Claim Denied: What To Do When Your Insurer Says “No”

By Neil B. Posner
 
Companies of every shape and size must maintain multiple insurance policies as a standard cost of doing business. While these policies offer necessary protection and peace of mind, the insurance documents themselves are often difficult to understand, leaving policyholders uncertain about their coverage when they need to file a claim.

The good news is that insurance companies have a duty to act in the utmost good faith when handling your claims. In fact, they are required by law to carefully investigate claims and pay them in a timely manner. It would be an act of bad faith, for example, for an insurance company to create unreasonable delays. Similarly, an insurer cannot say “no” to a claim without proper investigation and hope the claimant does not “push back.” Fortunately, most insurers take their good faith obligations seriously.

Still, there are times when an insurer may think it is entitled to deny coverage. Typical reasons include late notice on the part of the policyholder; a claim or occurrence that took place outside of the policy period; in the case of a general liability policy, the determination that there was no “bodily injury,” “property damage” or “personal or advertising injury;" circumstances of the claim that trigger one or more of the policy’s exclusions; or the indication that the policyholder breached a condition of the policy. In many cases, an insurer may examine a particular loss and determine that it was not the type of loss the policy was intended to cover.

Regardless of the reason, if an insurer intends to deny coverage, it is obligated to explain why. Because an adverse coverage decision can be extremely costly to an insured, the laws of most states afford some protection to policyholders, while also respecting the insurer’s right to avoid paying fraudulent claims or losses that legitimately are not covered by its policies. In Illinois, for example, an insurance company can agree to defend the insured while reserving the right to deny the claim if facts are later proven that make the claim not covered. Alternatively, the insurance company can bring a declaratory judgment lawsuit, in which the insurer asks the court to declare that, in light of the facts alleged in the complaint and under the terms of the policy, the insurer does not have to defend the insured. If the insurance company fails to follow either of these routes, it will be prevented (“estopped,” as the courts say) from relying on any defense to coverage it may have.

Even if the insurance company believes it is acting in good faith and its denial appears to be reasonable, the insurance company still may not be right. For example, the insurer may have focused on certain facts to the exclusion of others, or may have interpreted the policy language in a way that is not supported by applicable law. In a recent decision by the U.S. Court of Appeals for the Seventh Circuit, Keystone Consolidated Industries v. Employers Insurance Company of Wausau (August 3, 2006), an insurance company denied coverage for an environmental claim because a lawsuit had not been filed against the insured. Instead of waiting to be sued, the policyholder chose to clean up the site after the government ordered it to do so and filed an insurance claim for reimbursement for the clean-up costs. The insurance company, believing that it should not have to pay this claim, made an argument that convinced the trial court: It argued that because there was no lawsuit, there was no duty to defend. The insurance company further argued that because the duty to defend is broader than the duty to indemnify, where there is no duty to defend, there can be no duty to indemnify. Although the trial court agreed, the Seventh Circuit reversed the decision, holding that while it is true that the duty to defend is broader than the duty to indemnify, they are separate duties. Therefore, the duty to indemnify can be triggered even when the duty to defend is not.
 
What are the lessons for policyholders? Businesses today pay a lot of money for their insurance policies. If your insurance company denies coverage, or your insurer takes what seems like an eternity to make a decision about your claim, you should consult your insurance broker and your lawyer. Most brokers have claims departments that can be very helpful in resolving coverage problems, especially if they are based on a misunderstanding of the documents or the facts. If, however, your broker has difficulty persuading the insurance company to change its position or act more quickly, then you should have your attorney review the situation and help you determine whether it makes sense to challenge the insurer, seek a compromise or abandon your claim.

Neil B. Posner, head of the firm's Policyholders' Insurance Coverage department, focuses his legal practice in the area of insurance coverage, with specific emphasis on insurance recovery and dispute resolution, risk management, loss prevention and cost containment. His clients include a range of public and private companies, organizations, boards of directors, individual officers and other policyholders. Neil can be reached at 312.521.2623 or nposner@muchshelist.com.

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