Ethics Of Insurer Denial Questioned

An FC&S Bulletins user sent us a question thatraises ethical issues that can be looked at favorably from eitherposition you care to take, and one, it appears, about which nobright line ruling can be made. That makes it a perfect topic forthis months The FC&S Answer.

Im inviting opinion and comment, sort of making it anopened-ended FC&S Question that perhaps we can work out ananswer for collectively with our readers.

This insurance professional in a multistate brokerage operationbased in New York thinks he discerns a trend among some insurers.In these cases, a claim is submitted to the insurance company,which is subsequently denied as not being covered by the policy inquestion.

For example, the insured is being sued for a release ofpollutants and the liability policy in force absolutely excludesliability arising out of pollutant release.

The insurer, in addition to letting the broker and insured knowthe insurance companys position that there is no coverage under thepolicy, also sends a copy of the denial letter to the adversepartys attorney. Our FC&S user and his client are“concerned whether the insurer has the right to forward such denialletter to plaintiffs attorney.”

“Are there any laws that either allow or disallow same?” theprofessional asked us.

I went back to our subscriber and asked why there is concern andwhere this action might harm his client. He wasnt sure, but felt itwas a breach of privacy or ethics and just didnt sit right. He hadthe feeling that this information is proprietary between theinsurance company and the insured, for whatever reason, and thatthe denial of coverage should not be disclosed.

For example, the suit could be a grudge suit, and if theplaintiff knew that his adversary would have to foot the entiredefense and possible judgment, it might affect the aggressivenessof litigation.

Further, the client was kind of mad that the insurance companywould do such a thing. He thought that maybe being told there wasntgoing to be the big-gun defense provided under the duty to defendprovisions of liability policies might somehow hinder his clientsdeveloping defense strategy and that it was somehowinappropriate.

Thats one way to look at it. But as with so many issues, it isntthe only way.

There are no provisions in any of the liability forms I reviewed(the commercial general liability, the homeowners liabilitysection, the business owners liability provisions) that affect thispractice. There are no conditions or provisions in the form thatspeak at all to whether the insurer has the right to directlycommunicate to a claimant under the policy or that persons attorneyin the event of coverage denial. There is no “Our Duties in theEvent of a Denial” section in any liability form.

Neither would any of the privacy laws presently in placepreclude this act. HIPPA would not apply. The constitutionalpenumbra right (rights not specifically granted, but arising fromthe Necessary and Proper Clause of the United States Constitution)of privacy would not be able to be invoked, as, after all, alawsuit is publicly filed and available to any who care to seeit.

I turned to Ken Brownlee, the Claims-Conscious Iconoclastcolumnist for our sibling publication Claims magazine. Idragged Mr. Brownlee off his riding lawnmower at his home inAtlanta and put the question to him.

“Well, I dont see any problem here,” Mr. Brownlee said. “Infact, I view it as the insurance company doing a favor for apolicyholder whose claim theyve had to deny. The insurance companyis trying to lessen the chance of aggressive litigation by lettingthe plaintiff, and his attorneywho is counting on a contingency feepaymentknow that there will not be any deep pockets available inthe event of a judgment.

“I see it as appropriateand ethicalbehavior on the part of theinsurer,” he said.

It is true that the existence of insurance or the amount ofinsurance limits available is generally not admissible as evidencein a civil trial. But this isnt being offered as evidence in atrial. If anything, following Mr. Brownlees reasoning, its anattempt to thwart litigation from the get-go: “Hey folks, nothingunder this lily pad, better move on to where the feeding isbetter.”

There is one more point, not exactly a four-corner match, butsomewhat analogous to the fact at hand. In some states, Virginia,for instance, the insurance company has a statutory obligation toprovide notice to the adverse party in a claim involving one of itsinsureds if the insurance company is going to deny defense orjudgment reimbursement because of a breach of policy condition. Nowa policy condition (such as timely notice, misrepresentation orfraud, etc.) is not the same thing as a policy exclusion, but atleast this information lends some kind of support to the insurersact.

How do you feel about this? What if this was being done by yourcompany? Let us know and well pass along your opinion, thoughts andcomments.

Bruce Hillman, JD, is Editorial Director of Risk andInsurance Markets for the Professional Publishing Group of TheNational Underwriter Company, in Erlanger, Ky. Questions andcomment are invited at [email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, July 28, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.