You were sued in a BIPA class action. Oh crap! Your insurance company hired a law firm to defend you. Whew, that’s a relief. At the mediation, your lawyer tells you that the insurance company is only going to pay a portion of the settlement, because liquidated damages are not covered. Wait, what?
If you were named in a lawsuit alleging violations of the Illinois Biometric Information Privacy Act (“BIPA”), I do not need to explain what it is. And if you are reading this, you were likely lucky enough to have an insurance policy under which you were provided a defense by the insurer. But while the policy provided a defense, it likely did not cover liquidated damages. This meant that you, rather than the insurance company, had to pay most of the BIPA settlement (since most of the damages arising under BIPA are liquidated damages). Again, all of which you probably already know.
What you may not know is that the insurance company arguably was required to fully disclose the conflict created by your liability for liquidated damages and give you the opportunity to hire independent counsel at their expense. The failure to do so could mean that the insurance company is liable for the portion of the settlement that it did not pay.
Let me explain. The courts in Illinois (and other states) recognize that a law firm hired by the insurance company has loyalty both to the policyholder whom it represents, and the insurance company that is paying its bills. This “tripartite relationship” is not a problem most of the time, when the insurer and insured’s interests are aligned. But sometimes, such as when the insurance company reserves its rights to deny coverage for certain aspects of a lawsuit, it creates a conflict of interest. In such situations, the insurer is obligated to disclose the conflict to its insured and give the policyholder the right to hire its own lawyer. The insurer is required to pay the reasonable fees of this independent lawyer, who has no loyalty to the insurance company and can structure a defense that minimizes the policyholder’s exposure.
When the insurance company fails to make this disclosure and allow the policyholder to hire its own lawyer, it cannot then rely on policy exclusions to refuse to pay part of the claim.
Although the insurance companies disagree with me (to put it mildly), I believe that the fact that they do not cover liquidated damages under BIPA creates a conflict that requires them to allow policyholders to hire independent lawyers. Their failure to do so makes them liable for the portion of the settlements previously paid by the policyholders. Whether or not the independent lawyer would have reached a better deal for the policyholder is irrelevant. What matters is that the policyholder was entitled to unconflicted counsel.
