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A risk manager files a claim for what he or she considers a loss covered by insurance, but the insurer rejects it.
While the risk manager may consider seeking a court order to require the insurer to pay the disputed claim, there are several steps to take before going to court, experts say.
Claim denials typically arise from differing interpretations of policy wording relating to a financial loss.
“The most strategic item in avoiding a declined claim is to ensure the clarity of the contract language during the insurance policy negotiations,” said Neil Harrison, group managing director, risk control, claims and engineering, at Aon Global Risk Consulting's Chicago office. “It is essential that the broker, insurer and insured all have the same interpretation of what the policy covers. I'd say 70% of disputes would be avoided with a shared understanding of contract wording.”
As for the other 30%, brokers and attorneys specializing in insurance litigation agree that there are no surefire ways for risk managers to win claim payouts they believe are due their companies. Each dispute resolution mechanism—arbitration, mediation and litigation—has pros and cons.
Nevertheless, there are best practices that begin with a close reading of the policy the minute a claim is denied.
“A risk manager will want to evaluate the merit of the claim rejection by digging into the policy's coverage terms and conditions,” said Thomas M. Reiter, a partner at K&L Gates L.L.P., a Pittsburgh-based law firm that represents companies in insurance disputes. “This is your opportunity to negotiate what you think the claim is worth with the insurer, and what you think the law will allow and courts or arbitrators will provide.”
Sometimes a claim is denied because the policy requires a claim to be filed within a certain amount of time.
“Most policies will require you to file proof of loss within a certain period, such as within 90 days after the (loss) occurrence,” said Robert W. O'Brien, managing director at Marsh Inc.'s national property claim practice in New York. “Another time-sensitive provision concerns replacement cost. Many policies require, for instance, that to collect on a property claim, the property has to be replaced within a defined period of time. Fortunately, you can ask the insurer for an extension in advance of the deadline.”
When claim negotiations fail, a risk manager has some options.
In certain jurisdictions, such as Bermuda, policies often contain clauses directing the next steps.
“Policies written in Bermuda almost always have some kind of (alternate dispute resolution) provision in them—typically arbitration,” said Dan Bailey, member of the Columbus, Ohio-based law firm Bailey Cavalieri L.L.C. “Most policies issued by domestic carriers lack these provisions, although sometimes you see it.”
Even without an ADR provision, the respective parties can agree to it after a claim is rejected, although determining which course of action is best depends on understanding these resolution mechanisms and their key differences, he said.
“Each of the types of ADR provisions have their advantages and disadvantages to the insured and the insurer, so an insured should carefully consider and understand its options before agreeing to any type,” Mr. Bailey said (see related story).
For instance, a decision reached through arbitration typically is binding, whereas a decision reached through mediation is not. The former mechanism ends the dispute and removes litigation as a recourse, while the latter leaves litigation as a possibility.
“Mediation will not resolve a dispute that the parties are unwilling to resolve, although there are professional mediators out there...who are very effective at structuring a resolution,” Mr. Reiter said.
Some insurance policies contain mediation and arbitration provisions.
“A mandatory progressive ADR provision might require that the parties first try to resolve the dispute through a meeting, then through mediation and then finally through binding arbitration,” he said.
Arbitration is a sophisticated mechanism, involving a host of requirements, restrictions and determinations. In one example Mr. Bailey provided, one Bermuda policy had a three-page arbitration provision. It noted the location of the arbitration proceeding, limitations regarding who can serve as an arbitrator—in this case, someone familiar with the business of insurance—and the selection process to choose a panel of arbitrators.
Typically, each side in a dispute chooses one arbitrator and a neutral third party chooses an arbitrator for the panel. There can be as many as five arbitrators and as few as one, Mr. Reiter noted, although there are no hard and fast rules on the size of the arbitration panel. “All these various permutations can be worked out beforehand,” he said.
Most provisions requiring arbitration set a timeline for resolution. “Typically, the deadlines and other rules relating to how the arbitration should proceed are culled from the American Arbitration Assn., which has fairly defined processes,” said Paul J. Becker, senior claims consultant in the strategic outcomes practice of broker Willis in Dallas.
Risk managers have at their disposal two other types of ADR to assist claims resolution. One pertains only to those disputes in which the dollar amount of the claim is at issue, in which case the policy can be worded to require a third-party appraisal of the claim value.
The other is what Mr. Becker called an advocacy approach. “Sophisticated brokers have people such as myself who can assist in resolving disputes before they go to mediation, arbitration and litigation,” he said.
ADR is not the most common way of resolving disputes. “Most coverage disputes are resolved through a negotiated settlement rather than through litigation or ADR,” Mr. Bailey said.
But litigation brings to mind the financial question of when to engage lawyers in the dispute.
This is where observers diverge, with attorneys maintaining that internal and external counsel should become involved once the risk manager has formed an initial impression of the validity of the claim denial, and brokers indicating that lawyers are needed only after discussions have devolved with the insurer.
The size of the claim also figures in this reasoning, with large claims requiring earlier involvement by attorneys and smaller claims not necessarily needing any legal assistance.
As Mr. O'Brien said, “The time to call in an attorney is somewhat fluid.”
When policyholders and underwriters find themselves at odds over an insurance matter, attorneys and insurance experts agree that alternative forms of dispute resolution can yield better results for all involved parties than traditional litigation.