**MEMORANDUM** **TO:** Harborline Hospitality **FROM:** Coverage Counsel **RE:** Teel v. Harborline — Duty to Defend, Settlement Demand, and Bad-Faith Exposure **DATE:** Before Wednesday deadline --- ## Executive Summary The insurer has a duty to defend the entire Teel action because the complaint contains a potentially covered claim for independent negligence—hiring, training, supervision, and crowd management—even though the battery count itself falls within the assault-and-battery exclusion. The late-notice defense is weak: the insurer must prove substantial prejudice, and the facts show none. The reservation of rights creates a conflict requiring independent counsel. Most importantly, Teel’s $950,000 demand is within the $1 million policy limit and reasonable given a 60–70% liability assessment and a $1.4–2.6 million verdict range. The insurer must accept that demand, or it will likely be liable for the entire judgment above policy limits if the case goes to verdict. Harborline should not settle directly without the insurer’s consent, and should not contribute its own funds unless the contribution is structured in a written reimbursement/reservation agreement. The immediate, most defensible course is to send the insurer a letter demanding it accept the settlement, appoint independent counsel, and preserve all bad-faith and excess-judgment claims. --- ## I. The Insurer Owes a Duty to Defend the Entire Action The duty to defend is determined from the complaint plus facts known to the insurer. If any claim is potentially covered, the insurer must defend the entire action. Here, Count I is a battery claim by the bouncer. That is plainly within the assault-and-battery exclusion, and the insurer likely has no duty to indemnify that count. But Count II is different. It alleges: - negligent hiring of a bouncer with a prior arrest for a bar fight; - failure to conduct a background check; - failure to train; - failure to have a use-of-force policy; and - understaffing the exit/crowd management. These are direct corporate negligence claims, not simply vicarious liability for the bouncer’s battery. They depend on Harborline’s own alleged failure to exercise reasonable care in hiring, training, supervising, and staffing. They do not depend entirely on the excluded battery. The battery is the injury-causing event, but the negligence alleged is an independent basis of liability. Because at least one theory in Count II is potentially covered, the insurer must defend the entire action, including the excluded battery count. The duty to defend is broader than the duty to indemnify, and all doubts at this stage are resolved in favor of Harborline. If the assault-and-battery exclusion is ambiguous as applied to the independent negligence claims, that ambiguity is construed against the insurer. --- ## II. The Negligent Hiring/Training/Security Allegations Are Sufficiently Independent The key question is whether Count II is merely a repackaged battery claim. It is not. The complaint does not say Harborline is liable only because the bouncer committed a battery. It says Harborline hired the bouncer without a background check despite a prior arrest, gave him no training, had no use-of-force policy, and understaffed the exit. Those duties exist separately from the prohibition against battery. The negligent-hiring claim is based on what Harborline knew or should have known before the bouncer was hired. The negligent-training claim is based on Harborline’s failure to give the bouncer adequate tools and policies. The crowd-management/understaffing claim is based on the club’s own security decisions. These are classic independent negligence theories. Some jurisdictions construe assault-and-battery exclusions broadly and would bar all claims arising from a battery, including negligent hiring. But this jurisdiction’s stated rule is clear: claims genuinely resting on independent negligence may remain covered. At the duty-to-defend stage, Harborline gets the benefit of the doubt. So: | Count | Coverage | |---|---| | Count I: Battery | Excluded by A&B exclusion, but still defended because Count II is covered | | Count II: Negligent hiring/training/supervision/crowd management | Potentially covered as independent negligence | Because the complaint is a mixed covered/uncovered action, the insurer must defend the whole case. --- ## III. The Late-Notice Defense Is Unlikely to Succeed The general manager received the pre-suit claim letter and failed to forward it, and the insurer did not receive notice until nine months later, three weeks after suit was filed. That delay may violate the policy’s notice condition. But the insurer has the burden to prove substantial prejudice, and prejudice is not presumed. On these facts, the insurer cannot show substantial prejudice: - No depositions had occurred. - All witnesses remain available. - The security video was preserved. - The insurer has already retained defense counsel and formed a liability evaluation. - The claim and demand are still pending; the insurer can still investigate and respond. The insurer may argue that the delay made investigation harder or that it lost the chance to settle earlier, but that is speculation. Prejudice must be actual, not presumed. The late-notice defense should not prevent Harborline from demanding a defense and settlement now. --- ## IV. The Reservation of Rights Creates a Conflict: Harborline Is Entitled to Independent Counsel The insurer has reserved rights based on the assault-and-battery exclusion and late notice. That creates a conflict because the same facts that determine liability may determine coverage. The central factual issue is the “pursuit narrative”: did the bouncer pursue Teel into the parking lot and strike him? That narrative matters in two ways: - If the bouncer intentionally pursued and struck Teel, the injury looks like an assault/battery, which is excluded. - If the injury was caused by Harborline’s independent negligence—hiring an unfit bouncer, failing to train him, understaffing the exit—the claim may be covered. The insurer has an incentive to control the defense in a way that preserves its coverage defenses. For example, it may want the facts characterized as a deliberate bouncer battery rather than a foreseeable result of negligent security. It may also want to avoid developing the independent negligence theories that support coverage. The insurer-appointed defense lawyer cannot effectively represent both the insurer’s coverage interest and Harborline’s defense interest in those facts. Therefore, Harborline is entitled to select independent counsel at the insurer’s reasonable expense. Harborline should notify the insurer in writing that it is selecting independent counsel, and that the insurer must pay the fees. --- ## V. The Insurer Must Accept the Time-Limited, Within-Limits Demand Teel’s demand is a classic policy-limits settlement demand: - Demand: $950,000 - Policy limit: $1,000,000 - Liability assessment: 60–70% - Verdict range if plaintiff wins: $1.4–2.6 million - Medical specials alone: $310,000 - Demand expires Friday. The demand is reasonable. It is below the policy limit and below the low end of the credible verdict range. Given the 60–70% liability assessment, the expected trial value is likely well above $1 million. A rational insurer should settle within limits. When liability is reasonably clear and a claimant makes a reasonable settlement demand within policy limits, the insurer must accept it or face liability for the entire judgment, including the amount above policy limits. The insurer cannot hide behind a reservation of rights or the fact that it is still “evaluating.” If it lets the demand expire and Teel later obtains an excess verdict, the insurer—not Harborline—is liable for the full judgment. The insurer’s suggestion that Harborline contribute 50% is especially problematic. A within-limits demand should not require the insured to contribute to a settlement the insurer has a duty to fund. The insurer’s coverage doubts do not give it the right to shift that settlement burden to Harborline. --- ## VI. What Harborline Should Demand in Writing Before Friday Harborline should send an immediate letter to the insurer, by email and overnight delivery, to claims counsel and coverage counsel. The letter should state, in substance: > **Re: Teel v. Harborline Hospitality; Policy No. ________; Tender of Settlement Demand** > > Harborline tenders to the insurer the enclosed settlement demand from Marcus Teel in the amount of $950,000, which is within the policy’s $1,000,000 per-occurrence limit and requires a complete release of Harborline. The demand expires Friday. > > Harborline demands that the insurer: > > 1. Immediately accept the Teel settlement demand; > 2. Pay the full $950,000; > 3. Confirm in writing that Harborline is not required to contribute any funds; > 4. Immediately appoint and pay for independent defense counsel selected by Harborline, because the insurer’s reservation of rights creates a conflict over the “pursuit” narrative and the independent negligence claims; > 5. Withdraw or waive, or at least not rely on, the late-notice defense unless the insurer can prove actual substantial prejudice, which it cannot. > > The demand is reasonable. The insurer’s own evaluators place liability at 60–70% and the verdict range at $1.4–2.6 million. The policy limit is $1 million. The Teel demand is $50,000 below the limit and would eliminate all exposure. > > If the insurer fails to accept this demand before Friday, Harborline will hold the insurer liable for the full amount of any judgment, settlement, or award above policy limits, plus attorneys’ fees, costs, interest, and all consequential damages. This letter is not a waiver of any rights. Harborline expressly reserves all rights, including claims for breach of the implied covenant of good faith and fair dealing, bad faith, and coverage. The letter must be sent before the insurer’s Wednesday response deadline. If the insurer has not confirmed in writing by Thursday that it will fund the settlement, Harborline should be prepared to seek emergency declaratory and injunctive relief. --- ## VII. The Risk of Settling Directly Without the Insurer’s Consent Harborline must not settle directly with Teel while the insurer is providing a defense unless the insurer gives written consent. The rule is strict: an insured that settles without the insurer’s consent while the insurer is providing a defense forfeits indemnity, unless the insurer has wrongfully denied a defense. That risk exists here. The insurer has not denied a defense. It has issued a reservation of rights and is still “evaluating.” Even if the insurer unreasonably refuses to accept the settlement demand, that is not the same as wrongfully denying a defense. If Harborline settles on its own, it may lose its right to indemnity, including the ability to recover the $950,000 settlement. The risk disappears only if: - the insurer consents to the settlement in writing; - the insurer wrongfully denies a defense; or - a court determines that the insurer has forfeited its right to control the defense because of its conflict or bad faith. Before Friday, Harborline should not assume any of those exceptions apply. --- ## VIII. Should Harborline Contribute Its Own Funds? No, not unless absolutely necessary and not without strong protections. Harborline has $600,000 in liquid reserves. The insurer’s coverage counsel floated a 50% contribution. That is, in effect, asking Harborline to pay $475,000 to buy peace from a risk that is within the insurer’s policy limits. That should be rejected unless the insurer is willing to sign a written reimbursement/reservation agreement. If Harborline does contribute, the contribution must be structured carefully: 1. **Obtain the insurer’s written consent to the settlement.** This removes the voluntary-settlement forfeiture risk. 2. **Characterize Harborline’s payment as an advance or loan, not a voluntary settlement payment.** The agreement should say Harborline is paying under protest and expressly reserving all rights to seek reimbursement from the insurer. 3. **Get a written reimbursement obligation.** The insurer should agree that if coverage is found, or if the insurer is held to have acted in bad faith, the insurer will reimburse Harborline for the contribution. 4. **Do not release the insurer.** The settlement with Teel should release only Teel’s claims against Harborline. It must not release Harborline’s coverage, bad-faith, and excess-judgment claims against the insurer. 5. **Have the insurer acknowledge that Harborline’s payment is not a waiver of coverage and does not reduce the insurer’s duties.** If the insurer will not sign such an agreement, Harborline should not contribute. The better course is to force the insurer to fund the settlement and bear the risk of an excess judgment. --- ## IX. The Single Most Defensible Course Before the Demand Expires The single most defensible course is: **By Wednesday, send the insurer a written demand letter requiring it to accept Teel’s $950,000 settlement demand in full, without any Harborline contribution, and to appoint independent counsel. Then do not let the insurer shift the burden back. If the insurer refuses or equivocates, Harborline should seek emergency court relief before Friday—not settle unilaterally and not fund the settlement out of pocket unless the insurer signs a reimbursement/reservation agreement.** This course: - preserves the duty to defend; - preserves the independent negligence coverage theory; - sets up the bad-faith/excess-judgment claim if the demand expires; - avoids the voluntary-settlement forfeiture trap; - avoids using Harborline’s $600,000 to bail out an insurer that has the policy limits and the duty to act. If the insurer fails to accept the demand, the consequences should fall on the insurer. Harborline’s goal is to make that unmistakably clear in writing before Friday.