“In your policy it states quite clearly that no claim that you make will be paid. You unfortunately plucked for our Never-Pay Policy, which if you never claim is very worthwhile - but, uh, you had to claim - and there it is."
-Mr. Devious to Reverend Morrison about the letter from the insurance company refusing to pay the Reverend’s claim for damage to his car that was hit by a lorry while standing in a garage. Monty Python and the Flying Circus, circa 1971.
This is the final post in the "Never Pay Policy" series. The series deals with the fact that, at least in my small part of the world, many carriers are acting as if they sold the proverbial "Never Pay Policy." When the "Never Pay Policy" goes from being a joke to reality, many people lose. Insureds, whether businesses or individuals, are left to defend and settle claims with their own resources. In some cases, an insurer's failure to perform has the potential of putting an insured out of business or into bankruptcy. Claimants may face the prospect of not receiving compensation for their injuries. Damaged or destroyed property will not be repaired or replaced.
The prior posts covered some common sense steps that insureds can take to prevent a carrier from acting like it sold a Never Pay Policy in the event of a claim. Unfortunately, an insured can take all of these steps and still encounter a Never Pay approach. Even carriers that are generally responsible may have certain claims adjusters who think it is their job to deny as many claims as possible rather than making an objective and reasonable coverage determination. An insured’s experience with any carrier may turn out to be a crap shoot, depending on which adjuster is assigned. Some adjusters are reasonable. Some are not.
When an insured receives a reservation of rights letter (at least on serious claims) or a denial letter, it is time to consult with coverage counsel. Actually, if there is a serious claim, it is even better to consult with coverage counsel at the outset of a claim. Obviously, if a carrier has filed a declaratory judgment action, which is a lawsuit asking a court to determine coverage, the insured will need to hire coverage counsel to handle the lawsuit.
1. How to find coverage counsel. It is important for insureds to consult with counsel experienced in handling insurance coverage matters. It is tempting for many lawyers to take coverage cases even if they have very little experience in the area. These lawyers reason that an insurance coverage case is just a variety of contract claim, and that there is thus no reason they cannot handle it. I am not suggesting that a general litigator cannot handle a coverage claim, but if an insured is paying hundreds of dollars an hour, it usually makes sense to find someone with experience in the area.
Be aware that insurance carriers have legions of lawyers available to them. Each carrier has “panel counsel” consisting of lawyers from law firms pre-approved to represent the carrier in coverage disputes. In larger or troublesome risks (for example, those that may be relatively small but may set a precedent for other claims), the carrier may involve its national or regional coverage counsel. National or regional coverage counsel typically do little more than represent carriers in coverage matters, and will often fly in from out of state to work with the insurer’s local counsel. In a prior part of my career, I was on one of these teams and, although it is not what I do (or want to do) now, the experience was invaluable. Fortunately, the carrier I represented was one of the good ones.
There is no doubt that the carrier and its lawyers will check out the credentials of an insured’s attorneys. If the credentials show that the lawyer is an experienced coverage attorney, then the carrier will probably take an insured’s case more seriously. An insured will want to engage a lawyer with a lot of experience representing policyholders. Many policyholder lawyers formerly represented insurance carriers. Prior experience representing carriers is an advantage, because it provides insight into how carriers analyze claims and the issues that carriers tend to view as important.
There are resources to find experienced coverage counsel. A referral from a company’s usual business attorney is one method. There are other resources, such as Martindale.com and AVVO.com, which are directories that also rank attorneys. Be sure to review the lawyer’s credentials (most law firms have websites with online biographies), and ask questions about the lawyer’s coverage experience.
My upcoming book, An Insider’s Guide to Hiring a Business Attorney (Ocelot Atlanta 2010) details a process for finding, evaluating and interviewing a good business attorney. That process can be adapted to finding a coverage attorney. The book should be available in late March 2010 on Amazon.com.
2. A word about attorney's fees. In Georgia, the insured should expect to pay the fees of its coverage lawyer. The fees of the coverage lawyer are not part of the defense obligation (the obligation to provide a lawyer to defend the underlying claim). Even if the insurer sues its own customer and the insured prevails, an award of attorney’s fees is the exception, rather than the rule. This is a flaw in Georgia law that needs to be addressed by the courts or the Georgia General Assembly. The law in other states may differ.
3. Options for dealing with a carrier. The first thing a coverage attorney will want to do is to review the insurance policy and all communications between the insured and the insurer, particularly any reservation of rights or denial letter. After that review, the coverage attorney can advise the insured about possible options. Those options may include the following.
a. Negotiating with the insurer. A coverage lawyer may write a demand letter to the carrier asking it to reconsider its position. The demand may include additional facts that could affect the coverage determination or legal analysis. Sometimes, negotiations are successful.
It should be noted however, that many claims adjusters seem to become personally invested in their effort to deny coverage. Some adjusters seem incapable of being able to look at a claim objectively, particularly once a denial has been made. The only hope in such a situation is the involvement of another person. Sometimes, a supervisor may take a fresh look at the situation. In some instances, the carrier may choose to involve outside counsel. Outside counsel may advise the carrier to take a different approach. Although this sometimes works, carrier representatives and their counsel can be a particularly obstinate lot, so an insured should never count on an insurer changing its position.
Depending on the nature of the denial, an insured’s counsel may put the carrier on notice of a bad faith claim. Under Georgia law the bad faith remedy is limited to a penalty equal to 50 percent of the loss or $5,000, whichever is greater, plus the insured’s attorney’s fees in pursuing the claim for coverage. This is in addition to amounts due under the policy. However, obtaining a bad faith penalty requires suing the insurer. Georgia’s remedies are, in my opinion, far too limited, and virtually invite insurers to act irresponsibly. The law in other states differs.
There is another form of bad faith that may come into play. If a carrier has an opportunity to settle a liability claim within policy limits and unreasonably fails to do so, the carrier may be held liable for any resulting judgment even if it exceeds the policy limits. If a carrier has an opportunity to settle and fails to do so, then coverage counsel may put the carrier on notice that the insured will look to the carrier to pay “excess judgment” over the policy limits.
Negotiating with the carrier can sometimes be successful in resolving claims. In many instances, however, the carrier will be obstinate and will not reconsider its position. This leaves litigation as an alternative.
b. Filing a lawsuit. If negotiations fail, coverage counsel may recommend filing a lawsuit against the carrier. If the carrier has already filed a declaratory judgment action, then counsel will probably recommend filing a counterclaim.A lawsuit (or counterclaim) for coverage is essentially a breach of contract action. Nevertheless, it is a special type of breach of contract action, and some special rules apply.
Because insurance policies are contracts of adhesion -- meaning they are drafted by carriers and sold on a “take it or leave it" basis -- they are interpreted against the carrier and in favor of the insured. These and other rules give the insured at least a theoretical advantage in litigation. In many coverage cases, however, inexperienced counsel do not take full advantage of the rules. This has led to a number of unfortunate, and, in my view, wrongly decided decisions against insureds.
In reviewing the briefing (the legal arguments filed by the lawyers) in some of these cases, the lawyer representing the insured simply failed to make arguments and cite case law that might have changed the outcome. When an inexperienced lawyer (or one who fails to educate himself) goes up against an insurance company’s hired gun, it often not a fair fight.
What are the chances of winning a coverage case? Obviously, it depends on the facts of the case, the terms of the policy, the lawyers on the other side, and many other factors. The recent Georgia decisions suggest the result is a bit uncertain, as the decisions are not entirely consistent. The law in other jurisdictions varies.
c. Filing a bad faith claim. If an insurer’s refusal to defend or indemnify is objectively unreasonable, the insured may have a bad faith remedy in addition to recovering under the policy. The Georgia remedies were briefly discussed above. A bad faith finding is far from automatic, and requires an insured to show more than than the insurer simply made a mistake in denying the claim. There is no hard and fast rule about when an insurer crosses the line from good faith to bad faith, and the Georgia decisions indicate that a jury should usually decide the question.
In practice and in reviewing the recent Georgia decisions, the ability to prevail on a bad faith claim seems to depend as much on the court one is in as the facts. The federal court in Atlanta sometimes seems to take a very hard line against insureds asserting bad faith claims.
On the other hand, the Georgia Court of Appeals has issued a couple of recent decisions that are far more receptive to a finding of bad faith. In one very recent Court of Appeals decision, the court affirmed the trial judge’s finding of bad faith on summary judgment, meaning that the trial judge found the bad faith so obvious that the case could be decided without a jury trial. This case involved an underlying claim by a building owner against a building contractor resulting from a fire that was negligently started by a subcontractor. The insurance company refused to defend or indemnify the insured based upon a broad interpretation of "business risk" exclusions in the policy, which generally limit coverage for damages to the insured's own work.
The Court of Appeals found that the insurer's reliance on the builder's risk exclusions was incorrect and affirmed the trial court's decision that the insurer acted in bad faith. The Court of Appeals also quoted approvingly from the trial court’s order observing that the failure of an insurance company to provide a defense where it clearly should have done so could have put a smaller contractor out of business. This is one of the relatively few instances in which a court has expressly observed the enormous real practical consequences of a Never Pay approach.
Perhaps this case will start a new trend. In addition to affirming the trial court's finding of bad faith, the Court imposed a penalty against the insurer and its appellate counsel for a frivolous appeal. This penalty is rarely imposed. The case appears to indicate that at least some judges are fed up with insurers adopting a Never Pay approach. In theory, at least, the federal court is bound to follow the decisions of the Georgia state courts on issues of Georgia law.
There is case law in Georgia suggesting that an insured may only recover its attorney’s fees in pursuing coverage by proving bad faith, rather than simply prevailing on the coverage determination (proving that the insurer breached the policy). This is true even though another statute allows attorney’s fees in contract cases upon a showing that the other party had been “stubbornly litigious” or had caused “unnecessary trouble and expense.” There is a federal appellate case to the contrary.
The former decisions are particularly unfortunate, because they indicate that a party to a commercial contract - which, unlike an insurance policy is likely to be highly negotiated - has a better chance of recovering attorneys’ fees in a lawsuit over the commercial contract than an insured whose insurance carrier has breached the policy by incorrectly denying a claim.
There is great irony here because insurance company lawyers love to argue that an insurance policy should be treated the same as any other contract instead of being construed against the insurance company, as Georgia law provides. When the subject of attorney's fees comes up, however, the same lawyers argue that insurance policies should be treated differently from other contracts.
Once again, this discussion is based on Georgia law. The law in other states in this area varies considerably.
4. Possible future relief for insureds. In addition to the millions of dollars insurers spend on television advertising, as noted in the first post in the series, insurers also spend a lot of money on "governmental relations," or what might be known colloquially as lobbying. Any change in the current circumstances will surely bring substantial opposition. At least in Georgia, I suspect the carriers pretty much like things the way they are.
Insurers argue that if they are forced to pay more claims, premiums will go up. There are a couple of obvious rejoinders to that argument. First, what do insureds pay premiums for in the first place? Second, insurers rarely seem to take into account the huge costs associated with paying an army of claims adjusters, national counsel, regional counsel and local counsel in trying to support coverage denials.
In many instances, the result is that the insurer has to pay the claim anyway, and sometimes even a bad faith penalty. It would be truly interesting to see the results of a study comparing the costs of the current approach adopted by many carriers to the cost of a an approach that would give the insured the benefit of the doubt in simply paying claims.
I am not suggesting that insurance companies should be forced to pay claims that their policies were never intended to cover. What I am suggesting is that insurers should recognize they are in the business of covering risks. Therefore, doubts should be resolved in favor of the insured, rather than trying to force a claim into an awkward or forced interpretation of a policy term, condition, or exclusion.
Here are a few minor suggestions that would make the playing field a little more even for Georgia insureds.
a. The General Assembly, the Insurance Commissioner and the courts should prevent and give no credence to “Never Pay” provisions in policies or "Never Pay" interpretations of such provisions. It should be clear that an insurer's fundamental promise is to defend and indemnify claims. Insurers should not be permitted to sell policies with Never Pay provisions. Courts should follow existing precedent and interpret exclusions narrowly so that they do not swallow up the fundamental promise of coverage.
The Georgia Court of Appeals has recently done this in connection with the “business risk” exclusions in commercial general liability policies that insurers have used to try to deny coverage for claims arising from construction defects or negligent construction. Similar results should follow regarding the pollution exclusion, the fungus exclusion and other policy provisions that are sometimes used to try to deny coverage under circumstances that were never intended.
Further, the General Assembly and the Insurance Commissioner should prevent carriers from adopting such blunderbuss exclusions in the first place, or interpreting them to swallow the fundamental promise of coverage.
b. If an insured prevails in a lawsuit against its insurer, it should recover its attorney’s fees. In Georgia, a carrier can deny a claim knowing that it probably faces little risk beyond possibly having to pay the claim, while at the same time forcing the insured to hire and pay for coverage counsel. This can be a double whammy if the carrier has denied a defense and the insured is also having to pay to defend the underlying claim. In many instances, the insured may simply lack the resources to fight.
This allows carriers to engage in economic warfare against their insureds with little risk of consequence. If insurers force their insureds to go to court on coverage and the insured wins, an award of attorney’s fees should be automatic. This rule should apply regardless of whether the insurer or the insured institutes the litigation.
The reverse should not be true. Why? Because the insured has no say in drafting the policy language, does not have access to an army of lawyers, and is typically at an economic disadvantage.
At an absolute minimum, the Georgia courts should overrule the line of cases holding that the general contract statute for recovering attorney’s fees does not apply to insurance coverage cases. An insured, as a party to a “take it or leave it” contract of adhesion should not be at a disadvantage to a party suing regarding a carefully negotiated commercial contract.
c. The bad faith remedy should be made more meaningful. Presently, an insured that prevails in a bad faith action may recover, in addition to amounts due under the policy, a penalty of 50 percent of the loss. Previously, the statute provided for 25 percent of the loss. This is simply not enough to get a carrier’s attention. A multiplier of 200 percent would change this, and such would not be at the radical end of bad faith remedies in other states.
Conclusion. This series has provoked a quite a bit of interest and a little discussion. That is not surprising, as the subject is one of general concern. Almost all businesses and individuals purchase insurance to protect against a wide variety of risks. Monty Python’s “Never Pay Policy” skit is still funny after many years. As is the case with much humor, the skit is funny because it points to a generally accepted underlying truth. It is no laughing matter, however, when insurers deny claims and act as if they were selling Never Pay Policies. The consequences to insureds can be devastating. Until the insurance industry changes its ways or the state legislatures and insurance commissioners take action, insureds must look out for their own interests. Hopefully, this series has provided at least a few helpful observations on fighting the Never Pay Policy.