Critics of the industry say that when you purchase an insurance policy, all you are really buying is the right to sue. While such a cynical attitude is no doubt unfair, given the vast majority of satisfied policyholders, some lawsuits over claims rejections are inevitable. But should an insurance company be facilitating litigation against its peers? That's the question following the introduction of coverage for insureds looking to challenge denials.
That's crazy, you say? Well, I'm not making this up. Check out Managing Editor Susanne Sclafane's fascinating July 7 story, "War Chest: New Product Covers Legal Costs If Buyers Decide To Challenge Insurer Claim Denial," by clicking here.
Su reported that "the risk that a claim won’t be paid—a potential downside that every buyer of insurance faces—was an uninsured exposure until recently, according to the developers of a new policy to provide coverage so that risk managers can contest such rejections."
Jason White, a managing director for the Professional Services Group of Swett & Crawford, said he didn't believe there was ever any product on the market like this recently launched “Claims Dispute Insurance” policy.
As Su reported, "the new coverage, available to businesses of all sizes, will pay up to $250,000 in legal expenses associated with contesting the denial of an insurance claim under a commercial policy."
“We know that wrongful coverage denials occur in our industry. There’s a reason coverage attorneys exist today,” Mr. White said, explaining the impetus for the product launch.
The idea came from a law firm (big surprise!)—Surdyk & Baker in Chicago. “We saw a need in the marketplace,” said Len Surdyk, who spent the first 19 years of his career representing insurance carriers, but who has also been representing policyholders for the last three years.
Swett & Crawford wholesales the product on behalf of NAS Insurance Services, a California-based underwriting manager that writes the coverage on behalf of syndicates at Lloyd’s of London.
The coverage should appeal particularly to smaller insureds, according to Mr. Surdyk, who noted that “it wasn’t worth it for a client to hire us to file a lawsuit against an insurance company over $50,000—and insurance companies know that.”
The way coverage is structured is very interesting. Su reported that "a key feature...is a coverage analysis of denied claims. Panel counsel attorneys on the product will review the claim, and advise insureds as to whether they have justified allegations of wrongful denials, or if the insurance company denying the claim made the right decision."
Mr. White and Mr. Robin explained that "insureds who decide to go forward with litigation in situations where panel counsel attorneys advise against it, still get coverage up to the limit they purchased--but on a 50 percent co-insurance basis."
“They have to put some skin in the game if they want us to pursue a claim that we don’t think is worth pursuing,” Mr. Robin said.
On the other hand, insureds that move ahead to litigate in these situations and win won’t be responsible for the 50 percent co-pay. “We will have been proven wrong, so we’ll end up paying the whole bill,” he said.
Will independent agents sell this product? Wouldn't it be awkward to sell some commercial coverage to a client, but then add, "just in case the carrier screws you over and won't pay, take out some additional peace of mind insurance to cover your legal costs if you decide to contest a claim denial."
But Mr. White's counterargument is that, “if you want to have your head in the sand and pretend this doesn’t happen, then you’re never going to sell any. It’s just very naïve for someone to think claim denials don’t happen. They do happen—and they’re challenged every day by coverage attorneys.”
The article also notes a potential "hidden benefit" for agents--who risk being hit with E&O lawsuits if insurers deny their client's claims. Offering "peace of mind" coverage might protect the agent from such litigation.
The coverage is fairly cheap--with premiums starting as low as $1,000, and rates coming out to be about 1 percent of the premium the policy being covered is generating.
Will agents seize on this product as great portfolio protection for clients? The product is also being offered on multiple policies, including having the agency provide it on their own dime as value-added protection for clients. That's a nice sales twist in a very competitive market.
I like the concept in theory, but in practice, I fear it will only contribute to the insurance industry's negative image.
Having insurance agents selling coverage for legal challenges in case insurers don't pay legitimate claims will only fuel the perception of carriers as generally a bunch of crooks who hide behind obtuse policy language to deny claims they should be paying, then daring their customers to sue.
“We hope this product will provide an incentive [for carriers] to always do the right thing,” Mr. White commented.
Bob Hunter and his friends in the consumer advocacy community will have a field day with this!
What do you folks think?
Comments (8)
Well, Sam, I guess I am one of the naive people, because I don't believe that insurance companies purposely deny claims just to try to get out of paying, they deny them because insureds try to get away with getting something for nothing.
I do agree with you that this new coverage may cause more negative views of insurance companies and the industry certainly doesn't need that!
Posted by Carolyn | July 30, 2008 2:57 PM
Posted on July 30, 2008 14:57
I remember reading in the '70s that one of the primary principles of insurance was to provide peace of mind to the insured. I don't recall ever encountering that in practice.
I frequently have to look for ear-muffs whenever somebody finds out I am an insurance person.
Posted by Don Bealer | July 30, 2008 4:17 PM
Posted on July 30, 2008 16:17
This is not a new idea, every single similar idea over the years has had difficulty with acceptance and durability. Adverse selection.
Face it, there is nothing new, just some new people in another soft market being creative and hoping to write some premium.
I would like to assess the policy form and pricing. The contract details would be informative as to the value of the coverage.
Posted by Robert Holland | July 31, 2008 11:34 AM
Posted on July 31, 2008 11:34
Sam, I'm rather put off by the nature of your question: i.e., "Should an insurance company be allowed (by the government, I guess) to sell this subcategory of litigation cost insurance?"
This is supposedly a free country. As long as there is no coercion or fraud involved, and there is a means by which both parties to the contract can enforce the contract, why not? Let the market decide whether it's a viable product.
SAM RESPONDS:
Sorry, Mikk, but I don't believe I suggested insurers should not be allowed to sell this coverage. My exact question was: "But should an insurance company be facilitating litigation against its peers? Different point altogether.
MIKK GETS THE LAST WORD:
Your question is based on an assumption that the product would "facilitate litigation." But as I read about it, it will probably do just the opposite.
First, they promise to screen each complaint to see if it has sufficient merit to litigate. If not, they give their insured an incentive not to litigate it. That's a great service that may cut out non-meritorious litigation and focus on the cases of real injustice.
If they find the complaint has merit, well, then it should be pursued! I cannot think of an argument in favor of allowing an insurance company to violate its own contract with its customer; and if it takes another insurance company to help enforce the contract, I'm all for it.
Posted by Mikk | July 31, 2008 11:36 AM
Posted on July 31, 2008 11:36
Sam, as to the question you pose in response to Mikk: "Should an insurance company be facilitating litigation against its peers? Different point altogether?"
Of course! Why not?
If people wish to pay a premium sufficient to cover the costs they believe they will incur if they have a dispute with their insurers, the insurer is not facilitating the litigation--they are spreading their risk of potential litigation--with others.
Insurers are not perfect. They err and insureds are required to litigate when the insurer errs. It should be a profitable line of business if properly underwritten, since most insurance claims are paid to the satisfaction of the insured.
I wouldn't buy it, but many would.
I recently helped to hire a lawyer for a client, and the rates that were quoted from various top firms ranged from $650 an hour to $750 an hour. This can be too much for most insureds to cover.
Posted by Barry Zalma | July 31, 2008 1:46 PM
Posted on July 31, 2008 13:46
Barry:
If the claims case is righteous, the plaintiff bar is happy to work on a contingency basis, plus expenses.
Is the purpose of the proposed coverage to indemnify plaintiffs who demand $10 million for a broken arm from the Insured and get $10,000 in order to sue the insurer for "bad faith"?
Presumably this is after the insured has been found NOT to be negligent or "legally obligated to pay." Double jeapordy?
By the way, suppose the damages exceed policy limits, or the policy doesn't activate based on a signed exclusion?
If this coverage is to indemnify first-party insureds who complain of, what, failure to settle? Settle adequately? "Unfair claims practices"? Insurer E&O?
An e-mail to the Insurance Department with a copy to the insurer should fix that. If not, find an attorney and sue on contingency.
Posted by Bob Holland | July 31, 2008 2:18 PM
Posted on July 31, 2008 14:18
Bob:
First, contingency fees are too expensive if the case is good and encourage the lawyer to do nothing.
Second, if you believe a request to the Department of Insurance will cure a claims problem, you are smoking some cigarettes made by a lady called Mary Jane.
If I was writing the coverage, it would be to pay for litigation when an insurer refuses coverage or to defend or indemnify based upon a dispute concerning coverage, not damages.
Posted by Barry Zalma | August 4, 2008 11:59 AM
Posted on August 4, 2008 11:59
I guess the first question I would ask is if a client would distrust their insurer to that extent, why in the world would they even place business with them to begin with?
To think I would even consider a policy that would cover fees and costs associated with a suit against a claim that was denied, would send me running to seek another insurer.
Isn't sounding this type of horn just another red flag to the consumer that the industry is not playing fair with them? Is this saying we're not likely to pay your claim, so we'll sell you coverage to pay your attorney fees so you can sue us after we deny it?
That should set very poorly on the stomachs of the consumers who have already been beaten up pretty badly by some questionable claims-handling practices in the past, which, unfortunately, paints the industry with the same broad brush of disgrace.
My only other comment is a full agreement with Barry Zalma on the DOI in numerous states. Letters to them bring the same relief as a letter to Santa Claus asking for the Christmas pony! It gives you a nice warm glow while you're writing it, kid, but don't hold your breath waiting for anything positive to show up under your tree!
Posted by BJ | August 4, 2008 2:09 PM
Posted on August 4, 2008 14:09