Ethics Of Insurer Denial Questioned

An FC&S Bulletins user sent us a question that raises ethical issues that can be looked at favorably from either position you care to take, and one, it appears, about which no bright line ruling can be made. That makes it a perfect topic for this months The FC&S Answer.

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

This insurance professional in a multistate brokerage operation based 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 in question.

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

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

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

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

For example, the suit could be a grudge suit, and if the plaintiff knew that his adversary would have to foot the entire defense and possible judgment, it might affect the aggressiveness of litigation.

Further, the client was kind of mad that the insurance company would do such a thing. He thought that maybe being told there wasnt going to be the big-gun defense provided under the duty to defend provisions of liability policies might somehow hinder his clients developing defense strategy and that it was somehow inappropriate.

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

There are no provisions in any of the liability forms I reviewed (the commercial general liability, the homeowners liability section, the business owners liability provisions) that affect this practice. There are no conditions or provisions in the form that speak at all to whether the insurer has the right to directly communicate to a claimant under the policy or that persons attorney in the event of coverage denial. There is no “Our Duties in the Event of a Denial” section in any liability form.

Neither would any of the privacy laws presently in place preclude this act. HIPPA would not apply. The constitutional penumbra right (rights not specifically granted, but arising from the Necessary and Proper Clause of the United States Constitution) of privacy would not be able to be invoked, as, after all, a lawsuit is publicly filed and available to any who care to see it.

I turned to Ken Brownlee, the Claims-Conscious Iconoclast columnist for our sibling publication Claims magazine. I dragged Mr. Brownlee off his riding lawnmower at his home in Atlanta and put the question to him.

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

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

It is true that the existence of insurance or the amount of insurance limits available is generally not admissible as evidence in a civil trial. But this isnt being offered as evidence in a trial. If anything, following Mr. Brownlees reasoning, its an attempt to thwart litigation from the get-go: “Hey folks, nothing under this lily pad, better move on to where the feeding is better.”

There is one more point, not exactly a four-corner match, but somewhat analogous to the fact at hand. In some states, Virginia, for instance, the insurance company has a statutory obligation to provide notice to the adverse party in a claim involving one of its insureds if the insurance company is going to deny defense or judgment reimbursement because of a breach of policy condition. Now a policy condition (such as timely notice, misrepresentation or fraud, etc.) is not the same thing as a policy exclusion, but at least this information lends some kind of support to the insurers act.

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

Bruce Hillman, JD, is Editorial Director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, in Erlanger, Ky. Questions and comment are invited at fcs@nuco.com.

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

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Ethics Of Insurer Denial Questioned

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