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Has Value of Your Insurance Been Left to Chance

Policyholders are forced to play a game of Russian Roulette every time they submit a sizeable claim to their insurance company. They have no way of knowing whether the claim will be paid or coverage will be arbitrarily denied, leaving the company (or its risk manager) to take a bullet in the head. This uncertainty results from two things: (1) insurance companies routinely deny all manner of valid claims; and (2) whether the policyholder can enforce its rights in court or through settlement often depends upon which state's law governs the claim.

Two States, Two Different Results
Consider the following example: two companies purchase the same standard form comprehensive general liability coverage from the same insurance company. Each one is sued separately for property damage caused by defective products. The claims are small, so each company decides to handle the suit without notifying its insurance company. Two months later the plaintiffs amend their complaints against the companies in order to assert claims for bodily injury, and to seek punitive damages. Faced with potentially large exposures, both companies give notice to the insurance company, which denies coverage claiming that the companies had not provided timely notice of occurrence. The companies then commence actions against the insurance company. One of the actions is decided under New York law, and the insurance company prevails under New York's general rule that often leads to the forfeiture of coverage for late notice. The other claim is decided under California law, which upholds coverage unless the insurance company can demonstrate prejudice from late notice. The policyholder prevails in that action. Thus, as is often the case, identical coverage claims under the same standard form insurance lead to strikingly different results.

Late notice is not the only insurance coverage issue that is addressed in a variety of ways by the different states. Commonly used exclusions have been subject to varying interpretations, and the states apply a number of different standards for deciding whether an insurance company has acted properly in its denial of coverage. These issues not only dictate the way courts resolve coverage cases, but can also influence insurance company's behavior when they make coverage determinations.

As the above example demonstrates, a policyholder has the greatest chances of (sooner or later) recovering from its insurance company when favorable law is applied to its insurance claims. Typically, the policyholder waits until a coverage claim arises, and then argues for the law of a state in the context of that claim. This approach offers the benefit of allowing the policyholder to make an "up to the minute" determination of which state's law is most favorable at the time that law is to be applied. The policyholder can argue its position under choice-of-law principles and assert that the failure of insurance policies to contain a choice-of-law provision creates an ambiguity that should be construed in favor of the policyholder's choice-of-law. For some policyholders this may be the best approach. However, typically this approach is followed simply because the policyholder is unaware that it may be able to take steps earlier to influence choice-of-laws outcomes, rather than on the basis of informed decision-making.

Negotiating a Better Policy
In order to decide what, if anything, to do proactively about the problems created by differing court decisions, a company must evaluate coverage law in light of its greatest potential exposures. That analysis requires the involvement of the risk manager and legal counsel. When important issues have been identified, they can be addressed in two ways. First, the policyholder can negotiate with its insurance company for the inclusion or alteration of policy language to eliminate the problems. For example, a company that is concerned about late notice could seek a provision which states that late notice will not result in the forfeiture of coverage except to the extent that the insurance company can demonstrate prejudice.

Consider the Options Carefully
Second, policyholders who lack the bargaining power to insist on such provisions can consider attempting to influence the choice-of-law determinations of courts before a claim arises. It is impossible to predict with great accuracy how any given state will address legal issues in the future, and settled law may change. Therefore, pre-selecting applicable law has its risks. However, the law may be sufficiently well developed in a state on a number of important issues to convince the policyholder to attempt to lock in applicable law when coverage is purchased. For example, some jurisdictions allow for the award of punitive damages based upon an insurance company's bad faith in the denial of claims. Others provide for the award of attorneys fees. These remedies can be of significant value to policyholders when they are forced to sue to enforce their insurance coverage. Also, many jurisdictions have enunciated basic principles used in resolving coverage disputes which provide an indication of whether the policyholder can expect favorable or unfavorable treatment when novel issues are raised.

By Finley Harckham


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