on all communications, and has some measure of control over claims management will go a long way in equipping the company to align the claims process with its business objectives.
7. Require a budget and litigation plan: Counsel should provide a detailed litigation plan and budget at the outset, with periodic updates to reflect changes in the case. While some attorneys may resist, having a budget provides guideposts for regular communication about costs and strategy and helps avoid surprises.
8. Reinforce confidentiality and discretion: Engineering companies operate in a reputation-sensitive industry. Guidelines should emphasize the importance of maintaining confidentiality, including prohibitions on disclosing the company’s identity in seminars or casual conversations.
Conclusion
Effectively managing claims requires a combination of having the right toolset – established in the policy – together with active management and consistent oversight. Supplemental guidelines ensure that defense counsel meet the policyholder’s expectations and advance the company’s business objectives. By taking these steps, policyholders can better navigate claims, protecting both their immediate and long-term business objectives.
The Committee on Claims Reduction Management will conduct a Workshop on Reducing Claims Against Engineers on Alternative Delivery Projects, May 1-2 at ASCE headquarters in Reston, Virginia. Learn more at ASCE’s Risk Management Hub.
Read more helpful insights from the committee’s Claim Reduction series on the Civil Engineering Source.
