Tactical processes and measures to settle claims
Nobody wants to go to court to decide on insurance coverage. This is demonstrated
by the tiny fraction of insurance cases litigated to final judgment. Insureds
don't want to go to court because of the time, complexity, and stress
that could take several years to address. Insurers don't want to go
to court because of the cost and the possible effect of unfavorable rulings
on past and future claims in the case of suspected ambiguities. Policyholder
lawyers may not be interested in low-value claims where they do not make
good business sense. As a result, settling contested insurance claims
without litigation is most frequently the alternative option. The courts
do not always get it right. "Vacancy" is not "vacancy"
in another court. The same faulty claim in one state causes the insurance
policy as an "occurrence," but not in another. Burglar vandalism
is protected in one case, but not in another, even in the same language.
This article aims to provide a step-by-step method to settle a coverage
or claim dispute. This method requires four phases after getting a written denial.
- Read the policy.
- Interpret policies.
- Explore interpretation.
- Get a lawyer.
The first order of business (Step "0") includes obtaining written
denial of the claim that clearly and sufficiently outlines the reason
for rejection and acting on it promptly. The insurer must follow particular
minimum legal requirements outlined in legislation or regulations, from
Unfair Claims Settlement Practices and Unfair Trade Practices laws to
recommended guidelines for enforceable reservations of rights letters
defined by case law or statutes. Step 1 brings doing your homework to
practice. All available policy forms must be thoroughly checked, concentrating
on the insurer's conditions as the reason for rejection. The reasons
for the adjuster are not always right. Often for reasons other than those
alleged in the rejection letter, as stated later, a claim is not covered.
Stage 2 happens during and after policy reading. The insurance policy
should be read from the party's intention and realistic expectations
to establish a general impression of coverage or lack thereof. It is essential
to review the policy wording and understanding of the adjuster's rejection—step
3 reviews the adjuster's interpretation, including investigating the
alternative arrangement.
That research may suggest the interpretation of the adjuster was, after
all, accurate. Otherwise, this step's purpose is to gather enough
supporting documentation to make a coverage case. All anyone ever wants
is a fair shake. The parties pursue an advantage in carefully studied
and reasoned policy type interpretation. Step 4 includes enlisting an
attorney to plead to the individual refusing the argument to the case
you assembled in Step 3. In many instances, this effort reverses the adjuster's
initial rejection. There is a point/counterpoint exchange in some other
cases, and it is accepted that the adjuster was ultimately wrong. Or an
agreement can be negotiated.
If not, the rejection can be appealed to outside agencies within the insurer
or, theoretically, to explore real-life examples. Step 0: Heading Off
Denials After the Claim When an insured or a third party receives a claim
or suit, the first course of action is to ensure that subsequent steps
comply with the policy conditions. For example, timely notification to
the insurer is invariably necessary;
Otherwise, if delayed and maybe prejudicial, the insurer could not be contracted
to react. Please note some policies require accident or incident warning,
not just claim or suit details. Some insured, especially in "fender
benders," might not want to report an accident. However, suppose
you are an agent informed of such an accident. In that case, you might
have a duty under your agency/company arrangement (contract) or agency
regulation to report the incident to one or more insurers. My wife tapped
an off-ramp on another vehicle's rear bumper. There was no apparent
harm, but contact information was exchanged, and I reported to my agent.
The other party called a few days later and said her husband took the
car to a repair shop, and the frame was bent, but not too bad. She said
they would take $200 in cash and just let it go." I assured her our
insurance firm would be in touch and mysteriously vaporized their claim,
as I was told. These types of circumstances are predicted, and what appears
to be nothing can become whiplash allegations or worse.
Also, if an umbrella or excess policy is in place, notice under that contract
is likely required. For example, here is one such umbrella obligation
[emphasis added]: Duties In The Event Of Occurrence, Offense, Allegation,
Or Suit You must report any occurrence or offense as soon as possible,
regardless of how much may result in a claim. In one scenario, the loss
occurred in April 2007. A suit was filed in October 2007. When a decision
on the underlying policy cap appeared in October 2010, the umbrella carrier
was notified three years after the event. The umbrella carrier justifiably
submitted a declination letter due to a noticeable delay. The agent owes
allegiance to the insurer, his principal. However, a claims representative's
opinion should not be blindly welcomed when there is cause to doubt a
reduction in coverage.
Declination and reservation of rights
The first rule in this process is never to recognize oral coverage decline.
A written rejection is not only a smart idea; it's probably the law.
Not only do Unfair Claims Settlement Practices laws (or other statutes)
require written denials, courts have also considered this critical in
deciding the enforceability of letters of denial and reservation. Furthermore,
most legal experts advise that comprehensive rejection letters should
also contain policy terminology and its relation to the argument at hand.
In one claim, a written rejection was sent as a letter that explained
that you have no coverage for this loss. That's no more appropriate
than an oral decline. All statements should follow at least three criteria:
- Be written;
- Cite the relevant policy language (and only that language) for this denial;
- Explain why and how it works to exclude coverage in the argument. If the
reservation of a right is included (and will almost definitely be), additional
policy wording will be cited.
As mentioned below, however, the insurer does not provide a laundry list
of policy language extracts similar to copying and pasting the entire
insurance contract into the letter. Its weight or verbosity does not assess
the enforceability and importance of letter rejection and reservation.
Insurers tend to eliminate waiver and estoppel lawsuits by providing nonwaiver
agreements or reserving rights letters. These documents inform the insured
of liability concerns. If the insurer undertakes complete protection,
it can be avoided by essentially waiving the coverage problem from later
refusing coverage. A rights reservation provides the basis for a conditional
defense when publicity occurs, but that may change as the investigation
continues. It can also create additional contractual grounds to reject
a claim beyond those in a declination letter theoretically. An explicit
reservation of rights can include a declaration such as: "We will
continue to manage this claim even if a coverage issue exists. However,
no company representative's act when examining or negotiating this
claim's resolution or defending a lawsuit shall be construed as waiving
any of our rights.
- Policy language generalized or paraphrased;
- Include policy language extracts misrepresenting language intent; or
- Essentially, copying and pasting most policy exclusions, particularly those
with nothing to do with the argument.
- To highlight these points, below are five finger-wagging examples, four
of which are allegation denials and a coverage investigation.
Example 1:
An insured under cybercrime policy intercepted a bank-wired transfer and
stolen money. According to the declination letter, the adjuster recommended
that fraud must occur physically from the insured's premises or the
bank's venue, citing (with quotation marks) policy language that said
the scam must be linked to the use of a device within the insured's
premises or bank premises. The machine used for fraudulent transfer did
not have to be located within the insured or bank premises, but that seemed
to be the policy's condition based on contract language.
Example 2:
A condo owner rented the clubhouse for his child's birthday party to
demonstrate a selective language denial. The property management company
wanted $300,000 in liability insurance. Fortunately, this was a coverage
inquiry, not a claim denial, although the agent possibly made the mistake
of asking the underwriting issue, not the claims department. An underwriter
replied that his homeowner's policy would not cover while his restrictions
were sufficient. The agent should have an insured's special events
policy. The underwriter cited an exclusion of liability in the email response
relating to an insured's leased premises. The problem with this policy
language quote is that it did not include the exclusion exception, which
is not an insured venue. Description of the insured location involves
any portion of the premises sometimes leased to an insured other than
business usage. The clubhouse is an insured venue, so the exclusion does
not apply. Whether this was an error or a deliberate effort to hide appropriate
policy language is unclear.
Example 3:
An insured left home at 7:30 a.m. When she arrived home at 4:00 p.m., water
ran from under the front door. Most of the house's first floor had
flooded due to a kitchen-fitting burst water pipe. Before this incident,
a reported water leak had never occurred.
In his letter of rejection, the adjuster cited over a dozen exclusions,
ranging from wear and tear to pollution to birds, vermin, rats, or insects
to "water damage" to failure to and on defective construction.
Many citations were copied and pasted blocks of exclusions into the letter.
Indeed the loss had nothing to do with birds and waste. Also, citing exclusionary
clauses entirely unrelated to the allegation, essential parts of the political
language were omitted. For example, in one list of eight exclusions, the
adjuster failed to refer at the end of the listing to the critically necessary
coverage-granting paragraph. Language should have been included that states
if any of these causes water damage not otherwise excluded from plumbing,
heating, air conditioning or automatic fire-protective sprinkler system
or household. Besides, any ensuing loss to property described in Coverages
A and B not excluded or excepted in this policy is covered. The adjuster
also cited an exception for constant or repeated seepage or leakage of
water for weeks, months, or years. No proof of any water damage exceeding
that occurred that day. Although the allegation was recorded the day it
happened, the neglect exclusion was also cited within two hours of discovery.
The following series of events may have contributed:
- August 19 Water loss occurred.
- August 27 State approved adjuster as an adjuster.
- September 22 Date of a rejection letter
Ultimately, the claim was compensated when the agent brought it to the
insurer's claims' supervisory stage. My experience has been those
denials that cite exclusions while ignoring exclusions are normal. The
exception is always put at the end of a set of exclusions, so one explanation
for the prevalence of these types of inappropriate denials might ignore
them, not that this is a legitimate excuse.
Example 4:
Ransomware struck a dentist's office computer system, encrypting all
his patient data (personal details, x-rays, insurance information, accounting
reports, etc.), including backups. The dentist suffered considerable business
profits, loss of added costs, and loss of receivable accounts. Exclusions
are cited for everything from "wear and tear" and "mechanical
breakdown" to "faulty workmanship." in the adjuster's
voluminous rejection letter. None of the above exclusions applied to the
allegation. What was not noticed and essential was that there was no "direct
physical loss," as the policy form's insurance arrangement needed
to cause coverage. So the loss wasn't covered, but not for any excuse
in the letter of rejection. My experience over the years is often rightly
rejected arguments, often for the wrong reason.
Example 5:
During a drill, a crane inspector overloaded a crane for failure. His CGL
insurer rejected it. The written denial never really says why not cover
the loss. The reservation of rights paragraph is so broad that later,
possibly, divine intervention makes denial. The letter of 10 pages quotes
word-for-word, Coverage A Insuring Deal, Exclusions j.(1)-(6), k., l.,
m., n., t. Exclusion n is for product recall, not even remotely relevant
to the assertion. The letter quotes, verbatim, any term mentioned from
the insurance agreement and exclusions but never again says which exclusions
apply and why. It is unclear if this approach's intent originated
from laziness, indecisiveness, or indifference, or if it was a technique
just in case or, worse, a deliberate effort to obfuscate. The lesser evil
is not reassuring.
Is this a legal letter of rejection and reservation? It is axiomatic that
an insured should be provided with adequate details to understand why
the insurer feels the policy does not have protection.
Unfair allegations and misrepresentation
There are also several procedural rules regulating how claims can be rejected.
The model act of the National Association of Insurance Commissioners (NAIC)
describes over a dozen exhibits, including:
Knowingly misrepresenting claimants and insureds relevant facts or policy
clauses relating to the coverage at issue; not attempting in good faith
to resolve promptly, lawfully, and fairly claims under which the responsibility
has become reasonably clear; forcing insureds or beneficiaries to institute
suits to recover sums due under their policies by providing significantly less.
While many written claims quote policy language, my experience was that
so many do not make sufficiently clear why or how that language relates
to endorse denial. Many states adopted this model act; some changed. Some
states have far more strict and precise penalties for unfair settlement
practices, competition methods, or dishonest actions. For example, Florida
includes failure to provide the insured with a fair written description
of the insurance policy basis, the facts or applicable law, to refuse
a claim or propose a compromise settlement. Unfortunately, insurance companies
heavily lobby state legislatures in Texas. Therefore, the laws in Texas
strongly favor insurance companies.
An insurer refuses or declines a claim. It shall do so in writing in whole
or in part. It shall provide the applicant with a statement listing all
bases for such rejection or denial, including the factual and legal justification
for each reason given such rejection or denial, which is then within the
insurer's knowledge. Where, in whole or part, an insurer's refusal
of a first-party claim is based on a particular statute, applicable law
or policy provision, condition or exclusion, the written denial shall
contain a reference to it and clarify the application of the statute,
applicable law or provision, condition or exclusion to the claim.
Any insurer refusing or rejecting a third-party allegation, in whole or
in part, or disputing liability or loss shall do so in writing. NAIC model
law has a similar clause but lacks the crucial requirement to clarify
how the above policy terms apply to remove coverage. And again, several
states have legislative provisions for resolving policy language or claims
procedures. For example, New York Law 3420(d)(2) includes written disclaimers
(no rights reservations) in cases involving bodily injury and death. Failure
to implement mandatory language into insurance contracts or obey statutory
procedures can adversely affect a claim denial, resulting in significant
statutory penalties against the insurer.
Often unfair settlement practices may reach bad faith. One court upheld
a judgment that included bad faith damages after the insurer consistently
refused to justify the reason for denying the claim to the insured. According
to the court, another found bad faith was demonstrated by the insurer's
failure to examine the allegation adequately. When investigating a claim,
an insurance provider must vigorously pursue proof supporting the claim
of its insured. If it tries to discover only the facts that defeat the
argument, it is beyond the insured's interest. Even if it does not
reach bad faith status, an insurer must properly investigate a request
from its and its insured parts. Insurers will be well served to provide
legislative and case law prescriptions on what constitutes fair claims
mediation procedures and good faith in their procedural manuals. Such
laws' spirit should also be instilled in all claims workers at any
opportunity.
"The Devil Made Me Do It" Denial
One of the most frustrating denials is when the adjuster decides that the
insured is not liable to an applicant on the grounds of negligence or
any other civil liability premise protected by the policy. For example,
a giant icicle dropped from the insured's building and destroyed a
customer's car at $958. The CGL adjuster dismissed the allegation
because it was an act of God. Is that valid, or was the business owner
incompetent in failing to maintain the premises? What the insured did
is a matter of truth and statute. Suppose the adjuster cannot be convinced
that the property owner had a legal duty to keep invitees secure. In that
scenario, the only remedy may be the court, potentially costing the insurer
more than $958. A woman walked down the street, knocking her down and
biting her. She needed stitches and lost a tooth. Her medical costs were
$3,000. The dog owner's homeowners adjuster gave the $1,000 medical
payout cap, but otherwise, his insured wasn't negligent, and the injured
party had to provoke the dog.
A car wash customer's SUV was battered by fishing line sinkers stuck
in the brushes, seemingly in front of a pickup truck's cab. The car
wash owner's insurer rejected the claim that their insured was not
legally liable because it was an accident. A storage trailer blew off
a business owner's lot and crashed across the street through the plate
glass windows in a massive windstorm. The adjuster denied guilt, citing
this as an act of God. The damaged building owner argued that the trailer
owner had no adequate tie-downs as required by law. Note that the defense
is owed on claims and that the carrier must have a fair investigation.
A tree crashed into a neighbor's yard, destroying two luxury cars.
The adjuster said it was an act of God, but the neighbor said the insured
told him a year ago that the tree was sick and dead and had to be taken
down. A diabetic driver went by, sideswiping multiple parked cars on the
street before reaching a car at the intersection. The adjuster dismissed
all allegations that the insured was not incompetent and a victim himself.
Whether the driver is responsible is a matter of fact. Has the driver
had similar previous encounters or been warned of driving without proper
medication? Refusing to pay claimants without performing a reasonable
inquiry, according to NAIC, may be bad faith. Bear in mind that if the
policy contains the claimant files suit and some of the allegations that
the policy potentially excludes the claimant files suit and some of the
allegations, the insurer must provide protection. Judicial responsibility
is also less about legislative interpretation and more about the law-related
facts of the case.
Declaratory decisions
As juries decide evidence, judges interpret (and contract) law. Possibly,
litigation to the point of judicial settlement is most common when facts
are at the core of a coverage dispute. If the conflict depends solely
on the interpretation of the language in a policy form, either party can
request a declaratory judgment and, if necessary, an appeal of that decision.
In a declaratory judgment action, the insurer or insured can bring the
coverage dispute to the jurisdictional court, asking the court to determine
the coverage issue and each party's rights under the contract. The
court typically responds in three ways if the argument is denied:
- It relieves the insurer if coverage does not exist;
- It guides the insurer to pay or protect whether coverage exists; or
- It determines that the case must go to trial to determine whether coverage
occurs based on the case's circumstances and characteristics
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