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

“This is the first time we know of that this has ever been offered,” said Jason White, a managing director for Professional Services Group of Swett & Crawford, in the Los Angeles office of the Atlanta-based wholesale brokerage, referring to its recently launched “Claims Dispute Insurance” product.

The new coverage, available to businesses of all sizes, will pay up to $250,000 in legal expenses associated with contesting the denial 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 in Chicago.

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

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

“There are a lot of lawyers who want to represent insurance companies. It's steady, easy money, and there's a lot of competition there,” he said. However, he noted, “there are not a lot of lawyers willing to go after the insurers in smaller cases.”

Mr. Surdyk said that during the course of his work with insureds, he found that while many clients had legitimate disputes with their insurers, the underlying claims being denied were small-dollar amounts relative to the legal costs of coverage disputes.

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

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

He believes disputes are most likely for employment practices liability insurance policies, followed by directors and officers liability, then errors and omissions, and then general liability policies.

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

In spite of the clear need for a resource to deal with this risk, Mr. White conceded that some retail agents were slow to embrace the concept of insuring the cost to bring litigation against carriers they represent.

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

He said his counterargument is that, “if everybody is honest about it, then it's a good product. If you want to have your head in the sand and pretend this doesn't happen, then you're never going to sell any.”

“It's just very na?ve for someone to think claim denials don't happen. They do happen–and they're challenged every day by coverage attorneys,” he added.

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

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

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

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

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

But the developers of claims-dispute insurance say it's a way for the insurance industry to check itself, and that the product is structured in a way that helps weed out frivolous claims from policyholders.

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

On the other hand, he added, “if an insurance company made a mistake, whether intentionally or negligently, then they can't complain if somebody calls them on it.”

“If they get it right, then there's no need for the product. If they 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 is get the right result,” he noted, referring to a feature that prevents frivolous policyholder suits.

A key feature along those lines is a coverage analysis of denied claims. Panel counsel attorneys on the product will review the claim and advise insureds as to whether they have justified allegations of wrongful denials, or if the insurance company denying the claim made the right decision.

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

On the other hand, insureds that move ahead to litigate in these situations 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 whole bill,” he said.

While there are currently four panel counsel law firms on the product, Mr. Robin said additions are possible, noting that he is in discussions with another law firm recommended by an insurance agent.

Mr. White said that while some brokers have in-house attorneys to perform the type of coverage analysis that comes with the claims-dispute insurance, the in-house attorneys do not have the ability 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 cost standpoint. Mr. Robin said premiums start as low as $1,000, and Mr. White explained that individual policies are rated against total premium volume at about a 1 percent rate.

For example, if the total premium a customer pays for commercial insurance–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 for coverage.)

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

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

While Mr. Robin expressed the view that the timing of the product launch is right from a buyers' perspective–because of a concern that soft market conditions might prompt a greater proportion of coverage declinations from carriers looking to keep costs down–he also said he didn't believe there was anything devious going on, on the part of the insurance industry.

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

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

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

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

Mr. Surdyk also doesn't see any trends toward a greater proportion of denials. “I just think there are more claims now [overall] because we live in a more complicated society where people sue a lot. Because of the increase in litigation, you just naturally have a bigger pool for insurance companies to get it wrong 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 that a claim made for coverage under the new claims dispute product could be denied, Mr. White stressed the fact that this is a legal expense product.

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

Special Reports /

New Product Covers Legal Costs If Buyers Decide To Challenge Claim Denial

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