I’ve Been Sued! Now What?

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by Jeffrey Cavignac, CPCU, RPLU, ARM, CRIS, MLIS

It’s Friday afternoon, it’s been a good week, but then your receptionist tentatively drops a legal looking document in your in-box. Nervously you pick it up. You’ve never been sued…until now!

For most contractors of any size, litigation is an unfortunate fact of life. Dealing with our litigation system can be frustrating, expensive, time-consuming and emotionally draining.

The key to effectively dealing with litigation is to understand the process, know what you should and should not do and make certain you are aligned with the right attorney, insurance broker and insurance company.

How does the process work?

Summons and Complaint – The litigation process begins when the plaintiff, or his/her attorney, files a complaint (lawsuit) with the court. In the complaint, the plaintiff states (in more or less detail) causes of action which set forth the allegations against the defendant(s), the injury or damage suffered, as well as the amount of monetary damages or other relief sought. The plaintiff then serves the complaint on the defendant(s) along with a summons. A summons is a legal notice to the defendant that a lawsuit has been filed and that a judgment will be entered against the defendant if he/she fails to answer the complaint within the statutory time limit. For example, in the California State court, in most cases, the defendant has 30 days in which to file an answer to the complaint.

An answer is a written pleading filed by the defendant(s) and typically includes a general denial of the facts alleged in the complaint and an assertion of the defendant’s potential legal defense. The defendant(s) may also file a cross-complaint, which is a claim against the other party or a third party who may have some responsibility for the matter. Failure to file an answer with the court could result in a default judgment whereby the party loses the right to a defense and may also be liable for the plaintiff’s claimed damages and expenses.

If you are served with a summons and complaint, you must immediately notify your insurance agent or insurance company. Failure to promptly notify the insurance carrier of a lawsuit may result in the forfeiture of an insured’s rights under the policy. Lawsuits often contain multiple causes of action, and not all of them may be covered under the insurance policy. Consequently, there are some situations where there is a duty to indemnify an insured for certain claims or causes of action but not others. In those situations, among others, the insurance company will issue a reservation of rights letter stating that they are reserving their rights to deny coverage in the future if they learn these claims are not covered. Note that, generally speaking, if one or more of the claims or causes of action in the lawsuit are covered, the insurer is obligated to defend the entire case.*

Discovery: During the discovery phase of the litigation process, each party has the opportunity to gather information regarding the opposing party’s case. Some of the major discovery tools in a civil case are:

Interrogatories: Interrogatories are written questions served on a party that must be answered within a specified time frame. Your attorney can assist you in completing the responses.

Deposition: A deposition is a statement made under oath by a party or witness in response to oral questions. The deposition proceeding is transcribed by a court reporter. Your defense counsel will assist you prior to and during the deposition.

Request for Production and Inspection: One party in the litigation asks another party to produce documents and records (including your electronic files) or to allow for the inspection of relevant evidence, like a broken pipe or a home that was alleged to be defectively constructed.

Request for Admission: One party asks the other party to admit to a fact or to verify the authenticity (i.e., genuineness) of an evidentiary document.

Independent Medical Exam (IME): A physical or psychological examination of the plaintiff by a doctor hired by the defense.

Trial: If the case cannot be resolved through negotiation, it will proceed to trial. Most cases are tried in front of a judge and jury. However, the parties can agree to a bench trial, which is a trial in front of a judge, without a jury. Each side has an opportunity to make an opening statement to summarize what they will attempt to establish during the trial. The plaintiff puts on her/his case first by calling witnesses and presenting evidence to support the claims against the defendant(s). Counsel for the defendant has an opportunity to cross-examine the witness after the plaintiff’s attorney has completed his/her questioning. After the plaintiff rests his/her case, the counsel for the defendant has the opportunity to present a case on behalf of the defendant to refute the plaintiff’s claims. The plaintiff can cross-examine the defense witnesses. After the defense has rested its case, the plaintiff has the opportunity to present rebuttal evidence before each side makes its closing argument.

Most litigated matters are settled prior to the time a judge or jury renders a verdict (some estimate that as many as 19 out of 20 are resolved prior to final adjudication). Cases are settled in part because of the high costs of litigating cases, and because neither side wants to take the risk of losing. Both parties agree to a resolution which can include a dismissal of the lawsuit in exchange for a payment of money, usually in an amount that is more than what the defendant wanted to pay, and generally less than what the plaintiff believes the case to be worth. In most settlements, a written agreement sets forth the terms of the settlement, and a specific portion of the settlement says that neither side admits that the other side had a good case. An insurance company, within its obligations under the law and its policy, generally has complete control over whether or not a case should be settled. However, the insured’s opinion is also important in making this decision.

If a matter doesn’t settle it will go to the judge or jury to render a decision. After the closing arguments, the judge instructs the jury on the relevant law, its applicability, and the plaintiff’s burden of proof. The jury then deliberates the case until a verdict is reached, or until it becomes clear that they will not be able to reach a verdict. In California, at least three-fourths of the jury has to agree upon the verdict in a civil case. If it is a bench trial, the judge renders the decision. After a judgment is entered, the losing side may decide to appeal the trial court ruling. Your attorney can discuss appeal issues with you if you are faced with that situation.

Observations: Someone once joked that “every American is entitled to their decade in court!” While this may be a stretch, it is not uncommon for litigation to drag on for years. It is estimated that a case that goes through trial will cost the principal dealing with the problem 125 hours of time at a minimum! This doesn’t include the time spent by other employees who have to compile the necessary information, be involved with interrogatories and depositions and deal with other legal related matters. Because litigation is so expensive, time-consuming and frustrating, it is almost always in your best interest to try and resolve a matter prior to litigation. If face-to-face negotiation fails, you should consider some type or types of Alternative Dispute Resolution (ADR).

The most common form of ADR is mediation, although there are various forms mediation can take. Mediation is a process in which the parties get together with a neutral third party (usually a retired or active judge) to discuss and hopefully resolve the claim. The key difference between mediation and either arbitration or litigation (collectively known as “adjudication”) is that mediation is voluntary and the mediator acts as a facilitator and does not render a judgment. In both arbitration and litigation, a third party (arbitrator, judge or jury) will decide the case for you. Mediation has proven to be quicker and less expensive than either arbitration or litigation. There is one more critical benefit to mediation: while adjudication is almost certain to destroy relationships, relationships can survive the mediation process. Mediation is successful over 80% of the time, and if not, then the parties can still resort to either arbitration or litigation.

Final Comments: The importance of communication in resolving business disputes cannot be underestimated. Litigation is a horribly time-consuming, expensive, emotionally draining and frustrating process. There certainly are situations when two parties simply won’t be able to resolve their differences, and some type of adjudication is necessary; however it is strongly recommended that you make every possible effort to resolve your business conflicts amongst the parties involved. Arbitration or litigation should be your last resort.

SIDEBAR

What are the first things you should do if you are sued?

  • Call your broker or notify your insurance company as soon as possible.
  • Contact your Corporate Attorney and seek his/her advice
  • Identify who was served with the lawsuit, and the date(s) of service.
  • Do not give statements or discuss the case with anyone other than your insurance agent, a representative of your insurance company, or your attorney.
  • If necessary, contribute to a settlement in proportion to what is and is not covered. (Some lines of coverage like Directors & Officers liability may require this.)- Secure all evidence, records, and documents that may be needed for the defense of your case.
  • Identify witnesses and employees who have knowledge of the incident.
  • Provide full cooperation to your insurance company’s claims staff and to your defense counsel.

Internal Communications: Discussions with your attorney relative to a lawsuit are confidential. All other communications are not! In other words, any communications–written or oral–that do not involve your lawyer can be obtained by the other side during the litigation. Many people will meet internally after a claim is made to discuss the matter. Often things are said and written in those meetings in the heat of the moment; that stuff is all fair games during litigation. Likewise any emails with staff, partners and the like are also discoverable, and arguably so too are communications with insurance brokers. You need to stick to the facts and avoid speculation. You also need to make certain you understand the guidance provided to you by your attorney related to the matter and specifically to internal communications.