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IN TODAY'S INSURANCE ENVIRONMENT, it is common for insurers to assign attorneys to represent their interests immediately upon notification of a third-party liability claim. In instances where there is likely to be immediate legal action by the third party, such as bodily injury or death to one of its employees, this action is fully justified.
There are instances, however, that involve only property damage and/or business interruption losses to a third party that has an ongoing commercial relationship with the policyholder. In these cases, it is important for the claim to remain in a "non-adversarial" mode, if possible.
Unfortunately, the introduction of an attorney for the policyholder tends to imply litigation is likely, and the third party typically responds by engaging its own counsel. The presence of attorneys at this juncture tends to push the matter toward litigation, no matter how benign the original intent of both parties.
It is important for risk managers and liability insurers to recognize that litigation or adversarial confrontation is not necessarily inevitable, even in complex third-party liability situations. Proactive positioning and timely usage of consulting intermediaries can preserve business relationships, reduce claim costs and ultimately reduce the expense of liability coverage.
A successful alternative strategy involves the use of an independent adjuster to "investigate" the circumstances of the loss. The assignment of this intermediary has a significantly different implication for the third party, provided the adjuster's actions are impartial and professional in nature.
The presence of the independent adjuster implies that the policyholder values the ongoing commercial relationship with the third party and is interested in resolving the claim without litigation. The third party therefore is compelled to act in kind, lest it be seen as unnecessarily contentious in its business dealings.
If carefully implemented, the independent adjuster's role evolves from "investigator" to "mediator." The adjuster has the benefit of an open investigation of the circumstances surrounding the incident. The adjuster also has the benefit of attorney input relating to inherent legal liability and the amount of third-party damage. With this information, the adjuster is in an excellent negotiating position on behalf of the policyholder-and its liability insurers.
A case history illustrates this claim handling strategy.
In the early 1990s, a customer of Houston-based Enron Corp., an international energy company with a primary focus on natural gas and electricity, claimed to suffer property damage due to an extraordinary "flare up" of natural gas in its boilers and other gas-fueled equipment. The damage to this equipment was unusual; there was significant evidence of high temperature, including large volumes of slag from molten metal in key components.
Ultimately, it was alleged that a "slug" of natural gas condensate liquids from the Enron pipeline made its way into the customer's equipment. It was alleged that the heat content of the customer's fuel increased by approximately one thousandfold in a matter of minutes. This intense flash of heat melted and otherwise damaged a number of critical machinery elements, causing property loss and the partial interruption of business. No bodily injury occurred among third-party employees.
Enron immediately notified its liability insurers of the claim. The insurers, after discussion with Enron, assigned an independent adjuster to investigate the circumstances of the loss and develop a measure of the damage. If necessary, the adjuster was to advise of the necessity for legal representation.
The adjuster contacted the third party, carefully indicating his position as an independent entity assigned to investigate the circumstances and quantify the third-party loss. Although a non-waiver agreement was not requested, the adjuster clearly specified that the third party should not consider the adjuster's presence or investigative action to be an admission of liability. This prerequisite was accepted by the third party.
After several technical meetings to understand the circumstances of the loss, the adjuster requested that the third party provide documentation supporting the amount of its loss. Additionally, the adjuster requested and received authorization from Enron's insurers to assign legal counsel.
Counsel was instructed to provide a written opinion regarding the extent of damages owed, should liability be established. This written opinion provided the framework for the adjuster's analysis of the third-party claim.
The claim and related supporting documents added an element of complexity to the situation. The third party had been planning to replace the damaged equipment prior to the occurrence. The replacement equipment provided an enhancement to the third party's operation, and its cost significantly exceeded the strict legal measure of damage. Thus, the third-party claim included improvements for which the policyholder would not be held liable even if liability were established. The adjuster discussed this with Enron and presented the issue to the third party, indicating the claim was not a fair measure of the actual loss incurred.
At this point, the third party began to argue an alternative legal interpretation of the statutes and asked to bring its counsel into the discussion. Enron, however, advised that the discussions were not of a legal nature; rather, Enron and its insurers were acting on a "good faith" basis, without attorney representation. There had been no acceptance of liability; should the third party engage its attorney in the discussion, Enron would be forced to follow suit, and the mediation would become adversarial. When faced with this prospect, the third party reconsidered its position and entertained settlement discussions.
The adjuster then became the intermediary for negotiation of the settlement and, after several weeks of negotiation, all parties accepted a compromise settlement. Although liability never was admitted, the commercial relationship between the parties was maintained in good order, and the claim against the policyholder was resolved for an amount significantly less than originally presented. Insurers benefited from the reduced claim as well as a shortened claim resolution period and a significant reduction in claim-handling costs due to the avoidance of litigation.
For this strategy to work, the situation must be one that lends itself to these tactics. The optimum occurrence is one where bodily injury is not a significant factor and an ongoing commercial relationship exists between the parties.
Notification of the liability insurer and engagement of the independent adjuster should be expeditious. Quick action in responding to the third party is vital to avoid a lawsuit.
Attorneys should be utilized initially to provide the legal framework for claim discussion. Should litigation become necessary, the attorney will be familiar with the situation and have a much shorter "learning curve."
Obviously, the adjuster must avoid prejudice in favor of the insurers. Although a non-waiver agreement would be best, the adjuster can achieve a similar effect verbally in meetings with the third party. In this fashion, all parties can remain focused on the details of the occurrence.
The adjuster must remain unbiased and professionally independent in his analyses. Only in this fashion can the third party be reassured that there is a good faith effort to resolve his loss. Further, the adjuster must establish a high level of credibility if there is to be a realistic chance for negotiation of the amount owed.
In addition, the policyholder must remain visible in the process. The third party needs to feel the importance of the commercial relationship with the policyholder as a motivating factor toward resolution of the claim. At the critical moment when litigation appeared imminent, Enron provided the impetus to refocus the discussion and keep the claim process moving.
Clifton "Rex" Andrews is managing director-energy at Crawford-THG, aloss adjusting company based in Houston. James P. Studdert is director of claims for Enron Corp. in Houston.