Sunday, March 7, 2010

Is the "Never Pay Policy" Making a Comeback?: Some Final Thoughts

by John L. Watkins

Last week's post concluded a four part series of posts on some insurers (or claim adjusters) acting as if they had sold Monty Python's proverbial "Never Pay Policy." In Monty Python's skit, Mr. Devious explains to Reverend Morrison that his claim has been denied because his insurance policy states that any claim the Reverend might make will never be paid. Even after decades, the skit is funny, probably because it rings true to many people who have had to deal with insurance companies regarding claims. This week's post will provide a few final thoughts (at least for now) on this subject.

1. Your business still needs insurance. Although the "Never Pay" approach adopted by some insurers is extremely discouraging, businesses still need insurance, and the series of posts should not be taken as an indication to the contrary. The U.S., in general, is a litigious society, and a well designed insurance program provides the first line of defense. The "Never Pay" approach adopted by some, however, indicates that care should be taken in deciding which carrier to choose.

2. It is extremely important to use a good broker or agent. Most insurance is bought through a broker or agent. It is extremely important to have a good broker or agent. Such a broker or agent will stay on top of current trends, and can advise which companies tend ot act responsibly and which do not. Good brokers or agents can also offer substantial assistance in the event of a claim. If an insurance company or adjuster balks at paying a claim, a broker or agent may be able to pressure the insurer to provide a defense or pay a claim.

3. The early involvement of coverage counsel can help level the playing field. Insurance companies all have a small army of lawyers available to them in the event of a coverage dispute. Many of these lawyers (and I have dealt with many of them) seem to believe that their job is to assist the carrier to deny claims, rather than get to a correct result (or a fair result if there is a gray area). An insured is rarely equipped to deal with an obstinate adjuster, much less an obstinate adjuster backed by an equally obstinate hired gun. As result, insureds should consider engaging coverage counsel early in the process. It is important to use a lawyer with substantial insurance coverage experience.

4. The biggest flaw in Georgia insurance law is that insureds must generally bear their own attorney's fees in contesting coverage. In Georgia, if an insurance company refuses to provide a defense or to pay a claim, the insured must generally bear the cost of hiring a coverage attorney. If the insured prevails in a coverage lawsuit, there is relatively little chance that the insured will recover its attorney's fees. Under some Georgia case law, an insured has less chance of recovering attorney's fees against an insurer in a claim under an insurance policy (which is a contract of adhesion drafted by the insurer) than a party suing on a heavily negotiated commercial contract.

The fact that an insurer can deny claims with relatively little prospect of even having to pay the insured's attorney's fees creates an undesirable situation for insureds, whether businesses or individuals. The lack of consequences encourages bad behavior among at least some in the insurance industry.

Consider the likely thought process of a "Never Pay" adjuster handling a claim. The adjuster believes there might provide a basis for denying coverage, but also realizes that there is a good chance that the insurer could lose if coverage were litigated. Georgia case law indicates that the adjuster should interpret any ambiguities in favor of the insured and finding coverage. However, being a "Never Pay" type, the adjuster wants to deny coverage if possible. Under Georgia law, the "Never Pay" adjuster can go ahead and send the denial letter knowing that many insureds will simply give up when the denial letter is received, and also knowing that there will likely be few negative consequences to the insurer.

If the insured does not give up and hires coverage counsel, the adjuster knows that he can always reconsider the claim. The adjuster also knows that he can refer the matter to a lawyer on the insurer's coverage panel to fight the insured. Because the insurer usually has more resources than the insured, and because there is little prospect of being forced to pay the insured's legal fees, the "Never Pay" adjuster may determine that "economic warfare" is the best approach, perhaps resulting in a compromise for less than the claim is truly worth.

Every now and then, an insured will take the insurer on and a court will pop the insurer with a big loss and a judgment for bad faith that includes attorney's fees. In a recent case, the Georgia Court of Appeals affirmed such a judgment and even imposed an additional penalty on the insurer for a frivolous appeal. Decisions such as this help keep at least some insurers honest.

However, insurers with a little more finesse know that, in Georgia, they can simply pull back and pay the hotly contested claims, while continuing to deny most claims without consequence. A presumption that the insurer would have to pay the insured's attorney's fees in losing a coverage battle would even the playing field and likely change this behavior substantially.

Getting the Georgia General Assembly to adopt such an approach would be hotly contested by insurers. However, there are far more businesses and individuals relying on insurance than there are insurers. At some point, one would hope, legislators have to listen to their constituents. Business organizations should get behind this reasonably small change in statutory law to protect insureds.

Further, the Georgia courts can, under existing statutory law, make it clear that insurers who breach their policy by denying claims face the same potential liability for fees as do commercial parties who breach commercial contracts. This approach -- adopted by at least one federal court decision applying Georgia law -- would be a small step forward in putting an end to the "Never Pay" approach.

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