No one doubts that insurance companies are formidableadversaries. They play a long game and wear policyholders out whilekeeping the float.

Yet often, their efforts are counterproductive. As an attorneywho only represents policyholders in insurance-coverage disputes, Iperiodically see insurance companies and their attorneys shootthemselves in the foot. Here are 10 common mistakes made byinsurance companies or their counsel:

1. Ignoring Exposure to Attorneys' Fees

A majority of states permit the recovery of attorney fees by aprevailing policyholder in a coverage dispute, on the understandingthat insurance disputes are fundamentally different from otherdisputes. Findings that an insurance company breached the“litigation insurance” promise or acted in bad faith can be verycostly—and are not uncommon. Some jurisdictions will award fees ifa policyholder prevails; some require a showing of excessivemisconduct on the part of the insurance company.

2. Moving All Claims Activity to Attorneys

Some lines of the insurance business seem to have forfeited allclaims activity to attorneys, both inside and outside counsel. Thisrisks loss of attorney/client privilege. One court observed, “Mostcourts have adopted a rebuttable presumption that neitherattorney-work product nor attorney/client privilege protects aninsurer's investigatory file on an insured's claim from discoverybefore a final decision is made.”

3. Failing to Comply with the Non-Renewal andCancellation Law

Cancellation and non-renewal is regulated by state law. Therules are arcane and often strictly enforced against non-renewal orcancellation. To stay in compliance, get a copy of Christine G.Barlow's “2012 Cancellation & Non-Renewal” from the NationalUnderwriter Co. Book Store.

4. Delaying Inexplicably

Unexplained delay on the part of the claims department createsan unwelcome inference for the court and fact-finder and can have apreclusive effect on certain claims. In an age of email andTwitter, jurors no longer forgive a 45-day claims-calendarresponse.

5. Forgetting that the Adversary in a Claims SituationIs Your Customer                                

Policyholders are the customers of insurance companies. In aserious claims situation, that relationship is sacrificed. Shouldit be?

Many claims disputes escalate because of the policyholder'sperception of extreme mistreatment at the time of a significantclaim. I have heard too many variations on the lament, “Isn't atime like the present exactly why I purchased this insurance?”

6. Failing to Notify Underlying Plaintiffs in BodilyInjury Cases

Some statutes and regulations require an insurance companydisclaim “as soon as is reasonably possible.” A failure to meet therequirements of the statute can have dramatic effects. In one case,the New York Court of Appeals held that a delay of two months indisclaiming liability was, as a matter of law, unreasonable underNew York law.

7. Asserting “Prejudice” on Account of Late NoticeWithout Basis

When an insurance company denies coverage on grounds of “latenotice,” most states require there be a showing that the delayprejudiced the insurance company. In one case, the insurancecompany asserted that: 1) it lost the opportunity to interviewemployees; 2) it never was provided the names of certain witnesses;3) it was denied access to the premises; and 4) certain witnesseswere dead.

At trial, the policyholder presented evidence that: 1) theinsurance company did not seek to interview any employees; 2) thepolicyholder provided information containing the names of certainwitnesses; 3) the policyholder did not deny access to the premises;and 4) some of the alleged dead witnesses were not, andtestified.

8. Denying a Claim Your Company Is Advertising as aCovered Claim                            

In one notorious case, an insurance company's advertisement fora D&O product stressed that it “eliminates theindustry-standard 'insured-versus-insured' exclusion, insteadomitting coverage only in the exceedingly rare event that a claimis made by the organization against an individual insured.” In aclaim affecting that very policy, the insurance company asserted astricter view of the exclusion than appeared in the policy or intheir advertising. The policyholder saw advertisements depictingits claim as an example of a covered claim.

9. Neglecting Rules Regarding Right to IndependentCounsel

The rules regarding independent counsel are intertwined withattorney-ethics rules. In the event of a conflict—caused, forexample, by a reservation-of-rights letter—the insurer may have aduty to inform the policyholder about its right to independentcounsel.

10. Exposing Yourself to Bad-Faith Claims

With surprising frequency, insurance companies deny a claim ongrounds undercut by a paper trail documenting what they wantpolicyholders to think a policy covers and what their employees andagents say it covers. Sources of proof for a bad-faith claim caninclude claims and underwriting manuals; the insurer's ownreinsurance policy and communications; advertisements; othercommunications; and many other documents.