Government contractors, like all businesses, continue to face evolving liability risks. Examples include claims arising out of alleged losses or injuries due to global warming and patent infringement claims. Liability insurance allows a government contractor to manage its exposures. Although the insurance policy language will guide a government contractor’s strategy with respect to specific claims, the considerations reviewed below often apply and should generally be considered for each risk.

First, government contractors should know that most courts will interpret insurance policies in favor of coverage, notwithstanding that government contractors and their insurers are often sophisticated parties. However, each policy’s specific provisions require due consideration, because apparently minor differences in policy language can significantly increase or decrease available insurance coverage.

Following receipt of a claim (or knowledge of an event possibly giving rise to a claim), government contractors should identify all potentially relevant insurance assets and alternate sources of insurance recovery. Sources of coverage that may be overlooked include a corporate predecessor’s insurance policies, an affiliated company’s insurance policies, and coverage purchased by other third parties, such as suppliers, distributors, contractors, or retailers. Although these options may not readily appear applicable, these alternative sources of recovery may prove to be an important asset to government contractors.1

Other considerations related to identifying all available insurance coverage are the so-called “trigger” and “allocation” issues. Claims may involve circumstances spanning many years. Such claims can implicate policies in different years as well as different types of coverages. Accordingly, to maximize insurance coverage, government contractors should be aware that, in addition to their current policies, their prior policies can also be valuable sources of recovery.

After identifying available insurance coverage, another important issue concerns providing notice to the insurers. A policyholder’s failure to provide timely and effective notice could negate otherwise applicable coverage. Providing notice and timely updates to insurers can benefit government contractors by encouraging the meaningful participation of insurers in resolving claims and avoiding “late notice” defenses. However, government contractors should also consider whether notice under a particular policy is actually required, because providing notice could have a negative impact on a contractor’s relationship with its insurer as well as on premiums for subsequent renewals. Therefore, when faced with a claim, these competing considerations regarding notice will need to be carefully weighed in light of the specifics of the claim, the policy provisions, and the applicable law.

One important factor for government contractors to evaluate concerning whether to involve insurers in a claim is the estimated legal fees to be incurred in the defense of a claim. As government contractors are well aware, legal fees will often amount to hundreds of thousands, if not millions, of dollars. Liability policies can be important sources of funds for these legal fees. Under many policies, most courts require only a “potentiality” of coverage to find an insurer liable for its policyholder’s defense costs. That is, an insurer must pay legal fees incurred by its policyholder in defending a claim when the insurance policy possibly provides coverage. Thus, the insurer’s “duty to defend” is broader than its duty to indemnify a policyholder for amounts paid in settlement of a claim. In addition to being an important consideration in determining whether to provide notice of a claim, this “potentiality” of coverage standard is also another reason government contractors should be careful not to ignore insurance policies that may not immediately appear applicable to a claim.

The issues discussed above are only a few of the many considerations that a government contractor may encounter in dealing with potential insurance disputes. Government contractors should be proactive in managing their relationships with insurers, particularly in light of the many opportunities for disputes due to the variety of specific claims and policy provisions, as well as the differing laws that may govern any such disputes. Liability insurance remains a critical tool in helping manage the many risks facing government contractors. The considerations discussed above demonstrate the importance of properly handling insurance issues to minimize risks and potential exposures.