Step 2 of the claim resolution process involves interpreting policy provisions that are cited as the basis for a claim denial. This step (and Step 3) employs up to 12 interpretive doctrines and 17 largely legal and contractual principles for resolving coverage and claim disputes.
At this stage of the resolution process, we answer questions such as: What is the apparent intent of the insurer regarding the policy language in question? What are the insured’s reasonable expectations of coverage? Does the policy provision appear to be ambiguous? We are asking questions and forming opinions that we will research and document in Step 3.
Last month’s “RTFP!” column was an introduction to a dozen policy interpretation doctrines that govern insurance policy coverage perceptions and interpretations. These doctrines lay the foundation for the specific legal and contractual principles used in Step 3 of the claim resolution process to research and document our coverage interpretations.
In this month’s column, we’ll review six more of these interpretive doctrines. Then, in the next three columns we will examine a dozen or more largely legal and contractual principles that I’ve used for over 30 years to get arguable claim denials reversed.
Insurance is NOT a Commodity There is an almost universal perception
by consumers that “insurance,” especially personal lines, is a homogenous commodity distinguished almost exclusively by price. Why is this? Largely because of our industry’s incessant price-focused advertising, often framed in humorous TV commercials that do not impress upon the public how life-changing a poor insurance purchasing decision can be. Businesses are bankrupted and families destroyed, at least financially, because they do not understand the gravity of their decisions.
Even sadder is the widespread perception in our own industry that there is not enough difference among insurer products, especially auto and home insurance, to warrant learning the differences. I know this from the thousands of coverage and claim questions I’ve received over the past 30 years that began with, “Does ‘a’ homeowners policy cover…” or “Does ‘a’ BOP policy cover….” You must ‘RTFP!’ and not generalize.
To illustrate this with real-life examples that you can use to educate your staff and customers, visit my blog at www.InsuranceCommentary.com and search for “insurance is not a commodity.” You will find a number of actual claims and coverage examples.
Most Policies Are Contracts of Adhesion
Contra proferentem is a Latin phrase from contract law which roughly translates to “against the offeror.” Many, if not most, coverage and claim disputes arise from differences of opinion about what a segment of specific insurance contract language means. A component of these disputes is almost always an allegation that the language is ambiguous, meaning that it has two or more reasonable interpretations.
In litigated claims, if the court can be convinced that a policy provision is ambiguous and the policyholder’s interpretation for coverage is as valid as the insurer’s interpretation against coverage, the court will find for the policyholder the vast majority of the time.
One of the reasons for this is that most insurance policies are contracts of adhesion. The language was drafted by the insurer and the insured has no way of clarifying that language other than broad coverage modifications via endorsements that were also drafted by the insurer.
The value of this knowledge is that most claim professionals are reasonable and willing to consider an alternative interpretation. If you can convince the adjuster that the policy language could be ambiguous and/or interpreted to support coverage, my experience is that over 90% of the time you can get a reversal of the denial from the adjuster or through a process.
The Burden of Proof
The burden of proof for or against coverage rests with both parties to the contract. For most insurance policies, the insured must demonstrate that the insuring agreement is triggered, and the insurer must demonstrate that an exclusionary or otherwise limiting policy provision applies.
For example, if it’s a general liability claim, the insured must prove that there was an accident or occurrence for which the insured is legally liable that resulted in bodily injury or property damage during the policy period and within the coverage territory. Terms like “occurrence” and “coverage territory” are usually defined in the policy.
If it’s a property claim, the insured may be charged with establishing that the property is “covered property” as defined by the policy, that the claimant is an insured or otherwise has insurable interest and is entitled to coverage, that a named peril caused the loss, etc. In the case of open perils coverage, the presumption is that the cause of loss is covered, and the burden of proof is on the insurer to demonstrate that an exclusion applies.
The insured’s burden of proof may be less than the insurer’s because insuring agreements, especially for liability coverages, are usually very broad.
Clear and Conspicuous Exclusions
In my book, which is the subject of this series, a number of court cases are cited to support this contention. For example, one court opined that exclusions must be “…conspicuous, plain and clear in such a manner as clearly to apprise the insured of its effect.”
Another court said, “…exceptions and limitations on coverage that the insured could reasonably expect must be called to his attention, clearly and plainly, before the exclusions will be interpreted to relieve the insurer of liability or performance.”
Still another court said, “…exclusions are subject to invalidation where they are not conspicuous…or hidden in a subsequent section of the policy bearing no clear relationship to the insuring clause and concealed in the print.”
Many courts will not uphold exclusionary language that is not clearly and conspicuously posted in a section of the policy labeled “Exclusions,” “Limitations,” “Property Not Covered,” etc.
Duty to Defend vs. Duty to Indemnify
The duty to defend is a contractual and good faith obligation and it is independent of, and usually broader than, the duty to indemnify. The duty to indemnify is contingent upon evidentiary facts, while the duty to defend is based upon alleged “facts.”
The duty to defend exists as long as there is a potential for coverage even if a claim or suit is groundless, false, or fraudulent. In other words, there is a duty to defend even “coleslawsuits” (legal actions taken without a shred of evidence).
The most frustrating aspect of applying this doctrine usually occurs when an adjuster refuses to acknowledge that an insured might be legally liable for a loss. For example, in one claim, an insured’s portable building was blown in a strong windstorm through the plate glass window of a business across the street. The adjuster refused to respond to the complaint on the basis that the damage was an “Act of God.”
The damaged business owner, however, claimed that the insured negligently failed to properly secure the building with tie-downs. The duty to defend and investigate the claim is based on the allegation, not the adjuster’s perception of the “facts.” The adjuster’s failure to adequately investigate the claim is quite possibly a violation of the state’s unfair claim settlement practices law.
Folklore Is Not Fact
It’s frustrating for agents and adjusters when an insured will not accept the fact that a claim is not covered. Invariably, the insured will cite “experts” like plumbers who tell them that, “I’ve seen hundreds of leaks that have been going on for years that are covered by home insurance” and roofers who claim that, “insurance companies replace the entire roof all the time.” However, I’ve seen this in our own industry when coverage opinions begin with “I’ve always heard that….”
What an insurance policy covers or does not cover should be based on an examination of the insurance contract within the facts and circumstances of each claim, not on hearsay or folklore such as “I’ve always heard that the ‘rule of thumb’ for policy cancellation is….”
Last month, I told the story of an agency whose staff “had always been told” that, unless there was liquor consumption on the business’s premises, there was no need for liquor liability coverage. I can give you countless examples of similar folklore.
If you want to properly resolve coverage and claim disputes, begin with acknowledging and embracing these and other policy interpretation doctrines. Then, you’ll be ready for the next three articles in this series where we explore powerful principles of contract interpretation.
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