The risk that a claim won't be paid–a potential downside thatevery buyer of insurance faces–was an uninsured exposure untilrecently, according to the developers of a new policy to providecoverage so that risk managers can contest such rejections.

“This is the first time we know of that this has ever beenoffered,” said Jason White, a managing director for ProfessionalServices Group of Swett & Crawford, in the Los Angeles officeof the Atlanta-based wholesale brokerage, referring to its recentlylaunched “Claims Dispute Insurance” product.

The new coverage, available to businesses of all sizes, will payup to $250,000 in legal expenses associated with contesting thedenial of an insurance claim under a commercial policy.

“We know that wrongful coverage denials occur in our industry.There's a reason coverage attorneys exist today,” Mr. White said,explaining the impetus for the product launch. In fact, he noted,the idea came from a coverage law firm–Surdyk & Baker inChicago.

Len Surdyk, a partner in the firm who spent the first 19 yearsof his career representing insurance carriers, has also beenrepresenting policyholders for the last three years.

“We saw a need in the marketplace,” Mr. Surdyk said, summing uphis firm's reasons for broadening the scope of the practice, andfor bringing the idea of claims dispute insurance to Swett &Crawford and NAS Insurance Services–the Encino, Calif.-basedunderwriting manager that writes the coverage on behalf ofsyndicates at Lloyd's of London.

“There are a lot of lawyers who want to represent insurancecompanies. It's steady, easy money, and there's a lot ofcompetition there,” he said. However, he noted, “there are not alot of lawyers willing to go after the insurers in smallercases.”

Mr. Surdyk said that during the course of his work withinsureds, he found that while many clients had legitimate disputeswith their insurers, the underlying claims being denied weresmall-dollar amounts relative to the legal costs of coveragedisputes.

“It wasn't worth it for a client to hire us to file a lawsuitagainst an insurance company over $50,000–and insurance companiesknow that,” he said.

Mr. Surdyk–who provided legal cost estimates for cases centeringon duty-to-defend issues arising under management and professionalliability policies–reported that “a fairly straightforward case”costs about $50,000 to litigate, while more complicated cases couldcost $100,000.

He believes disputes are most likely for employment practicesliability insurance policies, followed by directors and officersliability, then errors and omissions, and then general liabilitypolicies.

Even property policies give rise to claims disputes, added Mr.White at Swett & Crawford. “Really, that's an uninsured riskfor everybody. There's a risk of claims not being paid. You'retaking that risk. We're saying, we can insure that risk,” hesaid.

In spite of the clear need for a resource to deal with thisrisk, Mr. White conceded that some retail agents were slow toembrace the concept of insuring the cost to bring litigationagainst carriers they represent.

Some agents say, “This is ridiculous. Why would I go in thereand tell them I'm selling them coverage with a great carrier, andthen tell them they need to buy this,” he reported.

He said his counterargument is that, “if everybody is honestabout it, then it's a good product. If you want to have your headin the sand and pretend this doesn't happen, then you're nevergoing to sell any.”

“It's just very na?ve for someone to think claim denials don'thappen. They do happen–and they're challenged every day by coverageattorneys,” he added.

Rich Robin, president of NAS Insurance, actually sees a hiddenbenefit in the new product for agents–who are often hit with agentE&O lawsuits when insurers deny their clients' claims.

“Any commercial insured declined for a liability claim thattheir agent said they had coverage for is going to go [after] theagent,” he said. “The insurance agent's E&O carrier would be onthe dime to at least defend that agent.”

NAS, which develops innovative insurance products, as well asmarkets and underwrites them on behalf of carriers, had a concernof its own when initially presented with the concept for the newproduct–that it might be difficult to get market support. “Youcould get a situation where [an insurer] is paying for a claimagainst one of its own declinations,” Mr. Robin noted.

The problem was solved by exempting the supporting market fromthe application of coverage. “We won't cover a claims disputeagainst Lloyd's,” Mr. Robin said.

A similar concern trickles down to brokers. “There's a questionof whether a broker really wants to represent a coverage that mightgo after one of its supporting markets,” he said.

But the developers of claims-dispute insurance say it's a wayfor the insurance industry to check itself, and that the product isstructured in a way that helps weed out frivolous claims frompolicyholders.

“If you think about it, if the insurance company is doing itsjob correctly, getting good legal advice and acting appropriately,then it shouldn't care if an insured has this type of policy,” saidMr. Surdyk.

On the other hand, he added, “if an insurance company made amistake, whether intentionally or negligently, then they can'tcomplain if somebody calls them on it.”

“If they get it right, then there's no need for the product. Ifthey either accept coverage or deny based on a legitimate basis,then there's no issue,” he said.

“It's not a one-sided product. What it basically tries to do isget the right result,” he noted, referring to a feature thatprevents frivolous policyholder suits.

A key feature along those lines is a coverage analysis of deniedclaims. Panel counsel attorneys on the product will review theclaim and advise insureds as to whether they have justifiedallegations of wrongful denials, or if the insurance companydenying the claim made the right decision.

Mr. White and Mr. Robin explained that insureds who decide to goforward with litigation in situations where panel counsel attorneysadvise against it still get coverage up to the limit theypurchased–but on a 50 percent co-insurance basis. “They have to putsome skin in the game if they want us to pursue a claim that wedon't think is worth pursuing,” Mr. Robin said.

On the other hand, insureds that move ahead to litigate in thesesituations and win won't be responsible for the 50 percent co-pay.“We will have been proven wrong, so we'll end up paying the wholebill,” he said.

While there are currently four panel counsel law firms on theproduct, Mr. Robin said additions are possible, noting that he isin discussions with another law firm recommended by an insuranceagent.

Mr. White said that while some brokers have in-house attorneysto perform the type of coverage analysis that comes with theclaims-dispute insurance, the in-house attorneys do not have theability to litigate. “These guys carry a bigger stick,” he said,referring to the panel counsel firms.

Both men said the new coverage is economical from a coststandpoint. Mr. Robin said premiums start as low as $1,000, and Mr.White explained that individual policies are rated against totalpremium volume at about a 1 percent rate.

For example, if the total premium a customer pays for commercialinsurance–other than workers' compensation and health insurance–is$500,000, then the claims-dispute insurance will cost about $5,000.(Workers' comp and medical insurance are not eligible forcoverage.)

Mr. White said the coverage can also be offered on a portfoliobasis for discounted rates–for example, if an agency wants to givethe coverage as a benefit to all its clients, or to just its top50. While discounts will depend on the size of the portfolio, hesaid, they can be 50 percent or more.

As for underwriting considerations for the individual policies,Mr. Robin and Mr. White said that while particularly litigiousinsureds–those who appeal every claims denial–are viewed with ahigher degree of scrutiny, they don't ask who the insurers are orunderwrite based on the claims-paying reputation of carriers.

While Mr. Robin expressed the view that the timing of theproduct launch is right from a buyers' perspective–because of aconcern that soft market conditions might prompt a greaterproportion of coverage declinations from carriers looking to keepcosts down–he also said he didn't believe there was anythingdevious going on, on the part of the insurance industry.

“As professional underwriters, what we all try to do is covervalid claims and not cover claims that aren't valid…and it's acontract. So by intent and design, there's going to be some clarityon what should be declined and what shouldn't,” he said.

In some situations, he said, insurer decision-making moves inthe other direction, with carriers deciding to pay claims for whicha strict policy reading would prompt a declination.

Providing a hypothetical example, he said an insurer writing aworldwide Coca-Cola program might cover one questionable $100,000claim just so it can get the order on the business again thefollowing year.

“I don't think it goes the opposite way. I'm not accusing anycarrier of declining claims that should have been covered in hopesthat no one will complain,” he said.

Mr. Surdyk also doesn't see any trends toward a greaterproportion of denials. “I just think there are more claims now[overall] because we live in a more complicated society wherepeople sue a lot. Because of the increase in litigation, you justnaturally have a bigger pool for insurance companies to get itwrong sometimes,” he said.

“We hope this product will provide an incentive [for carriers]to always do the right thing,” Mr. White commented.

Reacting to a tongue-in-cheek suggestion in a media report thata claim made for coverage under the new claims dispute productcould be denied, Mr. White stressed the fact that this is a legalexpense product.

“It's not a liability product. So in that context, it's hard forme to see how that issue could arise,” he said.