For most contractors, regardless of size, litigation is an unfortunate fact of life. The key to effectively dealing with litigation is to understand the process, know what the company should and should not do, and make certain it is aligned with the right attorney, insurance broker and insurance company.
Summons and Complaint
The litigation process begins when the plaintiff, or his or her attorney, files a complaint (lawsuit) with the court. In the complaint, the plaintiff states (in more or less detail) causes of action that 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 or she fails to answer the complaint within the statutory time limit. For example, in California the defendant usually 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) also may file a cross-complaint, which is a claim against the other party or a third-party that 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 be liable for the plaintiff’s claimed damages and expenses.
Upon being served with a summons and complaint, immediately notify the firm’s 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 in which there is a duty to indemnify an insured for certain claims or causes of action. In those situations, the insurance company will issue a reservation of rights letter stating it is reserving its rights to deny coverage in the future if it learns these claims are not covered.
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.
During the discovery phase of the litigation process, each party has the opportunity to gather information regarding the opposing party’s case. Following are some of the major discovery tools in a civil case.
- Interrogatories: Interrogatories are written questions served on a party that must be answered within a specified time frame. An attorney can assist the company in completing its 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. Defense counsel will help 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 electronic files) or to allow for the inspection of relevant evidence, such as 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: A doctor hired by the defense provides a physical or psychological examination of the plaintiff.
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 presents her or his case first by calling witnesses and offering 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 or her questioning. After the plaintiff rests his or her case, the counsel for the defendant has the opportunity 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 cases are resolved prior to final adjudication.) Cases are settled in part because of the high costs of litigation, 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.
Typically, 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 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.
Alternative Dispute Resolution
Someone once joked that “every American is entitled to his or her 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 matters.
Because litigation is so expensive, time-consuming and frustrating, it is almost always in a company’s best interest to try to resolve a matter prior to going to court. If face-to-face negotiation fails, consider some type of alternative dispute resolution—the most common of which is mediation.
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.
With an 80 percent success rate, mediation has proven to be quicker and less expensive than either arbitration or litigation. Additionally, while adjudication is almost certain to destroy relationships, they can survive the mediation 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 firms make every possible effort to resolve their business conflicts among the parties involved. Arbitration or litigation should be a last resort.
First Steps and a Note on Confidentiality
- Call the firm’s broker or notify its insurance company as soon as possible.
- Contact the company’s corporate attorney for 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 an insurance agent, a representative of the insurance company or an attorney.
- If necessary, contribute to a settlement in proportion to what is and is not covered. (Some lines of coverage such as directors & officers liability may require this.)
- Secure all evidence, records and documents that may be needed for the defense of the case.
- Identify witnesses and employees who have knowledge of the incident.
- Fully cooperate with the insurance company’s claims staff and with defense counsel.
Remember, discussions with an attorney relative to a lawsuit are confidential, but all other communications are not. In other words, any written or oral communications that do not involve a 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—all of which is fair game during litigation. Likewise, any emails with staff are discoverable, and arguably so are communications with insurance brokers.
Stick to the facts and avoid speculation. Also, make sure the company understands the guidance provided by its attorney related to the matter and specifically to internal communications.