While Understanding Why Some Claims Are Denied
In the first column of this series, I provided an overview of what it takes to successfully resolve coverage and claims disputes without litigation. In the coming months, we will be examining each of the facets of this approach. But before we can do that, we need to identify and understand exactly why claims are denied. How we proceed with claim resolution depends on the basis for the denial.
So, in this column, we’ll address four categories of claim denials. We’ll start with the most common reason for claim denials and arguably the rarest basis for claim denials, then focus on the two reasons this series of articles is principally designed to address.
They’re Not Covered
The vast majority of claims are denied for a very simple reason — they’re not covered. This usually means that either the policy insuring agreement is not triggered, or an exclusion clearly and unambiguously applies.
This doesn’t necessarily mean that the claim dies here because the question arises as to why the claim is not covered. If there is alleged negligence on the part of the agent or carrier, a properly denied claim can morph into an errors and omissions (E&O) claim. In an upcoming column, I’ll discuss three sources of coverage gaps that can arise during the insuring process and how they can be prevented.
Also, note the use of the word “properly.” Sometimes claims that are not covered are denied in an improper way and, until or unless that has been corrected, the claim denial may not stand. In another column in this series, we’ll examine unfair claim settlement practices, most of which arise not out of malice or wrongful intent, but rather due to poor training, supervision, workload or sloth.
Illegal and/or Unethical Reasons
In the Kentucky Court of Appeals case of Universal Underwriters Ins. Co. v. Travelers Ins. Co., the court opined, “It seems that insurers generally are attempting to convince the customer when selling the policy that everything is covered and convince the court when a claim is made that nothing is covered.” Of course, the court was speaking tongue in cheek, but policyholder attorneys that advertise on TV shows like Jerry Springer would have us believe that every claim is denied, in whole or in part, for some sinister reason.
There is no question that this happens. There is ample case law to demonstrate this. One that comes to mind was a homeowners claim denial where the claim file included a note from an adjuster to his supervisor that he was able to “low ball” (his words) an insured into accepting half of what the claim payment should have been. That $26,000 claim cost the carrier about $3 million. But I believe that such cases are, in the context of millions of claims, quite rare and more an indication of individual character flaws than corporate culture. Again, we’ll discuss unfair claim settlement practices and bad faith later in this series.
When I refer to a “cranial inversion” claim denial, that’s shorthand for a more medically correct “cranitis rectal inversio” diagnosis. Sometimes claims are denied for unfathomable reasons. Often such denials are verbal, or a written denial does not properly cite policy language and how it applies to preclude coverage. Again, this is something I’ll discuss in a later column on improper claims practices. For now, I’ll give you one notable example from a claim I consulted on a year or so ago.
Sometimes claims that are not covered are denied in an improper way and, until or unless that has been corrected, the claim denial may not stand.
A warehouse was insured using the ISO CP 00 10 Building and Personal Property Coverage Form and the ISO CP 10 30 Special Causes of Loss form. The latter form covers damage to property caused by vehicles. In this case, a truck slammed into a loading dock causing about $6,000 in damage. The adjuster denied the claim, citing the Property Not Covered section of the CP 00 10 which excluded damage to “Bulkheads, pilings, piers, wharves or docks.”
Needless to say, this list of excluded property refers to waterfront property, not warehouse loading “docks.” Why the adjuster cited this policy provision to deny the claim remains a mystery that I’ll explore in the Academy of Insurance’s companion webinar to this article, along with several other bizarre claim denials.
These types of claim denials are usually easy to overturn if you know how to do it, something revealed over the course of this series. In this particular case, we cited a legal principle called noscitur a sociis, Latin for “It’s known from its associates,” that is used by attorneys to resolve claims based on the interpretation of a list of contract terms.
Legitimate Differences of Opinion
Our focus throughout the remainder of this series will be largely on claim disputes that arise from legitimate differences of opinion about coverage, something that characterizes the majority of claim disputes. In last month’s column and webinar, I talked about the myth that insurance, especially personal lines, is a commodity distinguished only by price. Perception is not reality.
The reality is that, while many policy forms are similar, unless the language is exactly the same, minor variations can translate into major coverage differences. In fact, even when contract language is exactly the same, there may be disagreement about what that language means.
In addition, as Supreme Court Justice Oliver Wendell Holmes Jr. put it, “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and time in which it is used.” Likewise, identical policy language may be interpreted differently under a different set of facts and circumstances.
For example, we all know that most property policies exclude “earth movement.” So, what constitutes “earth movement”? What about damage done by a boulder rolling downhill (you can visualize this if you’ve ever seen the Chris Farley movie “Black Sheep”)? In an open perils policy, would the rolling boulder be considered “earth” movement? In a named perils policy that includes coverage for “falling objects,” what if the boulder bounces off a ledge and hits a structure? What prevails, coverage for the boulder as a falling object or the earth movement exclusion invariably found in even named perils policies?
‘The reality is that, while many policy forms are similar, unless the language is exactly the same, minor variations can translate into major coverage differences.’
I can tell you that I’ve been involved in at least two instances of The Case of the Bouncing Boulder and with both claims, we were able to convince the adjuster to pay the claim using the techniques I’ll be sharing in this series. I’ll elaborate more on these specific claims in this month’s companion webinar.
To further illustrate, we also know that most property policies exclude “water damage,” meaning flooding, water body overflow, surface water, etc. So, what is “surface water” since that term is usually not defined in the policy? Is the accumulation of water on a roof or a high-rise condo balcony that seeps inside the building a form of “surface water”? Not according to most case law, but we often find that policy form language changes to counter unintended legal interpretations.
While the majority of denied claims are denied legitimately because they are not covered, there are significant numbers of claims that are improperly denied or otherwise arguably covered.
We know that most liability policies have a “pollution” exclusion, but what is a “pollutant” (a defined term in most policies but still extensively litigated) and what kind of occurrence would trigger the exclusion? I can give you examples (and will in the webinar) of slips and falls involving pollutants that were improperly denied by someone who had not carefully read the form language or didn’t understand what was read.
Folklore, not facts, tells us that CGL policies, with a few very minor exceptions, don’t cover the use of autos. So, there would be no coverage for a church under their ISO CGL policy for a claim involving a church volunteer who has an injury-causing accident while transporting people to church, would there? If you have an ISO CGL form handy, take a look at the “auto” exclusion and answer that question. You may be surprised at your conclusion.
While the majority of denied claims are denied legitimately because they are not covered, there are significant numbers of claims that are improperly denied or otherwise arguably covered. As this series of articles and webinars unfolds, we will be examining dozens of such claims and acquiring the knowledge, skills and tools to be able to better resolve disputed claims without litigation.
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