Assessing Coverage by the Golden Rule

Since the dawn of property insurance when the “Names” of Lloyd’s did gentlemen’s business in London coffee houses, determining if coverage exists for a claim has posed challenges for insurers. Jurisdictional differences and insurers’ various philosophical approaches to coverage analysis make developing and declaring “best practices” difficult.

Best practices are linked to the so-called “golden rule”: Do unto others as you would have them do unto you; in other words, if the adjuster had a claim, how would he want his insurer to determine coverage?

The five best practices in evaluating a coverage issue can be summed up as follows:

The key is to avoid foregone conclusions that no coverage exists. If a problem with coverage is identified, however, you had better prepare to defend the denial.

Read the Policy
In many instances, coverage assessments are conducted based upon online forms, without consulting the underwriters to determine if those forms are actually a part of the policy in effect at the time and place of loss. It is imperative that the decision maker possess and read a complete copy of the insurance policy.

The policy should always be reviewed by the carrier in the spirit of granting coverage to the insured where allowed. Most jurisdictions construe any ambiguity in the policy language against the drafter, which is ordinarily the insurer. Of course, there are some accounts which have policies drafted by agents or brokers in a manuscript format. In those instances, the language might not be construed against the insurance company. Public policy favors finding coverage for an insured who has paid a premium for the insurance protection.

During a thorough policy read, you might find exclusions or violations that disqualify the claim. But the one constant on policies is that they vary, so dig for the details. Property policies generally involve either specified or named perils or “all risk” coverages. In the specified or named perils policies, you can hit the “easy” button. Coverage is available only in the event that the peril which caused the damage is named as a covered peril in the policy form.

In the newer, all risk policies, coverage is available for any loss unless it is specifically excluded or limited; thus, an insured must merely notify the insurer that property damage has occurred, it was caused by a fortuitous event, and it occurred within the policy period. Once the determination of a fortuitous loss occurs, there is a grant of coverage unless and until an applicable exclusion or limitation is discovered or there is non-compliance by the insured with one or more policy conditions, thereby voiding coverage under the policy. Late notice that prejudices the insurer in its investigation is an example of insured non-compliance with the policy. Fraud on the part of the insured is another.

In short, an adjuster’s first best practice is to begin with a determination of whether there is a grant of coverage under the applicable policy. If such coverage exists, you should look to the policy’s exclusionary language and any associated limitations to determine whether the existing coverage is removed. If no exclusions or limitations are applicable and no non-compliance with policy conditions is found, then coverage for the loss exists.

Parallel Investigation
Another best practice for the adjuster is to undertake a parallel investigation of the damages claimed while any coverage issues are being resolved. Most jurisdictions require insurers to assess damages while undertaking the coverage determination in order to prevent delays in compensation to the insured in the event of a finding for coverage.

This part of the process does not require any assumptions about the grant of coverage. It is primarily to assess damages. You might find during this investigation, however, that some damage from a covered peril is insured and some is not. For example, in the event of a windstorm or hurricane loss to a building, the damage to the building is payable, but any interior water damage may be limited or excluded unless there is an opening in the building envelope caused by the covered peril of windstorm.

Evaluation may involve site inspections, interviews with the policyholder and/or other witnesses to the events related to the claim, review of documentation submitted to support the claim, and potential involvement of experts to assess the cause of the damage and its measurement. If questions arise as to a determination or finding for or against coverage, it may also involve referral to counsel who knows the law of the jurisdiction and the manner in which the courts will interpret the policy provisions at issue.

In many jurisdictions, timing of the investigation is critical. Some states, through statute or regulation, impose time deadlines on insurers to deny coverage to an insured. For example, in Florida, the legislature recently enacted a “pay or deny” statute requiring that a residential or personal lines insurer communicate a decision on coverage and make payment within 90days of the claim being reported, in the absence of exigent circumstances. Failure to comply with that statute can result in assessment of interest on any sums ultimately paid and can constitute a violation of the statute. However, the failure to comply does not form the sole basis for any private cause of action brought by the policyholder.

In addition to adhering to statutory time limits, it is imperative that communications remain open between the policyholder, the insurer and their respective representatives. Most jurisdictions require a written explanation of the insurer’s decision to either pay or deny a claim. If payment is issued, an explanation of the calculation or basis for the payment is required. If coverage is denied, a written explanation of the denial is required with any supporting documentation included within that communication.

Prepare to Defend Yourselves
It won’t be as bad as a shootout at the O.K. Corral, but denying a claim can attract some heavy guns. Litigation isn’t the only option, though. In the event a claim is denied, both the insured and the insurer have a variety of options to resolve their dispute. The first option is negotiation and/or mediation. Generally speaking, these negotiations and/or mediation efforts are considered confidential and privileged from discovery in any subsequent litigation. Voluntary pre-suit mediations are becoming popular with insurers as a means to attempt to compromise on a coverage issue and provide some benefit to the policyholder for the premium paid, while still withholding full payment for non-covered loss or damage.

In the event the dispute involves both causation issues and scope or dollar amounts, the dispute could be resolved via the appraisal process provided for in the insurance policy. Different jurisdictions have varying interpretations of when appraisal is an appropriate vehicle for resolution. Most of the time, appraisal is not a means by which coverage issues can be determined and is limited to resolution of dollars. An appraisal proceeding ordinarily focuses on measurement issues, with coverage issues deferred to the court.

If neither appraisal nor mediation constitutes an appropriate method for claim resolution, the only other alternative is litigation—otherwise know as the L-word. Coverage litigation often can be very expensive for the insurer depending upon the complexity of the issues to be resolved and/or if the insured takes the position that he is entitled to pursue claims guidelines and internal interpretations of policy provisions. Depending upon the jurisdiction, these types of documents are not always discoverable. If the coverage issue is strictly a matter of law, the parties may elect to resolve the issue by cross motions for summary adjudication; nevertheless, policyholders are adept at creating fact issues to defeat summary judgments on coverage matters.

When a coverage denial is issued in a jurisdiction that provides for bad faith, it could lead to a breach-of-contract or declaratory-judgment action, which—if won by the plaintiff—can expose the insurer to a bad-faith or extra-contractual lawsuit.

The bottom line is that best practices in assessing coverages require that the insurer fully and fairly evaluate the facts and circumstances surrounding a claim, including but not limited to retaining an expert to assist in the determination of the cause of the loss and also legal counsel to advise on the applicable laws and interpretation within the pertinent jurisdiction. Coverage denials can often cause expensive litigation of the contract and extra-contractual issues. The ultimate in best practices is to make a fully informed, fair decision in a timely fashion and to communicate it clearly and concisely to the policyholder or his representative.

Janet L. Brown is a partner in the Orlando offices of Boehm, Brown, Fischer, Harwood, Kelly and Scheihing, P.A. Her practice concentrates on first-party property insurance coverage issues and insurance bad faith litigation.