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Risk managers have to carefully weigh their options when considering whether to sue insurers over a denial of coverage, as such lawsuits can be costly and result in an even bigger loss for their companies.
“As a risk manager, I have to understand that the best risk management strategy is avoidance,” said Ashraf Kilada, senior director of treasury risk management at PepsiCo Inc. in New York. “The best way to handle a dispute is not to have it in the first place.”
However, if a denial of coverage of a major claim occurs despite the risk manager's best efforts, “the most important thing is to take a deep breath, not get emotional … and try to understand the reasons for the denial,” he told attendees during the Risk & Insurance Management Society Inc.'s annual conference on Monday. “Is it justified based on the language in the policy?”
A face-to-face meeting with the insurer's claims counsel is preferable to an exchange of letters about the denial, Mr. Kilada said.
“When you talk to them, you really need to understand what their point is because maybe they didn't fully understand your case,” he said.
In addition, other factors could be at play, such as an “overly aggressive” claims staffer or counsel who wants to set case law, and further discussions could overturn that initial denial, Mr. Kilada said.
The litigation pathway has several pros, including increasing pressure on insurers, which can result in a higher dollar settlement, and securing a more favorable forum to handle the dispute if the company sues before its insurers do, said David Klein, a Washington-based partner at Pillsbury Winthrop Shaw Pittman L.L.P.
However, suing also has several cons, including the litigation expense, the possibility of not recovering anything from the insurer if the case is lost and the difficulty of settling once a lawsuit has been filed, he said.
“You want to be very thoughtful, particularly about pursuing bad-faith” litigation, Mr. Klein said. “The truth of the matter is 99% of the coverage lawsuits above a certain dollar amount do end up in settlement because no one wants to be responsible for losing that $100 million case on either side. But when you accuse someone of bad faith, you make them your enemy, at least for a while, and you make the hurdles to settlement more difficult.”
In one example, a directors and officers insurer could deny a claim to cover legal costs associated with a policyholder's receipt of a subpoena from a U.S. attorney, Mr. Kilada said.
Deciding what to do in such situations requires a careful balancing of factors, including the claim's importance to the company and the insurer and a cost-benefit analysis of litigation expenses versus what a settlement could secure, he said.
“Suing obviously makes it all or nothing,” he said. “You can win or lose or you can try to settle, convince them that maybe they should pay part of these costs. As far as the legal uncertainty, settling is much better for everybody.”
Barry Dillard serves on the Risk & Insurance Management Society Inc.'s board and is the director of claims management for the Walt Disney World Resort in Lake Buena Vista, Florida. There, Mr. Dillard, who is a member of RIMS' Central Florida chapter, leads a team of cast members who manage all aspects of the company's claims management program, including compliance operations, workers compensation and general disability claims. Mr. Dillard also teaches business management courses as an associate professor at the University of Phoenix. He received a bachelor of science in marketing from Hampton University and a master of business administration from Webster University. Mr. Dillard recently spoke with Business Insurance Senior Editor Mark A. Hofmann about his professional life and his service with RIMS. Edited excerpts follow.