When your business is sued: working with your insurer

When a summons and complaint arrive, do three things the same day: write down when and how you were served, send the entire package to your insurance broker and every carrier that might respond, and calendar the deadline to answer. Do not ignore the papers, do not call the plaintiff, and do not pay anything or promise anything without your insurer's consent. If a liability policy applies, the insurer usually hires and pays defense counsel. If you wait, you can lose both the coverage and the case.

This guide is the practical sequence. For the legal duty behind it, see the insurer's duty to defend: what triggers it and when it ends; for what an insurer's "we are defending, but" letter means, see reservation of rights letters: what they mean and how to respond.

The first 24 hours

1. Record the service. Note the date, the time, who handed over the papers and how (in person, mail, registered agent). The deadline to respond runs from service. In federal court the answer is generally due 21 days after service of the summons and complaint, or 60 days from the date the request was sent if you waived service (Federal Rule of Civil Procedure 12(a)(1)(A)). State courts set their own periods; California's summons, for example, directs a written response within 30 days after service (Code of Civil Procedure section 412.20). Missing the date can lead to a default judgment, which the court can enter without hearing your side.
2. Send everything to your insurer, not just the complaint. The standard ISO commercial general liability form (CG 00 01 04 13, Section IV, Condition 2) says that if a claim is made or a suit is brought, you must record the specifics and date received, notify the insurer as soon as practicable, see that it receives written notice, and immediately send copies of any demands, notices, summonses or legal papers. Policy language differs by carrier, but the pattern is universal. Email the broker and the carrier's claims address, keep the transmission record, and follow up by phone.
3. Identify every policy that might apply. Do not decide coverage yourself. Send notice to all of them (see the table below), including the umbrella or excess carrier if the damages claimed could approach the primary limit.
4. Preserve evidence. Suspend deletion of email, texts, job files, photos and video, and tell employees why. If you destroy records after you know of a suit, the court can penalize you, and the insurer can say you failed to cooperate. Counsel will usually send a formal litigation hold; start before they do.
5. Stop talking about the case. Do not discuss it with the plaintiff, their lawyer, the press or on social media. Route calls to your insurer or defense counsel.

Which policy gets the suit

Plaintiffs plead facts, not policy types, so one complaint can touch several policies. Send it to all that might fit.

Claims-made policies add a trap. They respond to claims first made and reported within the policy period (or an extended reporting window), so a suit that arrives near renewal must be reported before the policy ends. See occurrence vs claims-made policies and tail coverage and extended reporting.

Also check for coverage owed to you by others. If a subcontractor, vendor or landlord agreed to indemnify you or name you as an additional insured, send them a written tender at the same time. The sooner it goes out, the less room they have to argue it was late.

What the insurer will do

On a CGL, the insurer has "the right and duty to defend the insured against any 'suit'" seeking covered damages, according to the form's insuring agreement, and it "may, at our discretion, investigate any 'occurrence' and settle any claim or 'suit' that may result." Three consequences follow.

• The insurer picks and pays the lawyer. The defense is usually assigned to a firm on the carrier's panel, billing at the carrier's agreed rates under its litigation guidelines. You can retain your own lawyer at your own cost to advise you, which is worth doing when the damages claimed exceed your limits or coverage is in question.
• Defense costs sit outside the limit on the standard CGL. Under the form's Supplementary Payments provision, the expenses the insurer incurs do not reduce the limit of insurance, and the defense obligation ends when the limit is used up paying judgments or settlements. Many professional liability, D&O and cyber forms differ: the defense erodes the limit. Check which structure you have; see defense costs inside vs outside policy limits: why it matters.
• The insurer may settle without your consent. The CGL gives the carrier that discretion. Professional liability and D&O policies often require your consent and add a hammer clause that makes you responsible for the excess if you refuse a recommended settlement. See the hammer clause: what happens if you refuse a settlement.

If the carrier agrees to defend under a reservation of rights, read the letter closely. It tells you which allegations the carrier thinks may be outside coverage, and in some states a real conflict of interest entitles you to independent counsel at the carrier's expense. California's Civil Code section 2860 is the best-known example; see Independent counsel and Cumis counsel: when your insurer must pay for your own lawyer and California.

Your duties after the insurer takes the case

The cooperation condition is not a formality. Under the same CG 00 01 conditions, you must authorize the insurer to obtain records, cooperate in the investigation, settlement and defense, and assist in enforcing rights against others who may be liable. And, in the form's words, no insured will, "except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent."

In practice:

• Return calls and meet deadlines. Defense counsel will request documents, interview times and a deposition date. Delay hurts the defense, and in many states a documented pattern of non-cooperation that prejudices the defense can give the insurer a reason to withdraw.
• Give your lawyer the bad facts first. Conversations with defense counsel are generally privileged, but whether your statements to the adjuster are is a matter of state law. Put sensitive facts to counsel directly.
• Do not settle on your own. A side deal with the plaintiff, even a small one, can leave you without coverage for whatever you agreed to. Do not pay a claimant's medical bills or repair costs and then ask for reimbursement; get consent first.
• Watch for demands near or above your limit. If the plaintiff offers to settle within limits and the insurer refuses while the case could produce a larger verdict, you may have rights under your state's bad-faith law. Tell your broker, escalate in writing and talk to coverage counsel. See insurer bad faith: what it is and the remedies.
• Tell every carrier about developments. A trial date, a mediation, an expert report or a demand over the primary limit should reach the umbrella insurer promptly.

A hypothetical example

Say a 15-employee landscaping company is served with a complaint alleging that a worker's string trimmer threw debris and injured a passerby, and that the company also failed to train its crew. The owner emails the complaint and summons to the broker the same afternoon, noting service on Monday. The broker tenders to the CGL carrier and to the umbrella carrier, because the plaintiff claims $2 million. The carrier accepts the defense with a reservation of rights on punitive damages. The owner places a hold on crew texts and job photos, forwards a prior incident report, and stops speaking to the plaintiff's family. Counsel files an answer a week before the deadline. The facts are invented, but the sequence is the one that protects coverage.

What is typically not covered

Even a well-handled suit may include allegations outside the policy. Common ones are intentional acts, contractual liability beyond an insured contract, damages from a business's own faulty work in a pure breach-of-contract dispute, and fines or penalties. Whether punitive damages are insurable varies by state. Your reservation-of-rights letter and a read of the policy's exclusions will show where the gaps are. If the carrier declines to defend at all, see what to do when your business insurance claim is denied and coverage litigation and declaratory judgment actions: when you and your insurer end up in court. A coverage lawyer, not the defense lawyer, should advise on that dispute.

Key takeaways

• Record the date of service, calendar the response deadline (21 days in federal court, 30 days in California state court, differing elsewhere) and never let a default happen.
• Send the full suit papers immediately to your broker and every potentially responsive carrier, including umbrella and claims-made lines, and tender to anyone who owes you indemnity.
• On the standard CGL the insurer controls the defense and settlement, pays defense costs outside the limits and requires your cooperation; professional and management liability policies often work differently.
• Do not pay, promise or settle anything without the insurer's written consent, and do not discuss the case outside the defense team.
• Read any reservation-of-rights letter on the day it arrives; it may trigger a right to independent counsel in your state.