The Lawsuit and the Coverage Denial
As CEO of a Northeast-based steakhouse chain, you recently terminated a franchisee for failing to meet contractual obligations. Subsequently, you acquired the restaurant. Now, you and your company are facing a lawsuit from the disgruntled franchisee, who has brought numerous claims and made unfounded allegations. You provided the lawsuit to your insurer, but they denied coverage.
The insurer claims that all the franchisee’s claims fall under a policy exclusion, meaning you and your company must bear the litigation costs. This leaves you seeking options and asking: can anything be done to make the insurance company reconsider?
Understanding Insurance Policy Exclusions
When an insurance company invokes a policy exclusion, they must do so with utmost clarity and unambiguous terms. The exclusion should be so clear that the insured could not reasonably expect coverage to exist. A critical point to understand is that breach of contract claims are typically excluded from coverage. However, tort claims are generally covered. Tort claims can include tortious interference, misrepresentation, and negligence.
Thus, determining if the franchisee’s claims are excluded requires a detailed analysis of the specific policy language, the claims themselves, and the relevant state law.
Taking Action to Secure Coverage
If you believe that some or all of the franchisee’s claims are covered, you and the company need to immediately retain legal counsel. The attorney should communicate with the insurance company and formally demand coverage. Should the insurance company maintain its denial, you and your company should consider filing a declaratory judgment action to establish coverage.
Legal Deadlines and Burden of Proof
It is crucial to act quickly. With some exceptions, a declaratory judgment action must be initiated within six months of the date the franchisee sued you. In this type of action, the burden of proof always rests with the insurer.
The court will interpret your insurance policy as a whole, considering how a reasonable person in your position would understand it. This interpretation is based on a thorough reading of the policy terms.
Potential Financial Recovery
If a declaratory judgment action is successful, you and/or your company might be entitled to attorneys’ fees for both the underlying lawsuit and the coverage suit, in addition to costs and other damages. Depending on the policy language, the insurance company could be required to cover the cost of defending the franchisee’s lawsuit while the coverage case is ongoing.
