Saturday, February 27, 2010

Is the "Never Pay" Insurance Policy Making a Comeback? How to Fight It (Part IV)

“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.

Sunday, February 21, 2010

Is the "Never Pay" Policy Making a Comeback?: How to Fight It (Part III)

by John L. Watkins

“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.

The first post in this series discussed the apparent comeback -- based on my admittedly subjective observations -- of the proverbial “never pay policy,” or the practice of insurers in taking aggressive coverage positions and reserving rights and denying claims. If these observations are correct, the negative effects on businesses, claimants, and, ultimately, society, are readily apparent.

The second post of this series discussed some basic steps businesses and individuals can take to fight the return of the “never pay policy.” This post will go further and discuss what to expect in the event of a claim, how to tell if an insurer is acting like a “never pay” carrier, and some of the things an insured can do about it.

1. If you have a claim, or an event that may give rise to a claim, report it promptly. If an event happens that may give rise to a claim, notify the carrier. If there is a lawsuit, notify the carrier. In order to avoid disputes, provide notice in writing and keep a copy.

As noted in the second post, you should have access to a copy of the policy. Review the policy for the notice requirements and comply with the requirements.

Insureds often provide notice to their agent or broker. If you provide notice through the broker, make sure that the broker confirms in writing that no further notice is necessary. Then demand that the carrier confirm in writing that no further notice is necessary. Why? Because even when carriers receive notice from a broker, they will sometimes claim that notice to a broker is not in technical compliance with the policy.

Why the concern? Because insurers claim late notice all the time. Many insurers seem to raise late notice as a defense simply as a matter of course, regardless of whether the notice was really late or regardless of whether they were prejudiced by the claimed late notice.

Sometimes, carriers are successful in avoiding coverage on this ground. In an ideal world, insureds can cut off this issue by giving notice that cannot be challenged, and, importantly, documenting that they have given notice.

2. Until the carrier performs, be wary and very careful. The notice issue points out an unfortunate reality in the “never pay” era: Do not assume your insurer is on your side. Remember that the claims adjuster assigned to handling the claim will also be looking for coverage issues to raise.

Particularly in liability claims, there is an inherent conflict of interest (or, at the very least, a strong potential conflict of interest) in a claims adjuster handling a claim and also looking at coverage issues. In handling a first party property damage claim, for instance, a claims adjuster is supposed to be making sure that the insured is protected, that temporary assistance (such as temporary housing, a rental car, etc.) is provided, and that the insured’s life or business is put back together as soon as possible.

In a liability claim, the adjuster is supposed to be making sure that the incident is properly investigated, and that a lawyer is promptly appointed to defend the insured. Ultimately, it is the duty of the insurer to make all reasonable efforts to resolve the claim within policy limits. The claims adjuster will typically be privy to privileged information, including confidential reports and evaluations of defense counsel, some of the most sensitive information generated in defending a lawsuit.

Obviously, if an adjuster is looking for ways to deny or limit coverage, it runs counter to the insurer’s fundamental obligations in either a property damage or liability claim. In some instances (but usually only coverage issues are squarely in play), the insurer will adopt a “Chinese Wall,” meaning that there will be separate adjusters appointed for handling the underlying claim and the coverage issue. Theoretically, at least, the adjusters will not be able to communicate with each other which should prevent the use of confidential information to deny coverage.

In most cases, unfortunately, the carrier will not adopt a “Chinese Wall.” For this reason, there is always the potential of a conflict of interest. Accordingly, until the insurer performs, be very careful.

3. Cooperate with the insurer. While an insured must be wary, it must also cooperate with the carrier. Almost all policies have a “cooperation clause,” which provides that the insured must cooperate with the carrier in defending a claim. If the insured does not cooperate, the insurer may raise breach of the cooperation clause as a defense to coverage, and sometimes courts will deny coverage on this basis.

It may seem odd, to say the least, to be on guard and to cooperate at the same time. Nevertheless, this is the line an insured must walk, particularly in the “never pay” era.

4. What to expect if you submit a claim.

a. An Acknowledgement letter. Within a few days to a week after the claim is reported, the insured should receive an acknowledgment letter. This letter should confirm that the claim has been received and that the carrier is working on it. The letter should also provide the name of a claims adjuster and a claim number. Future communications should be addressed to this adjuster and should reference the claim number. The acknowledgment letter may say that the insurance company reserves its rights pending further review and investigation of the claim.

If you do not receive an acknowledgment letter within 10 days, it is a cause for concern. Check with your broker and consider sending further notice. If you send additional notice, be sure to reference the prior notice.

If the initial acknowledgement letter states that the insurer is generally reserving its rights, it is generally not a cause for great concern, as it is typically contained in the form used for such letters. If specific issues regarding coverage are raised, the acknowledgment should be treated as a reservation of rights letter, discussed below.

b. A Reservation of rights letter. An insurer may later provide a more detailed letter that is called a “reservation of rights” letter. As noted above, some acknowledgment letters should be treated as a reservation of rights letter. In this letter, the carrier will (1) set forth the facts of the claim, (2) quote policy provisions that may be applicable; and (3) will tell the insured what it plans to do. These letters are typically at least 3-4 pages long, and, in some instances, much longer.

In many instances involving liability claims, the insurer will say that it will “provide a defense,” but that it reserves all rights to withdraw the defense and not pay the claim. What this means in ordinary terms is that the carrier, for the time being, will appoint and pay for a lawyer to defend the insured, but may cut off the defense at a later date. The insurer may also refuse to pay for any settlement or judgment (the indemnity obligation).

If you get a reservation of rights letter, it is a cause for concern. If the claim is at all significant (meaning that it is a claim that would be a burden to handle without insurance), it is time to consult with an insurance coverage lawyer.

In this regard, a few words should be said about the lawyer appointed by the insurance company to defend the underlying liability claim. This lawyer will, in most instances, be chosen by the carrier and will be paid directly by the carrier.

There is again the potential for a conflict of interest between the insurance carrier and the insured regarding the defense lawyer. Unlike the claims adjusting process (at least absent a “Chinese Wall”), however, there are some checks and balances on this potential issue. It is clear under Georgia law that any lawyer appointed by the carrier is the insured’s lawyer. The lawyer owes all professional obligations to the insured, despite being paid by the insurer.

In this day and age, most “insurance defense” lawyers understand that they owe their primary obligations to the insured and will not cross the line. The lawyer appointed by the insurance company and defending the case cannot get involved in the coverage determination, either for the carrier or for the insured. If an insurance defense lawyer crosses this line and appears to be wading into the coverage issues, particularly on behalf of the carrier, it is a cause for great concern and the insured should consult with coverage counsel immediately.

Whether there appears to be a coverage issue or not, insureds should insist on being copied on all communications from the lawyer to the carrier, including any regular reports on the case. This demand will not only help the insured stay informed, it will help make sure that defense counsel sticks to its primary obligations.

c. A denial or declination letter. A denial or declination letter that means that, so far as the insurer is concerned, it is not going to pay the claim, or even defend a liability claim. A denial letter looks much like a reservation of rights letter: It typically summarizes the facts, and quotes provisions of the policy at length. The letter states, however, that the insurer is not going to provide a defense or pay the claim.

If an insured gets a denial letter, it should immediately consult with a coverage lawyer if it has not already done so. If there is a liability claim, the insured must also make sure that any litigation is answered and otherwise defended.

If there is a denial, the insured has essentially three courses of action: (1) the insured can accept the denial and deal with the claim itself; (2) the insured can respond to the letter with additional information or analysis and urge the carrier to reconsider its position; or (3) the insured can institute litigation against the insurer.

d. A declaratory judgment action. Sometimes, almost always involving a liability claim, a carrier will file a “declaratory judgment action” action against its insured. In a declaratory judgment action, an insured claims to be “uncertain” of its duties and asks a court to determine if it must defend a lawsuit and pay a claim. Often, the insurer will continue to defend the underlying claim under a “reservation of rights” pending the result in the declaratory judgment action.

A declaratory judgment action may sound innocuous, but do not be misled. This is a lawsuit in which the carrier is seeking the court’s blessing to deny a claim. It requires the insured to engage coverage counsel at the insured’s expense and to defend the claim, and possibly to assert counterclaims.

In many situations, an insurer filing a declaratory judgment action has already determined in its mind that there is no coverage, and is looking for the court to approve its determination. In other situations, the insurer may legitimately be unsure of its obligations. In other situations, an insurer may have determined that there probably is coverage, but perhaps its adjuster acted too aggressively. In such a situation, a declaratory judgment action may be used, ironically, to avoid or defend a claim that the insurer acted in bad faith.

This is a matter of opinion, but in my view, declaratory judgment actions are also sometimes also used as a weapon to conduct economic warfare on the insured. Carriers know that many insureds lack the resources to defend a lawsuit (ironically, that is why they purchased insurance), or that defending a declaratory judgment action will be a large financial burden. What the carrier may well be aiming for is capitulation or a settlement under which it lives up to less than its full obligations.

If a declaratory judgment action is filed, an insured has little choice but to hire a coverage attorney and defend the claim. This is simply the reality in the “never pay” era.

Conclusion. This post has covered some more of the steps you should take to fight the “never pay” policy. The next post will cover how to find a coverage attorney, and some of the legal steps that can be taken to fight the “never pay” policy.

Sunday, February 14, 2010

Is the "Never Pay Policy" Making a Comeback? How to Fight It (Part II)

By John L. Watkins

“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

In the last post, I focused on the business and societal ills that can result from insurance carriers acting as if they were selling Monty Python’s proverbial “Never Pay” policies. I also mused about a Utopian carrier that would write clear and easily understandable policies, and that would actually pay claims instead of paying claims adjusters to write reservation of rights and denial letters and a legion of lawyers to fly around the country litigating with the insurer’s own customers.

Now, I do not mean to suggest that carriers never pay claims. In many instances, they act responsibly. Unfortunately, it seems that some carriers (or certain claims adjusters) act as if they sold you a Never Pay Policy, and this attitude, at least based on observations from my little part of the legal world, seems to be increasing. Equally unfortunately, our Utopian carrier, at least to my knowledge, does not exist.

This post will begin to explore how the real world works and some tips for navigating the confusing world of insurance. I must, however, begin with this caveat. There is no way to make sure that claims that arise in the future will be covered, and there is no way to assure that your carrier will be reasonable. I am often truly astonished at the positions taken and incredibly creative arguments that insurance adjusters make to try to deny claims. There are some tips that may, however, increase your chances of success. This post will cover some of the basics. The next post will discuss when you probably need to consult with coverage counsel.

1. Find a good broker. Most insurance is bought through brokers or agents. Find an experienced broker, preferably one with experience in writing insurance in your industry. The broker should take the time to meet with you and develop an understanding of your business. The broker should know what you do and how you work in considerable detail. You may have particular risks that raise concerns. These risks should be discussed in detail. A good broker will likely raise other issues that may never have occurred to you. If a broker does not want to take the time to understand your business and review the risks, find another broker.

How do you find a good broker? Ask around. Do some research on the broker. Find out how many people the broker employs. It is probably not necessary to use a giant like Aon or Marsh, but be sure that your broker is well established. It is also helpful if the broker has a little size. Why? If a carrier is balking regarding a claim, a broker can sometimes step in and act as your advocate. It does not always work, but sometimes it helps. If the carrier views the broker as an important source of business, it may be more likely to pay the claim.

It may be helpful if you put in writing to the broker the risks that you want to make sure are covered. This will make sure that the broker has focused on the issues. Ask the broker to review any exclusions to coverage or endorsements that the insurer will require. Endorsements can include additional exclusions. Go over all exclusions and endorsements with the broker, and try to make sure that they do not create a hole in the coverage for potential risks of your business. If the broker makes a mistake and advises you improperly regarding coverage, the broker may be liable to you if the carrier fails to cover a claim.

A necessary implication of using a broker is that you will not be purchasing insurance online. Many carriers, particularly personal lines carriers (home and auto) are selling insurance online in an effort to cut out broker or agency fees and commissions. I would not advise buying business insurance online and would advise you to exercise extreme caution in buying even personal lines insurance online. A good broker is well worth having.

2. Check out the carrier. A broker may propose one carrier or several. Check out any proposed carrier’s financial strength. The broker can usually provide financial strength ratings, such as by A.M. Best, and explain them to you.

Any broker or policyholder’s coverage lawyer knows that some carriers are better about paying claims than others. Ask the broker about this issue. Ask the broker whether the broker would be comfortable relying on this carrier for its own insurance. Do some of your own research. “Google” the carrier online. You will probably begin to get a feel for the carrier’s reputation.

3. Do not buy based solely on price. It is tempting, particularly in the current economic environment, to take the cheapest quote that is offered. If your choice, however, is between buying a cheap policy from a carrier with a bad reputation and buying a somewhat more expensive policy from a carrier that has a good reputation, think very carefully before taking the “bargain.”

It is also worth noting that you should make every effort to make sure that you are comparing “apples to apples.” Make sure that your broker outlines any substantive differences between the cheaper policy and the more expensive policy. The cheaper price may be partially explained by higher deductibles or self-insured retentions (the part of the loss you must pay), lower policy limits, or endorsements that eliminate coverage for particular risks that may be important to your business.

4. Get copies of your policies and keep them with other important papers. I am often asked to evaluate insurance coverage issues. Of course, the first thing I need is a copy of the insurance policy. It amazes me how difficult it is in many instances simply to get a copy of the policy.

It also is clear to me that many business people do not even have a clear understanding of what an insurance policy is. Often, when I ask for a copy of the policy, I am provided with a one page copy of what is known as the “dec page.” This provides almost no help in evaluating coverage, other than determining the policy limits.

Just so the issue is clear, an insurance policy typically consists of three components. First, there is the previously mentioned declarations page, or “dec page.” This is usually one page (sometimes two) and it summarizes the types of coverage and the policy limits. The policy limits establish the maximum amount the carrier will pay. Limits are typically stated as “per occurrence,” meaning the maximum the carrier will pay for one event. Sometimes, the limits are stated to be “per claim” or “per accident,” which will establish the maximum amount the carrier will pay for a single claim or accident. There are also “aggregate” limits. Aggregate limits establish the total maximum amount the carrier will pay in a given period (typically a year) regardless of the number of “occurrences” or “claims.”

Note: There are important differences between “occurrence” based coverage and claims made coverage. These differences are beyond the scope of this post, and should be discussed with the broker. Most general liability coverages are “occurrence” based. Much professional liability coverage (such as for architects, engineers, attorneys) is written as “claims made” coverage.

The second part of the policy is the “body” or “policy form.” This is the main part of the policy, and includes the insuring agreement (what the policy will cover), exclusions to coverage (types of events that are not covered), conditions to coverage, and definitions. This, in essence, is the insurance contract, and is what a coverage lawyer or insurance professional will need to begin evaluating any coverage question.

The third part of the policy consists of endorsements. Endorsements are amendments to the policy. Endorsements can be very important and they can substantially alter the rights of the insured. Endorsements can include, for example, additional exclusions to coverage. For example, one now often sees endorsements with “fungus” exclusions. These exclusions were added by many carriers after many claims were reported several years ago for alleged mold-based property damage or bodily injury.

The policy will usually be delivered after it is purchased, sometimes long after it is purchased. The policy should include the declarations, policy form and any endorsements. Typically, it will be stapled together.

It is a good idea to keep a copy of the policy stored away from your place of business. Why? If there is a loss (a fire, for example) at your place of business, the policy will probably be destroyed. Copies can be maintained in a safe deposit box, or a copy could also be stored in an electronic form where it will be remotely backed up.

The important thing is to have ready access to the policy. Yes, your broker should have a copy. Yes, it should be possible to get a copy from the insurer. However, you would be surprised how tedious this process is. If you have a catastrophic claim and need to consult with an coverage attorney immediately, it is vastly preferable to have a copy of the policy readily available.

5. When you get the policy, review it. Take a careful look at the policy. Does it appear to be what you and the broker discussed? Do there appear to be exclusions or endorsements that affect coverage that were not discussed? If so, call your broker and go over these issues immediately.

One of the practical problems with the way insurance is sold in the U.S. is that the policies are not written in a readily understandable way. Unfortunately, even a careful reading of the policy is not likely to identify every possible issue that may arise. However, it does not hurt to go over the policy and to bring any possible issues that jump out to your broker’s attention.

6. Make inventories and take pictures. A big problem that exists for many property claims is documenting the property that was destroyed. It is a good idea to make lists of property (including, if known, the purchase price), and to take photos or videotapes of property. There are many cheap and easy to use video cameras, such as those by Flip video, that will fit in a shirt pocket. Many digital cameras, even ones that are quite inexpensive, now have video capability. Lists and videos can help eliminate disputes in the event of a claim. Electronic copies of lists and videos should be stored remotely or so they are backed up remotely.

7. If there is an event that may lead to a claim, take pictures. If there is an unusual event that may lead to a claim – such as, for example, a large hail storm – take pictures of the event. Take photographs of the hail or the weather event. If you have a video camera, take video.

It is unfortunate, but some insurance claim adjusters will try to deny that a weather event was substantial enough to cause damage. They may argue that generalized weather information, or even damage to surrounding buildings, is not enough. Although I do not think that many courts would agree with this approach, having photos or a video can end the debate.

Note that some policies require that particular types of property be separately scheduled. This can be true for personal and business lines of insurance. Ask your broker whether this should apply to you, particularly if you have unique and highly valuable property (jewelry, artwork, unique business machinery, etc.).

Conclusion. If you follow these basic steps, you will be more ready to deal with a claim than the average insured. In the next post, I will get into some of the details that may arise if there is a claim and if you need to consult with an insurance coverage attorney.

Sunday, February 7, 2010

Is the "Never Pay Policy" Making a Comeback? Fight It!

by John L. Watkins

“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.

It seems impossible to watch five minutes of television without being bombarded by insurance commercials, whether featuring a talking gecko, cavemen, “Flo” with the nametag, a Benji-like dog losing sleep over worries about his bone, or the dulcet tones of actor Dennis Haysbert (he does have an amazing voice) asking whether you are in good hands. Although many of these commercials focus on saving money, they also promise you will be well treated if there is ever a claim. You are told you will be treated like “a good neighbor,” will experience “concierge claim service,” or will be in the aforementioned “good hands.”

It is not surprising that insurers spend hundreds of millions of dollars portraying themselves in this manner. After all, what insurers are selling is the promise of protection. Insurance is a product that you hope never to use, but, when you need it, you expect it to be there. Please be assured that I am not anti-insurance. If you have read this blog or listened to my podcasts, you know that I encourage businesses to establish a relationship with a good insurance broker, to put a good insurance program in place, and to review that insurance program regularly. In the past, I even represented a large carrier group (fortunately, one of the better ones).

Nevertheless, a large part of my practice now involves representing policyholders (typically commercial policyholders) when insurance companies will not pay their claims. I’m talking about liability claims, not health care and other types of claims. Maybe it is just my little part of the world, but my recent experience suggests that insurers are reserving rights and contesting claims with incredible vigor. Many insurance companies, quite frankly, act as if they are in the business of selling “Never Pay” policies, and they certainly do not always act as they portray themselves in their never-ending commercials.

If my recent experience does represent a larger reality, it bodes very badly for business. In fact, it bodes very badly for society in general. Small business is the backbone of our economy, and, if we are to recover from the current economic woes, small business will lead the way. Small businesses, however, can literally be wiped out a single claim if their insurance company does not pay.

In this regard, it should be remembered that the typical liability policy makes two fundamental promises by imposing two fundamental duties on insurance companies. The first duty is the duty to defend. This means that if you or your company is sued, the insurance company must appoint and pay for a lawyer to defend the case. If the insurance company refuses this fundamental duty, the cost of paying for a defense can impose a huge burden on a small company.

The second duty is the duty to indemnify, which is the duty to pay settlements or judgments to resolve the claim. Buildings and lives cannot be rebuilt if insurance companies do not pay claims. Injured parties will not be compensated if insurance companies do not pay claims. In short, business depends on insurance companies keeping their promise of protection, and, to some significant extent, society does as well.

It is my sincere hope that one of these days a carrier will come along with a new business model. First, this carrier will write policies that ordinary people can understand that clearly state what is covered and not covered. If an insured needs additional coverage, the insured will be able to buy additional coverage for the risk, again in plain language.

This carrier will realize, finally, that its insureds are customers, not adversaries, and will treat them as such. It will deal openly and honestly and will resolve doubts in favor of the insured, as the law already says it should. It will hire claims adjusters that focus on fairly paying losses, rather than writing reservation of rights and denial letters. This carrier will have no need for a legion of insurance coverage lawyers flying around the country filing lawsuits against the company's customers seeking court permission to deny coverage.

This carrier will have no need to spend millions of dollars on endless television commercials. It will become known not for what it says it will do, but for what it actually does. Its reputation will spread like wildfire in the community and it will never want for business.

This post has defined the problem and posed a Utopian solution. Unfortunately, our mythical perfect carrier is likely to remain a myth, at least in the foreseeable future.

For now, you must remain vigilant against the Never Pay Policy, and fight it at every turn. In the next post, I will cover a few tips that will help you fight the good fight and hopefully win.