“If a tree falls in a forest and no one is around to hear it, does it make a sound?” For centuries, that philosophical question has been inspiring vigorous discussions of perception and reality.
Turn that question around and recast it from a claims perspective: “If a tree falls on a boat, is it covered?” Presumably, the answer would be a simple yes or no, depending on a customer’s policy language—not grounds for debate.
Yet Mark Goldwich, now an adjuster in Jacksonville, Fla. who previously spent four years working in a catastrophe claims center for a large, national insurance company, saw firsthand that the answer often was, “That depends.” Interestingly, it was not policy language that governed the decision but rather how that language was interpreted from one jurisdiction to the next.
Discrepancies in coverage interpretation do exist. “When going from state to state, you can see discrepancies in coverage interpretations,” Goldwich says. “Where a tree fell on a boat in a windstorm, if there wasn’t coverage under that policy for wind for that boat being damaged, you might find coverage by calling it a falling object. One insurer would allow that, and another wouldn’t.”
If a major storm hit several states over the course of two or three days, there could be different interpretations of coverage language from state to state, he says, and sometimes the coverage interpretations would even change during the course of the storm.
Here Come da Judge
For the sort of cases that Goldwich witnessed, the cost impact falls pretty much on the insurance underwriter whose operations allow the differing interpretations within its claims division. However, coverage interpretation becomes a multi-million-dollar problem for the entire industry when courts get involved and issue rulings that cast contract language in a very different way than intended when the policy was underwritten.
“The fact that similar contract language can be interpreted very differently, not just across state lines but within states, either in different courts or in the same court over time, is a huge problem,” says Robert Hartwig, president of the Insurance Information Institute (III). “An insurer writes a policy, underwrites, and prices based on prior interpretations of contract law. If that changes, the underwriting and pricing of the policy is inadequate because the risk has changed.”
Hartwig estimates that on an annual basis, contract disputes could easily cost “tens of millions of dollars and perhaps several hundred million dollars, depending on the situation.” And those figures are based only on the fees to defend and do not reflect the awards in the cases, most of which are settled out of court.
A classic example of the far-reaching, costly impact was the wind versus flood coverage dispute after Hurricane Katrina. Although the language on flood exclusion in homeowners policies is nearly identical in every state and has been upheld by many courts, a number of lawsuits were filed seeking to bring coverage for flood damage under a standard homeowners policy.
“There is no premium charged or reserves established to pay these kinds of losses, yet insurers are having to pay many millions of dollars to defend themselves in court despite the fact that many precedents are on their side,” Hartwig points out. “They won, yes, but it took two years of being dragged through the courts and lots of negative publicity, all to demonstrate that people are entitled to the coverage they purchased, no more and no less.”
“It absolutely does add to the cost of insurance when coverage is flipped on its head like it was after Katrina,” says Michael Kay, the online editor of Claims Pages and an adjuster for 15 years. “If the courts had found ultimately that flood was covered, policies would have doubled in premium as a result. This was actually what an insurance company would describe as a legal hazard, where the courts overturn prevailing knowledge in an area.”
In the Eye of the Beholder
Differing interpretations of coverage are common in auto policies, particularly in the areas of uninsured and underinsured motorists and whether or not it is possible to stack coverages, Kay says.
In many states, $25,000 is the minimum that can be purchased for bodily injury for an individual, $50,000 is the minimum for the entire accident, and $25,000 is the minimum for damage to a vehicle. Normally, in the case of a severe accident when the at-fault party has only minimum coverage, a person who has purchased underinsured motorist coverage from his own carrier can collect the difference between the underinsured policy limits and the minimum limits in the policy of the at-fault party.
“But where it gets murky,” Kay says, “is that in some states, lawyers have been successful in convincing courts that this is not the proper method for determining the amount of underinsured motorist coverage that is available,” frequently to the benefit of the at-fault party. “The lawyers are convincing the courts to do these creative things, and what happens is that the plain language of the policy is thrown out.”
Another trouble area relates to environmental claims. For example, when a Texas court concluded that mold was covered under a standard homeowners insurance policy, it triggered a wave of litigation and cost insurers big bucks in defense costs. Even though few other jurisdictions agreed with that finding, essentially all homeowners policies nationwide ended up being changed to guard against the possibility of future mold claims.
“It involves all lines—personal and commercial, such as general liability and umbrella liability,” says Randy Maniloff, a partner in the business insurance practice group at White and Williams LLP in Philadelphia, who is writing a book on differing coverage interpretations. “The very nature of the court system—based on state sovereignty—makes it inevitable that different states will interpret policy language differently. Also, whether certain policy language is ambiguous is a subjective question, and different judges will see things differently. There are even disputes between judges within the same state over how to interpret the same policy language.”
They Feel The Pain
Courts rule emotional injury to be compensated as “bodily.”
Randy Maniloff, a partner in the business insurance practice group at White and Williams LLP in Philadelphia, prepares a list each year of the 10 most significant coverage decisions from courts around the country.
One of the cases making his 2008 list came from the Montana Supreme Court, which significantly changed the interpretation of an insurance policy’s bodily injury coverage to include “emotional injury” of a person who did not suffer bodily injury. The District of Columbia Court of Appeals issued the same sort of ruling.
In Allstate Insurance Company v. Wagner-Ellsworth, Terry Wagner-Ellsworth, the driver, struck and seriously injured a child, Matthew Rusk, as he and his brother, Brandon, were crossing the street in front of their elementary school. Brandon witnessed the accident, and Matthew’s mother, Tiffany Rusk, arrived at the scene while her son was still lying on the street.
Although Allstate paid the policy limit for Matthew Rusk’s bodily injury claim, his mother filed a lawsuit seeking coverage for the emotional injuries she and her other son suffered, alleging they were damaged because of the bodily injury suffered by Matthew.
The Montana Supreme Court held that the policyprovided coverage for “damages which an insured person is legally responsible to pay because of bodily injury sustained by any person.” Maniloff noted the Montana court also held that emotional injury for the non-injured party “accompanied by physical manifestation,” such as migraine headaches and a physical response on hearing sirens, constitute “bodily injury as defined by the Allstate policy,” suggesting a possible additional limit of liability.
Donald Malecki, a principal at Malecki Deimling Nielander & Associates, an insurance risk and management consulting firm in Erlanger, Ky., says differing interpretations of the same language is not only “a big problem” but an irritation.
“I am really shocked at some of these decisions, and I get really annoyed,” says Malecki, who has been in the business nearly 50 years, has written 10 books on insurance issues, and is frequently an expert witness in insurance cases. “I have got to think at some times, it is how the judge feels in the morning or whether opposing counsel is tired or whether it is raining or sunny outside” that forms the decision.
Even if the claims cases may seem capricious, Hartwig says, insurers have no choice but to defend themselves in court.
“Many lawyers will try to worm their way into a contract, then try to erode prior precedent. Insurers are always having to defend the integrity of the contract, and that means generally the language in the contract,” according to Hartwig. “You have to be willing to spend the time and the money to make the point. It is well beyond defending the case at hand. You are also guarding against future claims and cases.”
In addition to mounting a legal defense, insurers respond to differing interpretations by tightening the policy contract language.
“Policies are constantly being updated and revised to address changing legal circumstances and challenges,” Hartwig says. “If there is a case that appears to breach the contract, clarifying language may be issued in subsequent policies.”
In the end, Hartwig contends, although these cases frequently are described as “victories for consumers, this kind of decision puts the insurer on the hook potentially for billions of dollars in losses that they have not included in the price charged or reserved for. And that, down the road, could create a cost of tens of billions of dollars that ultimately is borne by consumers. There is no free lunch.”
Neither is there any obvious solution to the problem.
“There is simply no way to put an end to the situation,” said Maniloff. “It is inherent in the very nature of insurance and our legal system. First, an insurance policy is a fixed document. Its terms are set out at the beginning and do not change. However, its purpose is to address fortuitous risks, of which there could be an infinite number. In other words, a static and fixed document is required to respond to an unknown and variable number of circumstances. Thus, it is inevitable that disputes will arise over the scope of the coverage.
“Unless a policy covers a very specifically defined risk, such as life insurance or title insurance, the question of what was ‘intended to be covered’ will be in the eye of the beholder.”
Cheryl Arvidson is a Claims Advisor contributing writer.