Due Diligence Defence

After more than 40 years of defending insurance claims, I can observe that the insurance industry in general spends entirely too much time and effort building reactive defences to whatever the plaintiff has claimed. Quite simply, we tend to fight on the plaintiffs’ chosen field of battle.

If we look at commercial coverages, it is much better to take a proactive stance and combat the claim on the strength of the honest efforts and procedures that insureds have put in place to “do the right thing” and prevent harmful incidents.

In my view, the insurance industry needs to integrate its underwriting practices with the risk management efforts of brokers and insureds – and tie those efforts in with what is needed in court. This is when insureds become “Trial Ready” and have an excellent chance of preventing or defeating claims.

The Defence Pyramid depicts the types of defences that are and can be used to combat claims.

The Standard Defence is the most commonly used approach and it says “prove we did something wrong.” With respect, it is totally reactive and simply sets out to make the plaintiffs prove their case. It costs comparatively little for investigation and preparation and is easiest to utilize. However, it does not take risk management into account and often has inferior results. Juries don’t like it.

The Proactive Defence is somewhat better in that it adopts the premise that “we did nothing wrong.” It requires more investigation and more work in general, is more expensive and is usually a “proactive reaction” to the plaintiff’s claim. In other words, it does not take risk management into account but deals with the specific incident, often with the support of an expert.

It works better than The Standard Defence, but is still being fought on the battlefield of the plaintiff’s choosing and is weakened because of that.

The Due Diligence Defence is, as depicted in the Pyramid, the highest form of defence and can deal a knockout blow to any general liability claim. It requires focused investigation and integrates risk management and underwriting efforts with what is needed to fight an action. It is an absolute defence to a GL claim.

Historically, Due Diligence had its origin when those who defended regulatory charges were required to combat the concept of absolute liability. An absolute liability offence, such as environmental degradation, means that if an incident takes place in certain circumstances, there is an automatic conviction – whether standard criminal intent was established or not.

The only way defendants could defeat the charge was to argue that they took “reasonable steps” to prevent the event. This meant that, if the accused could prove the reasonable steps, there would be a finding that Due Diligence had been exercised and acquittal would result.

In civil cases, the onus is on the plaintiff to prove negligence or a failure to take reasonable steps. Accordingly, if the defendant can prove that reasonable steps were taken, Due Diligence is positively established and that will amount to an absolute defence. It is important to note that the onus for this will be on the defendant.

At a minimum, to establish Due Diligence a defendant has to prove The Three P’s – a Policy concerning the risk, Procedures to adequately control the risk and Proof that there has been compliance with the standards and procedures.

This can sometimes be a daunting task. What is set up for risk management purposes often does not meet what is required for the courtroom. Risk management procedures may be useful for prevention of incidents and safety, but they are not packaged for dealing with claims, particularly at trial.

Also, there is a well-recognized gap (or wall) between the efforts of risk managers and underwriters and the requirements of claims personnel, adjusters and lawyers. Until this gap is bridged, it is very difficult to prove Due Diligence.

One step that can help the insured address unmeritorious claims is to become Trial Ready. Simply put, risk management must be packaged for use in the courtroom. There must be a common language and complete integration of efforts at the front end of the process, which includes the requirements for preventing and defending claims.

While the concept is relatively simple, the requirements are stringent. Components such as standards, inspections, education, audits, compliance enforcement and management review are usually not put together in a framework that is useful in the courtroom. This demands a coordinated effort between risk managers, underwriters, brokers, claims personnel and defence lawyers.

Several of our self-insured retention (SIR) clients understand this model and are putting Trial Ready programs in place. Once insurers start to integrate and coordinate, there will be far fewer successful claims. Their insureds will be Trial Ready.

Owen Smith is a trial lawyer who has been involved in defending insurers for over 40 years. He is the founder and CEO of Strategic Risk Control Ltd and the creator of The Due Diligence Solution, The Fourteen Point Formula for Controlling Risk and The Trial Ready Concept.