Case Evaluations and Pre-Litigation Steps

Because this author is an attorney exclusively representing policyholders against insurance companies, this article will focus on the evaluating of an insurance recovery case and the pre-litigation steps from the perspective of a policyholder. However, much of the advice can be seen as mirroring what counsel for an insurance company would recommend for that side. For a policyholder faced with a property loss, lawsuit, or other claim that triggers its need for insurance, there are important tips and tactics that can help the policyholder obtain what they are entitled to recover. While this article provides a guide on evaluating and settling insurance claims, the reality is that insurance companies do not like to pay claims. As such, even if a policyholder is well-prepared and has a good plan in place, it must be prepared for the possibility that its insurance company will use every proverbial tool in its toolbox to delay or avoid paying its policyholder’s claim.

Case Intake and Informal Investigation Tactics

Following a loss, a claim, or a potential loss or claim, a company must be prepared to perform an investigation and take the steps necessary to protect itself with its insurance company. Below are some suggestions to protect your company: Provide Notice – The most important thing to remember is to provide notice of any loss or potential loss to your insurance company. Failure to provide timely notice can result in the loss of coverage, so it is very important to notice all insurance companies whose coverage is potentially triggered. For some companies, there may be only one insurance company providing coverage, but many companies end up with different coverages from different insurance companies or may have umbrella or excess policies. Because of the importance of notice to all insurance companies, notice should be provided in the initial stages of the investigation. It is much better to inform an insurance company that a claim is not being pursued than it is to be denied coverage because of failure to provide notice. Organize the Right Team – Your team should consist of people familiar with your liabilities (past and future), your insurance coverage (past and present), and the issues common to insurance coverage disputes. These people can be limited to company personnel or can include outside consultants. Depending on the loss, outside consultants can include lawyers, accountants, loss adjusters, insurance brokers, environmental consultants, insurance archaeologists, and others. Importantly, while the team should and will be expanded depending on the nature of the claim involved, a company should have some of the team set up in place for case intakes. In addition, employees of the company who likely will become aware of claims or potential claims should be aware of who the team is to ensures that the individual at a company who handles reporting to the insurance companies or brokers is notified of any loss or prospective loss. Record Your Investigation – A company facing either a third-party claim or a first-party loss will inevitably perform some internal investigation. The investigation can be anything from pulling the employee file of a former employee suing the company to hiring engineers to inspect physical damage. During all phases of these investigations, it is important to keep records of the results of the investigation. Being able to document your claim and loss will be a key component of reaching a successful conclusion with your insurance company. Keep the Insurance Company Up To Speed – Even if the insurance company appears to be indifferent or dithering, it is important to keep them up to speed with what you are doing. In addition, these updates should be written. Insurance policies typically include a “duty to cooperate” provision, which requires that the policyholder cooperate with the insurance company’s investigation and evaluation of the claim. While it can be very frustrating to respond to an insurance company’s repeated requests for documentation and other information, the policyholder must satisfy its cooperation responsibilities and it is helpful to preempt the requests of the insurance company. Do Not Rely Exclusively on the Insurance Company’s Investigation – Even if the insurance company appears to be accepting coverage and sending out experts to evaluate a claim, a policyholder would be mindful to perform their own investigation. Even if a company lacks resources to perform as complete an investigation as an insurance company, the company should be sure to perform some investigation and be prepared to respond if the insurance company makes any misrepresentations. Often an investigator for an insurance company will not be as familiar with the nature of a business and can end up misrepresenting because of a misunderstanding and it will be important for the policyholder to be able to respond quickly and effectively to any misrepresentations. Keep Track of Your Investigation Costs – Not all policies provide coverage for an investigation, but many do. As such, it is important to keep track of the costs that stem directly from the loss and keep track of those costs as part of your insurance claim.

Finding Sources and Limits of Coverage

As discussed above, the right team is an integral part of finding the sources and limits of coverage. Companies may have multiple insurance policies that all potentially provide coverage. In addition, a loss may arise from an occurrence that occurred years before the current policy period. It is important that companies keep records of their insurance policies so they know where to seek coverage. For example, plaintiffs alleging asbestos exposure often sue companies for occurrences that took place thirty or forty years ago and possibly with a former company. If a company fails to maintain its institutional records, there may be losses for which coverage existed but is now lost. Similarly, it is very important to obtain policies and review the language of the policies. Coverage may be available for losses from policies that upon reading the title doesn’t seem to apply. For instance, boiler and machinery policies cover significantly more than boiler and machinery, including, often, electrical systems, so a surge which destroyed computers and important data may be covered by a boiler and machinery coverage that is never reviewed. Be aware also that the insurance company will be looking to the language of the policy closely to determine if coverage is available. Language in an insurance policy is often convoluted and can appear contradictory. Still it is important to be mindful of the language, especially the language in exclusions when writing to an insurance company. Claims can be delayed significantly by misuse of words. For example, if a policy contains exclusion for contaminations and your loss involves products being lost during manufacturing because of faulty machinery, referring to the product as contaminated could seriously delay the claims. This does not mean that a policyholder should mislead its insurance company, but it should be mindful that someone without a full understanding of the nature of the loss may end up with a belief that coverage doesn’t exist based on poor language choice. 

Negotiating the Claim With the Insurance Company

When negotiating with the insurance company, a policyholder should plan for settlement while preparing for trial from the very beginning of the claim process. In the face of an insurance company’s delay tactics, formulating a comprehensive settlement strategy can be the best way to resolve an insurance claim as quickly, inexpensively, and favorably to the policyholder as possible. Consider the following suggestions. Control the Lawyers (and Other Non-Principals) – Allowing outside attorneys, including the insurance company lawyers, to become tangled in unproductive arguments only serves to slow down or entirely halt the progress of the negotiations and delay resolution. It is important to remember that, as mentioned above, the insurance company and its lawyers have an interest in delaying settlement. Therefore, while your team can provide advice behind the scenes, keep the business people involved in all aspects, and try to maintain a principal-to-principal line of communication. Avoid Open-Ended “Standstill Agreements” – Parties sometimes agree to delay or suspend litigation to allow time for settlement negotiations. While a “standstill agreement” can be a useful tool to resolve a claim and control litigation expenses, it is important to realize, however, that a standstill can reduce the policyholder’s settlement leverage. A standstill must have a clearly defined deadline that provides a realistic period for the policyholder to provide necessary information, for the insurance company to review the information and respond, and for negotiations to proceed. Any period longer than reasonably necessary to complete this process simply results in more time that the policyholder does not get paid. Be Prepared, Cooperative, and Persistent – Prepare thoroughly. A good starting point is to collect and organize some basic information, such as all potentially applicable insurance policies and related documents, and evidence of all relevant costs and expenses. Having this information in hand helps to realistically understand and evaluate the value of the claim, and means you have the proof necessary to substantiate the claim. Do not give the insurance company a reason to not pay your claim. Promptly respond to the insurance company’s reasonable requests for information, ask for clarification if you do not understand a request, follow-up on requests to which the insurance company has not responded, document all of your communications with the insurance company, maintain a professional and courteous demeanor, and be persistent. The last letter should be from the policyholder. Try to Accommodate Reinsurance Companies – Insurance companies are often concerned about whether their reinsurance companies will cover amounts that they pay a policyholder. Whenever possible, honor requests that assist your insurance companies in getting reimbursed from their reinsurance companies. Being cooperative in this respect maximizes the amount of money that you may be able to recover. Calculate Each Insurance Company’s Exposure – When a large claim involves multiple insurance companies, as most do, each insurance company’s exposure should be calculated separately. For “long-tail claims,” e.g., those involving multiple years of coverage such as environmental and asbestos claims, the calculation methods can be infinite. Evaluate each insurance company’s potential liability. Negotiate With One Company at a Time – Generally, negotiations that bring all of the insurance companies together at the same time may not result in prompt settlements. Because the issues in these negotiations are numerous and complex, settlements often take place separately with each insurance company. There are certainly exceptions to this rule, particularly where the claim involves a single year of coverage. Properly Document Settlement – As you progress through negotiations and near a resolution to the claim, make sure that you consider a few additional issues and properly document the settlement:

  • Focus on the Scope of the Release
  • Beware of Indemnification Provisions
  • Examine Allocation Issues
  • Do Not Bind Future Acquisitions

While each policyholder’s claim is unique, it is important to be mindful of some general issues that can be helpful when facing a dispute with your insurance company. Above all else, obtain and organize the facts, evaluate the strength and value of the claim, develop and pursue a strategy, and don’t give up. 

Tendering a Claim for Defense

Generally, policies and the law require that, for an insurance company’s duty to defend to be triggered, the policyholder must put the insurance company “on notice” of the claim. The policy will normally specify how notice should be provided, but often requires the policyholder to provide certain key information, including the name of the claimant, information about the claim, and names of witnesses. It is important to cooperate fully by providing what information you have available as part of the tendering of the claim for defense. In addition, the tender of the claim should be in writing and specify that you are seeking for the insurance company to provide a defense. Verbal communication throughout this process is fine, but all communication should be memorialized to avoid misunderstandings. In addition, a company should continue monitoring a litigation even after tendering a claim for defense. First, the insurance company may not be mindful of non-economic concerns and it is important for you to make counsel aware of these and work with the insurance company to have them addressed. Second, it is also important to monitor any counsel appointed by the insurance company. While counsel appointed by the insurance company represents you, they are in a difficult position, especially if the insurance company is providing defense under a reservation of rights. In some cases, because the duty to defend is broader than the duty to indemnify but only exists so long as there remains some possibility of the insurance company to owe indemnification, a motion for partial summary judgment or settlement with some parties can result in the duty to defend expiring and the policyholder left defending the remaining claims without the insurance company. Third, while the insurance company generally has the right to settle for amounts below the policy limits, such settlements can erode the total limit of liability, so a policyholder will want to be sure the insurance company is not seeking to get out quick and leave the policyholder exposed to future risk.

Insurance Company Claim Investigation

The insurance company has an obligation and right to perform a claim investigation. The goal of the policyholder during this investigation should be to cooperate and avoid creating delays. As discussed above, the mantra for a policyholder is to be prepared, cooperative, and persistent. Enacting this mantra will help in avoiding a long investigation and will put pressure on the insurance company to make a final determination. Although this investigation can be very frustrating for a policyholder, who often will have done an investigation and feel like coverage is clear, it is important to remember that the insurance company is often brand new to the claim. During the investigation is not the time to create an adversarial relationship with the insurance company. From the perspective of the insurance company, it is important for the insurance company to perform a full investigation, but not to delay the process for its own benefit. The right to perform an investigation and for the policyholder to cooperate should not be used as carte blanche authority to indefinitely delay payment. On the other hand, if the policyholder is not cooperative, an insurance company should be persistent in completing its investigation and make clear to an uncooperative policyholder that its intransigence will result in denial of coverage under that section of the policy. 

Denial of Coverage and its Potential Consequences for Both Sides

If the insurance company denies coverage, the first and most significant impact for the policyholder will be in determining how to go forward. If the policyholder is facing third-party claims, it must consider how to cover the costs of that litigation and whether it has the resources to pursue a claim against the insurance company. However, even if the policyholder cannot afford to sue the insurance company, it is worth the company to continue to discuss resolution with the insurance company. A denial of coverage may be an aggressive position by the insurance company, but the insurance company may be willing to settle so as to obtain a release. From the insurance company’s perspective, a denial of coverage does come with some risks. The biggest risk is that its denial will be found to be in bad faith, exposing it to various penalties depending on the state. In addition, the insurance company will have no control over repairs or remediation in the case of a first-party loss or over the defense in a third-party claim. As such, if the insurance company is later found to be responsible for coverage, its exposure can be greatly increased. If you have any questions or would like more information on case evaluation please contact us.