Q: I am the CEO of a steakhouse chain that franchises restaurants across the northeast. We recently terminated a franchisee that was not living up to its contractual obligations. We then acquired its restaurant. We have since been sued by the disgruntled franchisee, who has brought numerous claims against me and the company and made many baseless allegations. I have provided our insurer with the franchisee’s lawsuit, but it has denied coverage. According to the insurance company, all of the franchisee’s claims are subject to a policy exclusion, and so we must solely bear the cost of the litigation. Is there anything we can do to make the insurance company reconsider its coverage position?
A: When an insurance company asserts a policy exclusion, it must do so in such clear and unambiguous terms that the insured can have no reasonable expectation that coverage exists. Generally speaking, claims for breach of contract are excluded from coverage. But tort claims (e.g., tortious interference, misrepresentation, negligence) are typically covered by insurance policies. Thus, whether the franchisees’ claims are excluded from coverage requires a careful analysis of the policy’s specific language, the franchisees’ claims, and the applicable law.
If there is coverage for some or all of the franchisees’ claims, you and the company should retain an attorney to communicate with the insurance company and demand coverage. If the insurance company maintains its coverage denial, you and the company should consider bringing a declaratory judgment action against the insurance company to establish coverage.
With limited exception, a declaratory judgment action must be brought within six months of the date the franchisee sued you. In a declaratory judgment action to determine coverage, the burden of proof is always on the insurer. And when the court construes the insurance policy, it will do so as a whole and as a reasonable person in the position of the insured would based upon more than casual reading of the policy.
In addition to indemnity coverage under the policy, if the lawsuit against the insurer is successful, you and/or the company may be entitled to attorneys’ fees (in both the underlying suit and the coverage suit), costs, and other damages. Depending on the language of the policy, the insurance company may also be required to pay the cost of defending the franchisee’s lawsuit while the coverage case is pending.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.