Claims files end up in litigation for a variety of reasons. Unless the reason for the litigation was intentional on the part of the insurance company or self-funding entity, the litigation may indicate unsatisfactory service by the claims department or an individual adjuster. Litigation is an extra expense on top of the value of the claim, unless the basis for the dispute was legitimate and unavoidable.
Why do claims files end up in litigation? There are a number of reasons why an insurer may elect to litigate a claim. The first is that there is a coverage dispute and the insured does not agree with the insurance company that the coverage does not apply to the claim. In such cases, the insurer may file a lawsuit with the court requesting declaratory relief, even if the insurer is actually defending the claim under a reservation of rights (ROR). The court will then review the claim and the coverage and look for the “eight-point match,” under which the “four corners of the policy” must match the “four corners of the claim or lawsuit.” If they do not match, then coverage does not apply—or at least it does not apply in totality. The parties must then agree as to what is covered and what is not covered as well as who will pay for non-covered parts of the claim.
Source of Coverage Disputes
Coverage issues can arise from many causes involving almost any aspect of the policy. The claim may involve a question of whether the parties against whom the claim is being made are insured under the terms of the policy or by virtue of some contract. The dispute may involve a condition, such as late notice or, in a “claims made” policy, determination of when the insured first knew about the claim and whether it was made within the time prescribed by the policy. The claim may not fit—or may not totally fit—the insuring agreements. Many lawsuits against insureds are filed for financial damages. Financial damages are neither bodily injury nor property damage, except to the extent of special damages or loss of use of physical property. Perhaps the most common source of a coverage issue is an exclusion. If a loss is clearly excluded, then there is no coverage.
Now, what does the adjuster do with such a lawsuit? He or she could call the insured and say, “Sorry, this lawsuit is not covered. A denial letter is in the mail.” That would make quick work of it—and would result in a lawsuit. Or the adjuster could call the insured and explain that the way the lawsuit is worded creates coverage issues. Since the insurer needs to act immediately in the insured’s best interests, it would send an ROR letter reserving the right to deny coverage if the allegations turn out to be true—but in the meantime the investigation would proceed and the insured would be defended. Then the adjuster would proceed to investigate and, in 99 percent of the cases, find that the allegations of an “intentional act” were not true.
But there is that one percent of cases where it might be true. In such a case, the insurer may elect to take to court the evidence that the insured knew the plaintiff, that he was angry with the plaintiff and did intentionally ram the plaintiff’s auto with the intent to injure the plaintiff—and seek declaratory relief that further defense is not owed.
Then, if all this was done and the factors discovered were favorable to the insured, did the adjuster sit down with the attorney and discuss the facts? Today it is almost unheard of for an adjuster to actually meet with a claimant’s attorney and discuss the claim. If the attorney is sitting with a file a foot deep and the adjuster has a file that has only a police report and the medical bills in it, the adjuster will not be able to correctly evaluate and reserve the file and conduct a reasonable negotiation.
Litigation is costly to both sides. If the adjuster has properly investigated the facts as to coverage, liability, and damages, then every attempt to resolve the claim without litigation should be made. Few insurers today allow their adjusters to do that. Instead, there is a phone call or two, an offer, counterdemand, new offer, and a “take it or leave it” new demand followed by a delay in response while the reserves are updated. If this is what the auditor finds, then it is most likely the claim manager’s limitations on the adjuster rather than the adjuster’s own laziness that will be the cause of that lawsuit.
It is comparable to a patient seeing a doctor. The doctor makes a diagnosis but suggests a variety of expensive tests to confirm or rule out the diagnosis, partially out of fear that if the battery of expensive tests are not run, the patient might later make a malpractice claim. But every patient must be his or her own medical manager, asking for an explanation of why each suggested test is needed and deciding whether to proceed. A patient, after all, can say “No.” If the patient doesn’t, then sometimes the patient’s insurance company may have to say “No.”
Likewise, the attorney must provide the best defense for the client, the insured policyholder. But it is not always necessary to depose everybody in town and obtain five tons of documents if the claim does not warrant such. Therefore, the adjuster needs to be involved in the day-to-day litigation management, with the stated objective of resolving the dispute as quickly and cheaply as possible.